Conundrum of Higher Education Funding: Public, Private or Other?

Funding higher education is no easy task; usually the choice is made between increasing already overstretched public budget allocations or raising politically unpopular tuition fees. Countries may choose different financing models, but most successful higher education institutions supplement their financing sources with research and development and medical services revenues.

Although, due to ageing societies, government budgets in developed countries tend to be squeezed by social security and healthcare-related expenses, some countries still manage to increase their public spending on education. For example, in 2016, the Icelandic Government’s expenditure on education per household was the highest among developed nations, growing by 31% since 2015.

Iceland is also one of the Nordic region’s most productive countries in terms of issued university papers. The country leads in terms of the number of papers per USD1 million GDP and is second in terms of growth in scholarly output and paper per capita after Denmark. What is more, Iceland is the leader according to the percentage of paper co-authored with industry, thus raising the applicability of its university research.

Graph 1: Per household government expenditure on education and % growth in expenditure over 2015-2016 in developed countries in 2016

Another significant part of the education financing comes from tuition fees, which is mostly reflected as revenues from households. Such revenues are expected to grow over the next five years in the majority of developed nations, most notably in the UK, where it looks set to surpass the CAGR of 4% witnessed over 2011-2016 and expand by a CAGR more than 5% over 2016-2021. Expansion might be trimmed by preferences revealed in the 2017 General Election though, when the Labour Party, promising free education, was overwhelmingly supported by the UK’s younger voters, which cost the Conservative Party its majority in parliament.

Tuition fees was also a highly disputed topic in the US presidential election, and although fees are not expected to disappear, they are planned to be abolished in New York. What is more, the newly elected South Korean leader Moon Jae-in has prioritised a reduction in tuition fees, while the Japanese Government has suggested putting tuition-free education for 18-22-year-olds into the Constitution. Abolishing tuition fees in some or all public education institutions might come at a price though, where the teaching quality (or quantity of students) will be compromised by a lack of funds, as stretched public budgets will be unable to cope with the numbers of education seekers.

Graph 2: Consumer Expenditure on Education in Developed Countries in 2011-2021

So, the conundrum remains: how to ensure sufficient funding for education whilst not compromising on overstretched public budgets or implementing politically suicidal tuition fee rises. Some universities have managed to overcome the issue by generating revenues from selling other services. For instance, in 2016, in the largest educational institution in the US, the University of California, nearly half of revenues were generated by its medical centres, educational activities and auxiliary enterprises, while direct state appropriations and student tuition fees accounted for 25% of revenues combined. A similar pattern was echoed in numerous universities across the US. Another top player among educational institutions, the University of Oxford, generated the majority of its revenues from research grants and contracts (40% of turnover in 2015/2016), as opposed to 22% from tuition fees and 15% from direct government appropriations.


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