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Parental Contributions and
Education Savings Plans
Alex UsherEducational Policy Institute
Accessibility of Higher Education: Challenges for Transitional Economies
Moscow, Russian FederationJune 29-30 2004
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Who Deserves Educational Subsidies?
• Three Possible Answers:
1) Everyone equally (Scandinavian model)
2) Future graduates who obtain below-average salaries in the labour market (Australia/UK model – on tuition but not living expenses)
3) Children who come from low-income backgrounds (North American model…also Australia/UK for living expenses)
• If answer is no.3 then consideration must be given to parental contributions
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Comparative Evidence on Parental Contributions
28%23%
45%
35% 31%
27%25%
14%
10%
21%
0%5%
10%15%
20%25%30%
35%40%
45%50%
Irl A Bel (f) Bel (w ) Fin Fra D Ita Ned Can
% of total student income from parental transfers
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Setting Parental Contribution Rates
• Need a base income below which no contribution is required
• Contribution should rise with marginal income above this amount
• Contribution rules should be easily communicable to parents
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Parental Contributions: a Formula to Avoid
Canadian Parental Contribution Formula:
(Y-S) * (.45 for 1st $3000) + (.6 for next $3000) + (.75 for all remaining income)
Y = Family After-tax Income
S = Minimum Standard of Living (varies according to family size and location)
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Problems with Parental Contributions
• Some families will not contribute or save the “expected” amount
• There are three ways to deal with this problem:– Deny the student adequate assistance (i.e.
punish the student)
– Set up an unsubsidized loan system to allow students to borrow what parents did not contribute (i.e. help the student)
– Set up measures to encourage parental savings (i.e. help the parent)
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Why Savings Programs?
• Loans are about smoothing consumption forward from the point of purchase
• Savings are about smoothing consumption backwards from the point of purchase
• Savings are thus a natural complement to loans
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Rationales for Education Savings Programs
• to assist in cost-shifting from state to individuals;
• to discourage an over-reliance on borrowing as a means of spreading costs over time;
• to help families hedge against future tuition increases;
• to help families meet the “expected” contributions of student assistance programs.
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Other Examples of Government Savings
PromotionsGovernments promote savings for
other significant life events:
» Pensions
» Home Ownership
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Two Types of Savings Programs
• Defined Benefit Programs:
– Contributors make specific contributions over a period of time in order to receive a specific, predetermined benefit at the end of the period.
• Defined Contribution Programs:
– no guaranteed return; the end product is simply the sum of contributions plus interest or gain accruing to the capital over time.
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Examples of Savings ProgramsEducational Savings
Housing and Pensions
Defined Benefit
Pre-paid tuition plans (USA)
Bauspar programs (Germany, Central Europe); most state-pension programs
Defined Contribution
RESP/CESG (Canada), Coverdell Savings Accounts (USA)
RRSP (Canada); 401(k) (USA); PEL (France); Chilean-style pension plans
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Tools for Promoting Savings
1 - Matching donations to a registered savings program
2 - Providing favourable tax treatment of contributions to a registered savings program
3 - Increasing the rate of return to an investment
4 - Providing favourable tax treatment to the return on investment
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Savings Promotions ToolsFavourable Treatment of Capital
Favourable Treatment of Returns to Capital
Cash Benefit
Matching Savings Programs (e.g. Canada’s CESG)
Interest top-ups (e.g. France’s PEL)
Tax Expenditure
Tax deductions/credits for contributions to plans (e.g. most voluntary retirement savings programs)
Tax-sheltered or tax-free growth of savings within registered plan (many IDAs, Canada’s RESPs)
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Linking Savings and Loans
• Bauspar model provides specified loans in return for specified savings over time
• Most effective where credit records are weak and value of purchased asset uncertain
• Likely most effective in transition economies
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Problems With Savings Programs
• the rich have more disposable income and a greater ability to save than the poor, and hence are likelier to benefit from savings programs
• the rich tend to have higher levels of financial literacy than the poor and hence are better able to take advantage of government programs that promote savings
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Canada Education Savings Grant Expenditures By
Income Quartile$150
$101
$70
$40
$0
$20
$40
$60
$80
$100
$120
$140
$160
Highest Higher Middle Lower Middle Lowest
Income Quartiles
Millions in
200
1 D
olla
rs
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Canadian Tuition Subsidies by Income Quartile
$2.53
$2.01
$1.55
$1.23
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Highest Higher middle Low er income Low est
Income Quartile
Bill
ion
s o
f D
olla
rs
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The Balance Sheet on Savings Programs
• Evidence shows that savings programs are slightly more regressive than tuition subsidies.
• Savings Programs are extremely popular politically.
• Savings programs are cheaper than tuition subsidies; if introduced at the same time as cost-sharing measures, it would be a small regressive program replacing a large regressive program.
• Provided that cost savings from cost-sharing are re-invested in expanded opportunities and a system of grants for low-income students, the net result should be progressive and result in expanded access to tertiary education.
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For further information…
Alex UsherEducational Policy Institute
Toronto Office1701-77 Bloor st. West
Toronto, Ontario(416) 848-0237