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Parental Contributions and Education Savings Plans Alex Usher Educational Policy Institute Accessibi

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Moscow, Russian Federation. June 29-30 2004. Who Deserves Educational Subsidies? ... 3) Children who come from low-income backgrounds (North American model...also ... – PowerPoint PPT presentation

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Title: Parental Contributions and Education Savings Plans Alex Usher Educational Policy Institute Accessibi


1
Parental Contributions and Education Savings
PlansAlex UsherEducational Policy
InstituteAccessibility of Higher Education
Challenges for Transitional Economies Moscow,
Russian FederationJune 29-30 2004
2
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 modelalso Australia/UK for
    living expenses)
  • If answer is no.3 then consideration must be
    given to parental contributions

3
Comparative Evidence on Parental Contributions
4
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

5
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)

6
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)

7
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

8
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.

9
Other Examples of Government Savings Promotions
  • Governments promote savings for other significant
    life events
  • Pensions
  • Home Ownership

10
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.

11
Examples of Savings Programs
12
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

13
Savings Promotions Tools
14
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

15
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

16
Canada Education Savings Grant Expenditures By
Income Quartile
17
Canadian Tuition Subsidies by Income Quartile
18
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.

19
For further information Alex Usher Educational
Policy Institute Toronto Office 1701-77 Bloor st.
West Toronto, Ontario (416) 848-0237 ausher_at_educat
ionalpolicy.org
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