Feb 22 - 28, 2010

Since independence of Pakistan, various governments tried to focus on education but the outcomes were not satisfactory. There are numerous factors because of which government spending, quality and level of education could not increase. A large junk of government's budget goes to fund two areas, one repayment of existing debt and other on defense. Rest of the budget is for development of people. It is unfair to blame federal and provincial governments for spending on these two heads which are essential because of obvious reasons however it is debatable whether rest of the funds are used properly or not.

Education and specially higher education is one of the main areas where Pakistan needs to focus if it wants to grow. Many students could not get the higher education just because of lack of funds. Therefore, in which way the government of Pakistan should help students pay for a higher education is a matter of great practical and theoretical interest. Yet, there is remarkably little analytical work done on the subject in Pakistan.

Due to lack of requite available resources, there is a need to develop a financing market for higher education students. In the absence of a clear and simple policy, a young person's ability to attend university would be restricted by the extent to which his parents are able to support him. It is then possible that a number of young people, who could gain from attending university, will not do so. Different federal and provincial governments tried to relax the budget constraint of these young people yet a lot many needs to be done.

Most industrial countries have traditionally subsidized the provision of higher education. However, alternative .financing schemes, which rely on larger contributions from students, are increasingly adopted. The problem is that some students may be unable to contribute and, even if loans or insurance are made available to overcome their liquidity constraints, education is often viewed as a risky investment in Pakistan, which can further hinder participation. Schemes such as income-contingent loans can provide insurance against uncertain educational outcomes. But the real issue remains how to pledge the future repayment of premium or debt. There are not many good job opportunities in Pakistan and reasonably good individuals prefer to settle abroad.

There can be two ways to address the financing schemes of students of higher education, one tax on degree and second direct loan or insurance. However, when education outcomes are uncertain, the graduate tax is better than a pure loan/insurance, because it provides greater recovery, and it is also preferable to an income-contingent loan scheme on the grounds that the latter implies some reverse redistribution. A pure loan scheme is a public loan with mortgage-type repayments. Each individual pays back exactly the amount it has borrowed plus interest.

A system of income-contingent insurance makes repayments of premium conditional on whether the income of the student exceeds a pre-specified level and computes repayments as a percentage of his earnings. The main feature of the income-contingent insurance is that low-earning graduates do not fully pay back the cost of their education and are subsidized by general taxation, whereas their graduate tax consists of a public subsidy to education, which also makes repayments contingent on income, but where repayments by high-earnings graduates, exceeding the cost of their education are used to subsidize low-earnings graduates. This system is partially self-financed since there are no subsidies from general taxation to higher education.

There are some ways to finance higher education: 1) the traditional tax subsidy system where the cost of education is shared by all the population, 2) pure insurance/loans, where each student pays for his own education, 3) income-contingent insurance of the risk-sharing type, where successful graduates pay the full cost of their education and the cost of the education of unsuccessful graduates is shared by the whole population, and 4) income-contingent loans of the risk-pooling type where successful students pay the full cost of the education.

Under risk neutrality, the traditional tax subsidy system induces the highest participation, at inefficient levels. The income-contingent insurance with risk sharing induces a low number of graduates. Both the insurance/loan and the income-contingent insurance/loan with risk pooling lead to the optimal degree of participation in higher education. Risk aversion reduces participation for each financing scheme. It is safe to say that higher education is a risky investment.

One alleges advantage of an insurance based education scheme is that it should not deter potential students from disadvantaged backgrounds from university participation more than other students, since payment of insurance premium depends on future ability to pay, rather than current financial circumstances. However, it is also important to make a policy on how to introduce a charge as it might decrease the incentives for students in general to undertake higher education.

Studies that ask people about the factors that shape their decisions to participate in higher education have found that it has not been a dominant factor influencing individual decision-making.

As a first step, federal and provincial governments in Pakistan should pool a fund which would be used for education insurance. All expenses of the deserving students to be borne by the state fund and later beneficiary individuals return their cost of education in installments when they get the job. Thus, the first fill of the educational insurance pool will be replenished by the graduating students, which will be used for next batch of students. Subsidized student insurance schemes should be made available to the students who need financial assistance to pay for college and university expenses and fall within a certain income bracket.

In addition to owning and maintaining certain institutions of higher education, the government of Pakistan should also provide and/or facilitate loan or scholarships or insurance schemes for students in higher education institutions. While the government continues to be the main financer of higher education, it is the higher education's policy maker and supervisor of its implementation. The government should have more responsibility on the direct costs of higher education than on indirect costs. Indirect costs are those covering the students' welfare e.g. application fees, registration fees, meals and accommodation, books and stationery, field practical expenses, medical insurance, examination fees and tutions. However, students should also show responsibility in getting education and repaying the benefits to state.