Rethinking the Welfare State: The prospects for ... - e-Library

Post-secondary education 183
universities (which require lower physical capital investments as a prerequisite to
effective entry) virtually guarantees that foreign institutions will be an important
competitor in the local education marketplace. 72 On the other hand, funding students in
foreign programs creates more daunting monitoring challenges because governments will
typically have less information respecting the character of the institutions than those in
their own jurisdiction, increasing the scope for students and others to defraud the state.
Further, because foreign-educated students are less likely to return home after graduation,
the risk of loan non-repayment is increased.
Scope of the voucher entitlement
As discussed above, the voucher we are proposing would be geared to tuition levels and
reasonable living expenses and repaid on the basis of ex post realized incomes. In
Friedman’s original conception of the university voucher, however, graduates would pay
a percentage of their future taxable income (above a certain threshold) based on the
amount that they originally borrowed to finance their education. Thus, the government’s
contribution would not so much be a loan as it would be an equity investment in an
individual’s human capital that reaps dividends throughout a beneficiary’s life and
throughout each year as employers withhold mandatory payments with income taxes.
However, a program designed on this model introduces certain incentive problems.
Students who anticipate earning high incomes post-graduation will refrain from
participating in the program because they fear that government will appropriate too large
a share of the value of their enhanced human capital, and will, if they can, seek to secure
loans from other sources who offer funding on more conventional terms, although to the
extent that education-based loan markets are underdeveloped, their capacity to do so may
be constrained. Alternatively, as Riddell notes, economically prosperous graduates may
seek to exit to other states having lower effective levels of taxation, so that they avoid the
repayment obligation. 73 Although sponsoring governments could seek to impose an exit
tax on graduating students when they leave their home jurisdiction equal to the amount of
the outstanding student debt, such taxes are enormously difficult to implement and also
have pernicious effects on individual liberty and societal wealth creation.
In any event, Friedman’s scheme is not the only proposal that could be considered. As
an alternative, the government could operate a true loan program in much the same way.
Borrowers would pay a minimum percentage of their taxable income (that would be
withheld at source along with their income taxes) toward their loan liability and the
accrued interest until they have fully paid it off. This would allow students to pay off
their loans at a pace that they could manifestly and demonstrably handle—higher
payments in years of high income, and lower payments in years of lower income—and
would not disproportionately place the burden of funding post-secondary education on
the most successful, ambitious, or financially fortuitous graduates—as Friedman’s
scheme may
Of course, under this alternative system some post-secondary education borrowers
would never pay off the full amount of their loan because of premature death, the
difficulty and costs of tracking persons who leave the jurisdiction, or because, for
whatever reason, they do not engage in monetarily rewarding employment. To the extent
that money is borrowed and never repaid, the loan scheme would subsidize post-