Research Topic: Financial Sustainable Development of Higher Education Institutions in Developing Countries

I. Introduction
Education is an economically and socially productive investment and in the majority of the both industrialised and developing countries, it is funded mainly by the government (Psacharopoulos, 1986). The expansion of education received by individuals depends both on their and governments’ fiscal resources (Barr, N., 2008). In recent years, however, the world financial-economic crises and adverse macroeconomic conditions have reduced most government’s ability to continue expanding quantity of educational institutions, improving quality of education and widening access, all subject to a fiscal constraint. At the same time, the potential contributions of students and their families are limited by the current financial arrangements (Albrecht & Ziderman, 1995). The result is underinvestment in education, particularly in higher education. However, more investment in human capital will lead to higher economic growth rates and that the rates of return on these investments for both government and private individuals would be very profitable (Steyn and Villiers, 2006).
Most empirical studies by several researchers, such as Barr, N. (2008); Johnstone, B. & Marcucci, P. (2010); Psacharpoulos, G. & Partinos, H. A. (2004); and Sam, M. (2011) reveal that higher education has expended significantly in the last quarter century in most of the developing countries, but this expansion has not been great enough to drive the social rate of return on such investment near that of alternative investments. Hence, each country’s context requires different solution to the investment and funding difficulties, given the constraints under which institutions operate and the political realities in the country (Johnstone, 2004).
In recent decades, a growing number of countries have sought innovative solutions to the substantial challenges they face in financing HEIs (Salmi & Hauptman, 2006). In most countries around the world, one of the principal challenges is the demand for higher education is growing far faster than the ability or willingness of countries to provide public resources that are adequate to meet this demand (Psacharopoulos, 1986). On the other hand, competing demands on public resources are growing more intense as governments around the world face challenges across the board in providing more and better public services, including health care, housing, transportation, agriculture and the full range of education (Salmi & Hauptman, 2006). In this context, higher education is often far from the highest priority for public funding in both industrial and developing countries.
Governments and institutions of higher education, in both industrialised and developing countries, have responded to the mismatch between available public resources and the growing demand for higher education in several broad ways. One related response has been to seek additional private resources through the commercialization of research, instruction and other private use of institutional facilities and staff (Sanyal & Johnstone, 2011). However, the most frequent response has been to mobilise more resources principally by introducing or increasing tuition and other fees as a way of rising cost sharing (Albrecht & Ziderman, 1995; Brown, 2001; and Johnstone, 2004). Perhaps less commonly found response as mentioned by Sam, M. (2011), in lower-middle level income countries, has been an increased reliance on some forms of creative financing (e.g. bond issuance) that allow for greater public and private partnerships in providing services related to higher education activities.
This research work addresses to answer the question of how higher education institutions (HEIs) can achieve the financial sustainability and what financial factors (i.e. sources of funding) might significantly influence on the financial sustainable development of HEIs in low-middle level income countries. The research study is structured as follows: the rest of the introduction reveals the historical perspectives of university funding. Section two briefly discusses the international trends in the public and private financing of universities. Section three considers the examples of cost-sharing and issues concerning it. In section four, the implementation of more effective deferred payment strategies in the both industrialised and developing countries is debated in detail.
Historical perspectives of universities funding
A substantial innovation in higher education occurred during the Roman Empire. Initially, Roman education borrowed heavily from Greek traditions in science and the arts. In the first and second centuries, the Romans developed the study of law, which was seen to be extremely important for preserving order throughout the Empire. While the emperors started to provide financial assistance only to higher education and to provide donations for particular chairs (Albrecht and Ziderman, 1995).
The renaissance period in Europe, the HEIs have funded mostly by students and the Catholic Church. For example, the two major prototypes for this collective university arrangement appeared in Bologna and Paris. The Bologna University was organized by students who elected the administrative employees for the institutions. The students-dominated prototype became common throughout southern Europe, in contrast, teachers administered the University of Paris (Weisbrod, 1962, part 2).
At the beginning of the nineteenth century, the first instances of largely State supported universities were in France and Germany. The University of Berlin and the Ecole Polytechnique in Paris were founded to provide necessary technical manpower to work in government. In the twentieth century, the pattern of developing publicly supported institutions to provide administrative and technical manpower was exported to many developing countries that were colonies of European countries. The universities trained the colonials who lived in the country for the civil service, since it was a less expensive option than educating them at home. Nevertheless, after these countries achieved independence, the structure for the universities system was already in place and most governments decided to expand these institutions rapidly.
Albrecht and Ziderman (1995) argue that higher education history reveals three important points: First, universities were consumer demand driven institutions, until the early nineteenth century, to which financing of universities were dependent on students and not government funding. Second, as a consequence of this funding relationship, universities were much more responsive to student demands. Third, the imputes for massive state intervention, both finance and provision, was the training of individuals for administrative and technical careers in the civil service. For instance, in Greece and China, private universities concentrated to train individuals to become scholar administrators. In the Islamic world, students could hire teachers inside mosques for religious instruction.
Ransom, Khoo and Selvaratnam (1993) point out that the role of HEIs are very crucial to generate new skills and prepare graduates for positions of leadership and responsibility in a rapidly changing, increasingly complex and competitive world. Since, a substantial increase in enrolments has been followed in universities of lower-middle income countries in the last two decades. However, both public and private resources (which will be discussed in the next section) were not sufficient to meet the increasing enrolments and costs. Darrell and Dundar (2000) note that “the number of students in developing countries has more than tripled over the past two decades, but the amount of recurring public resources allocated to higher education has only increased by about 15% to 20%”.
In recent years, many researchers, particularly economists and educationalists, have proposed the adoption of a market approach to funding HEIs. It is expected that competition provides universities with incentives to improve quality and to introduce dynamic innovation while at the same time costs can be reduced to maximize the return (West, 1997). Leslie and Slaughter (1997) and Williams (1995) pointed out that increasing the use of market mechanisms can achieve greater efficiencies and responsiveness, also government controls can be further deregulated by expanding the role of private funding and by increasing commercial activities by HEIs themselves.

II. Public and Private Provision/Financing of HEIs
Public provision of institutions of higher education:
As it is known already the regardless of the size or characteristics of the higher education system and regardless of a country’s wealth or politics, all costs of higher education are borne by a combination of four sources of finance: 1) government finance – the traditional tax-subsidy system, 2) Students – where each student pays for her/his own education, 3) Parents – where parents pay for their children education, 4) Institutions/organizations (Jonstone, 2002). In most of the both industrialised and developing countries the public HEIs financed by public funds, either via Ministry of Higher Education or Ministry of Finance (Barr, 2003). A basic indicator in the comparison among countries is public expenditure on higher education as a percentage of the GDP of each country.
Table 1 illustrates a summary of figures by UNESCO of the total expenditure on higher education as a percentage of the GDP made by local, regional and national governments in 2001 for 84 countries. The average public spending on HE of 21 European countries in 2001 was 0.95per cent of GDP. The countries of the other continents such as Africa (15), North America (13) and South America (6) expenditures on HE as a percentage of the GDP were between 0.85per cent and 0.88per cent. However, the Asian (24) and Oceania (5) countries expenditure on HE as a percentage of the GDP, namely 0.64 and 0.74, respectively for 2001 were the lower than the average value for all 84 countries.
Table 1: Total expenditure on HE by government as a percentage of the GDP for 2001 according to continent/region Continent/Region | Number of Countries | % of GDP (Average) | Africa | 15 | 0.85 | North America | 13 | 0.88 | South America | 6 | 0.85 | Asia | 24 | 0.64 | Europe | 21 | 0.95 | Oceania | 5 | 0.74 | Total | 84 | 0.81 |
Source: UNESCO Institute of Statistics (2004): Table 11
Table 2 shows that most EU8 countries have managed to protect the percentage of GDP that is devoted to public expenditure on education (slightly higher on average than in the EU15), but with variations between countries, the Czech Republic and Slovakia are below the average. Also, real public expenditure on education has increased faster in the EU8 than in the EU15 since 1995, with Lithuania leading, but the Czech Republic and Slovakia lagging behind. The two groups spend the same proportion of GDP on higher education (1.1per cent) but with variations: no EU8 country approaches the 2.1 per cent of GDP devoted by Finland for this purpose. There is less variation in the proportion of the education budget going to HE - between 17 and 23 per cent: Ireland and Finland allocate much larger shares to HE than any EU8 country.
Table 2: Public funding of higher education (EU8 and EU15 countries, 2001) | Total public expenditure on education as % of GDP | Change in Total real public expenditure on ed., 1995-2001 | Total public expenditure on Higher Education as % of GDP | Tertiary as % of total public education expenditure | EU15 of which: | 5.1% | 14% | 1.1% | 21% | France | 5.8% | 12% | 1.0% | 18% | Ireland | 4.4% | 45% | 1.2% | 29% | Finland | 6.2% | 16% | 2.1% | 33% | EU8 | 5.3% | 25% | 1.1% | 20% | Czech Republic | 4.2% | -1% | 0.8% | 19% | Estonia | 5.5% | 31% | 1.1% | 20% | Latvia | 5.8% | 29% | 1.0% | 17% | Lithuania | 5.9% | 52% | 1.3% | 23% | Hungary | 5.2% | 21% | 1.1% | 22% | Poland | 5.6% | 40% | 1.1% | 19% | Slovenia | 6.1% | - | 1.3% | 22% | Slovakia | 4.0% | 1% | 0.8% | 21% |
Source: Eurostat database
Another Indicator often used to compare the situation in different countries is the public expenditure per student (see Table 3). The challenges facing the EU8 countries in integrating into the EU higher education system is revealed by the fact that, while on average they spend a much higher proportion of GDP per head per student in public tertiary institutions than do EU15 countries, and a much higher multiple of expenditure per primary school student, the number of Euros spent per tertiary student, adjusted for differences in purchasing power, is much lower than in the EU15 group. Moreover, HEIs in the EU8 spend a lower percentage of their budgets on research and development than do their counterparts in the EU15, but even if this taken into account, the contrast in unit educational spending remains (OECD, 2004).
Table 3: Public expenditure per student in the HE sector (EU8 and EU15 countries, 2001) | Expenditure per student in public HEIs (EUR PPS) | Ratio of tertiary to primary expend. per student in public institutions | Expenditure per student in Public HEIs as % of GDP per head | EU15 of which: | 8426 | 1.9 | 38% | France | 8043 | 1.8 | 33% | Ireland | 9282 | 2.7 | 35% | Finland | 9069 | 2.1 | 39% | EU8 | 4877 | 2.8 | 48% | Czech Republic | 5431 | 3.3 | 40% | Estonia | 5143 | 3.1 | 59% | Latvia | - | - | - | Lithuania | 3274 | 1.7 | 39% | Hungary | 6942 | 3.0 | 60% | Poland | 3582 | 1.6 | 38% | Slovenia | - | - | - | Slovakia | 4891 | 4.2 | 49% | Source: Eurostat database
Mora, Palafox and Perez (1995) built a model for financing institutions of higher education and explained the model through an explicit definition of its financial objectives: The first objective is to increase gradually the amount of total expenditure committed to higher education, until reaching the standards of the surrounding countries. The second aim is to increase private contributions of funds at a rate which will allow them to raise their relative importance in the total budget of the university. Thus, Mora, Palafox and Perez (1995) proposed a model for the allocation of resources to the universities in order to achieve the objectives. The most well-known one is a basic fund – formula based financing. Formula based criteria are proposed to provide the basic finance to the universities. The aim of the basic fund is to finance teaching and basic research activities in the universities and should be given to the universities as a lump sum (Mora, Palafox and Perez, 1995).
To achieve the above objectives, it is proposed to establish criteria of distribution which first of all will estimate the equivalent number of students to be financed (FSE) based on the following variables: * Students enrolled for the first time (St) * Graduates (Gt) * Nominal length of the studies (in years or in credits/year) (n) * Coefficient of tolerance in delays (a) * Coefficient of dropouts (b)
Thus: FSE= f(St,Gt,n,a,b) It is noted that the value of each coefficient will depend on discussions between the universities and the administration, but all of them must stimulate the output of graduates in a reasonable time, accepting the financing of only a tolerable rate of dropouts.
Once the number of equivalent students to be financed is fixed, Mora, Palafox and Perez, (1995) mentioned that the total funds for the university (TFU) will depend on: * The amount of the basic subsidy per student (SBF) * The number of equivalent students financed (FSE) * The capacity of the university to offer student places in studies which are demanded by students as a first preference (FP), that is, p = %FP / %S, and the percentage bonus which is desired to offer for this capacity. * The percentage increase in cost of studies of an experimental nature (E) * The proportion of students in experimental sciences (d) * A measure of internal inequality in the universities (D)
This means: TFUt= g(SBFt,FSEt,pt,%,dt,E,Dt)
As in the previous formula, the parameters which accompany each factor will be the results of agreements between all the parties concerned. But, they argue that the proportion of these basic funds should cover 80-85 per cent of the total funds for current expenditure.
Typically, a large share of the public finance goes to the public HEIs themselves and is used for two main purposes: 1) Teaching, this includes instruction, operations and investment to allow instruction and operations, and 2) Research, basic and applied researches (Johnstone, B. and Marcucci, P., 2010). As we have mentioned above, usually public financing generally goes to public institutions. However, a growing number of countries such as Chile, New Zealand, several Asian countries and most of the countries in the MENA, region allow for private providers to compete for public funding for either training or research (Jaramillo and Melonio, 2011). Furthermore, governments can directly finance HEIs or set up agencies devoted to the disbursement of funds on the basis of a detailed mandate or to meet specific policy and priority goals (Barr, 2003). While directly funding universities might theoretically reduce some expanses (e.g. transaction costs) by cutting intermediation, the second strategy might provide a more politically-neutral mechanism to distribute funds among different HEIs.
According to Jaramillo and Melonio (2011) studies, there are four main types of allocation mechanisms for funding of teaching and operational costs of HEIs: 1) Negotiated or ad hoc budgets whereby a specific amount of money is allocated to an institution with or without prior negotiation; 2) Categorical or earmarked funds whereby governments specifically target one or various institutions based on predetermined criteria; 3) Funding formula - was designed to be able to weigh different types of factors and to present a more 'objective' way of determining budget allocation. Formulae vary greatly country to country, Salmi and Haupman (2006) identified three main types: Input-based formulae, costs per student and performance-based formula components; 4) Performance-based funding which focuses on outputs or outcomes, such as the number and/or results of graduates and/or number of students integrated into the labour market.
There is no ideal mix of allocation mechanisms and each country must determine on its own which financing mechanisms and what combination of mechanisms work best in the given context. Thus, it is in the country's interest to develop stable and more sustainable public HEIs, infusing public higher education with a variety of effective and efficient funding mechanisms is one method to support that objective. However, oversight will have to be exercised by ministry of education or some other government body to ensure that mechanisms and programs do not conflict or generate perverse incentives.
In addition to financing HEIs directly, most countries have also been involved in financing its demand (Albrecht and Ziderman, 1995). That means the public funds have been made available to support the studies of selected students by channelling the amounts through the prospective students or their families and through them to the HEIs. In other words, students and their families act as intermediaries whose choices will determine the budget of the HEIs. Salmi and Hauptman (2006) note five types of demand-side allocation mechanisms which can stimulates universities competition: 1) Demand-side vouchers; 2) Government grants and scholarships; 3) Tax benefits; 4) Student loans; 5) Part-grant/part-loan mechanisms.
The empirical studies show that in almost all low-middle income countries the state-run HEIs receive all their funding from the government, which also subsidizes student living expenses. In the majority Asian countries, however, the government subsidy of student living expenses approximates, or even exceeds direct transfers to HEIs to cover recurrent expenditures (Albrecht and Ziderman, 1995). Similarly, they argue that in many universities systems in developing countries, the student support represents a particularly heavy burden on university finances. Thus, Barr (2008) notes the state may both provide and finance student living services as in several African and Asian countries or it may be involved in neither as in most Latin American countries.

Add some numerical examples from both industrialised and developing countries on government funding…
As it is already mentioned above that the main sources of funding for the public HEIs is government appropriation in most of the countries, thus the several developing countries are given as an example here: In Malaysia the main source of funding for the public universities include the government financing, consultancy activities, students and parents, short term professional development programs, endowment and philanthropic (MofF Malaysia, 2008-2010). Public institutions receive government subsidies for financial programmes and expenses such as operating costs and facility expenses. Finance is also secured through government support for tuition and other fees, and contribution from profit making activities through university enterprise (MofF Malaysia, 2008-2010).
In China, funds for higher education are derived from various sources, including government allocations, donations and income from teaching, research and other activities. As illustrated in the figure 1, government allocations and income from teaching, research and other activities are the two main sources of higher education funds. Moreover, the growth rate of government allocations for education was above 10 per cent, between 1999 and 2007. In 2006 and 2007, the growth rate was significantly high, approximately at 23 per cent in 2006 and 30 per cent in 2007. Also, government allocation for education as a percentage of GDP has increased considerably, from 2.32 to 3.48 per cent between in 1995 and 2008 (National Bureau of Statistics of China, 2010).
Figure 1: Sources of funds for Higher Education, 2007
Source: National Bureau of Statistics
In Philippines, however, the private HEIs constitute the majority of the total number of colleges and universities (88 per cent) in the tertiary education subsector and private HEIs represent approximately 62 per cent of higher education enrolment (Department of Budget & Management, 2010). Private universities depend largely on tuition and other fess. Some also receive donations and grants and support from other sources (e.g. industries and businesses). According to DofB&M (2010), some government subsidies find their way to the private HEIs in the form of scholarships for students who enrolled in such institutions and through Grants in Aid for research and institutional capacity building, the amounts of such subsidies is not considerable. But, most of the state money for higher education goes to public HEIs: State Universities and Collages (SUCs) and other government HEIs that are funded by national government agencies (DofB&M, 2010).
Although in the face of growing demand for basic instruction and the consequent decreasing share of higher education in the total education budget, the SUCs have been allowed (through the "Higher Education Modernization Act of 1997") to conduct income generating projects to augment their budget and utilize the generated resources for the institutions' needs. The internally generated income of SUCs amounted to 7.2, 9.4 and 10.2 billion PHP, in 2008, 2009 and 2010 respectively (DofB&M, 2010).
In Uzbekistan, the main source of higher education funding is the government subsidies for the all HEIs, but contributions from tuition and other fees are insignificant. According to UNISEF survey (September 2007) Uzbekistan allocates 9% of GDP to educational needs. In Uzbekistan, individual institutions prepare budget bids which are submitted to and thereafter examined by the Ministry of Higher and Secondary Specialised Education. The total budget is aggregated and submitted to the Ministry of Finance, where a judgement about the total is made and sent back to the MHSSE, which then reallocates the final figures between its institutions (EACEA, 2010).
According to the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan, finances derived from students' paid contracts do not decrease the amount of financing from the budget and can be used entirely for the needs of the educational institution. Also, according to the Decree of the Cabinet of Ministers of the Republic of Uzbekistan on regulation and payment of students’ scholarships (Tashkent, 17.10.2001) a new procedure was introduced on provision of all students with scholarships studying on budget or contractual basis (Decree of the Cabinet of Ministers of the Republic of Uzbekistan, 2001). In addition, the amount of a monthly paid scholarship is included in the cost of the contract. The procedure is related also to Governmental Scholarships of the President of the Republic of Uzbekistan and Government Scholarships named after Beruny, Ibn Sino, Navoi and Ulugbek (Ahmedjanov, 2013). These all examples above reveal that the government is dominant in most higher education institution systems both in financing and in provision. In order to assess the influence of the state dominance for university funding in the developing world, Sanyal and Johnstone (2011) estimated the changes for the period 1999 to 2009 both in public higher education expenditures per student and in GDP per capita by using data from UNESCO Institute of Statistics (UIS) on 104 countries. Their results reveal that in 81 out of the 104 countries, the ratio of public expenditure per student to the GDP per capita dropped. Thus, all the reported Arab states, the Latin America, the South, West and Central Asian countries showed a decrease.
The region where the lowest percentage of nations had a declined ratio was Sub-Saharan Africa. A World Bank (2010) report confirmed this finding for Sub-Saharan Africa: annual public expenditure per student as a percentage of GDP per capita fell from 353 per cent in 1990 to 293 per cent in 2006. Although the points of time and the coverage of the region very, the trend is expected to continue in the same direction. All these outcomes above support the following point, governments have far from adequate capacity to provide the financial resources needed for the serious expansion of higher education in most regions of the world, particularly in low-middle income countries.
According to the UNESCO statistics, it was observed that in 70 out of the 111 countries, the share of public expenditure in higher education increased. In the total public educational expenditure, 38 of them belonged to the developing countries. However, out of 41 countries having a reduction in their share of expenditure in higher education, 34 belonged to the developing countries and only 6 of them belonged to the developed countries. Among the developing countries, a significant number (38 out of 72) could increase expenditure in higher education in spite of the priority given to basic education in these countries during the past decades. Nevertheless, the most of those developing countries had suffered a reduction in their shares (UNESCO, 2010).
Since the expansion is significant all over the world, per student resources available from the government has reduced significantly as well, the situation being worse in developing and transitional countries than in developed countries (Albrecht and Ziderman, 1995). Based on UNESCO statistics, the annual average cost per student varied from USD220 in Madagascar to USD13,224 in Sweden, but public expenditure per student dropped from USD6,300 in 1980 to USD1,241 in the last decade in Africa. In the United Kingdom, the public financing per student dropped by fifty per cent between 2000 and 2012.
The funding of universities in the developing world has been largely borne by the state through tax financing where the cost of education is financed by general taxes, however, very little or zero costs borne by students and their families. For example, in virtually all Sub-Saharan countries, the government provides more than 90 per cent of the support for higher education (Teferra, 2007). In China, 82 per cent of public higher education institutes revenue came from the state funds in 1992 (National Bureau of Statistics of China, 2010). In India, over 90 per cent of higher education budget came from government grants. Singapore universities were receiving about 90 per cent of their operating budget in 1990, but beginning from 1995 they receive only 60 per cent through government funding. Even, in higher level income countries, such as Australia, New Zealand and United States of America, governments funding accounted for 49, 51 and 50.5 per cents respectively, in 2002 (Cheung, 2004).
As claimed by Psacharopoulos (2004), however, such a system is unsustainable in the aspect of increasing demand for higher education coupled with limited fiscal state revenues mainly due to an inefficient tax system. This leads to a reducing of financial resources per student and a subsequent decline in the quality of instruction provided. Moreover, Barr (2008) notes that the worldwide collision between growing higher education and fiscal pressures means exclusive reliance on tax finance creates downward pressure on quality of education. Also, he stated that "tax finance is deeply regressive. If it is unfair to ask graduates to pay more of the cost of higher education, it is even more unfair to ask non-graduate taxpayers to do so". Besides, the historical records in many countries reveal that tax funding has had an insignificant influence to widen access. Private financing of institutions of higher education:
Though Psacharopoulos and Partinos (2004) argue the welcoming atmosphere should be created for the involvement of the private sector in order to improve efficiency in the entire education system and reducing the financial burdens on public finances. They also note the fact that higher education has the lowest social returns to education and the private returns significantly exceeds that of the social return to higher education than other levels of education. Thus, increasing fiscal pressures coupled with these emerging works on rates of returns led to the rising acknowledgment by most developing countries those students in HEIs must pay for the costs of their education. For these reasons, most of the developing countries’ institutions of higher education are turning to the alternative sources of funding, especially private financing of institutions of higher education.
A high proportion of funding for HEIs is provide by private actors in most of the industrialised countries, for example, in the form of tuition and fees, research contracts, endowments or grants (Liefner, 2003). Their demand drives many activities of universities, faculties and staffs. Competitiveness is important for receiving high level of funding, and HEIs have to offer high-quality teaching and research, and foster educational and organizational innovations. However, in traditional public-coordinated systems, programs of teaching and research offered by HEIs are strongly managed by government directives. Also, these systems obtain funding exclusively from their government (Clark, 1983; Flitner 1989), and the government allocates funds on the basis of the previous years' budgets and adds or deducts incremental charges (Ewers, 1996) Though, the state oriented systems have the tendency to conserve structures and be less innovative and less responsive to changes in demand (Clark, 1983).
Proponents of at least some significant cost-sharing also claim that charging some fees for tuition, food and lodging makes for greater efficiency, both in the provision of the higher education and in its consumption (Johnstone and Marcucci, 2010). The final report of UNESCO in 2004 stated as follows: “With regard to inputs, the general consensus is that financial responsibilities should be shared by all stakeholders. More concretely, increased contributions are expected not only from the state but also from students and their families, and from industries and businesses”.
In the developing world, many HEIs have already begun to diversify revenue sources beyond cost-recovery of traditional teaching activities by developing additional forms of income generation from non-traditional activities, such as consultancy services, applied contract research for organizations, short ad hoc vocational oriented courses, tapping alumni and industry for donations and endowments, (Albrecht and Ziderman, 1995). In addition, universities' source of revenue differs in public and private higher education. The educational expenditures per student in public higher education are driven primarily by tuition levels and the state appropriations per student, while expenditures per student in private higher education are driven primarily by tuition levels, non-traditional activities and external gift and endowments (Johnstone, and Marcucci, 2010).
In most of the Asian countries, even today, higher education is free or tuition fees are nominal. Until very recently, universities were not allowed to generate their own income, let alone receive donations (Psacharopoulos, 1986). This has been pretty much the case in most systems of public higher education. In this system, as we have mentioned early this section, HEIs are financed basically through the public purse by taxpayers' money (Cheng, 2008). However, if higher education has to grow, this growth should be supported by private resources. This is very much demonstrated by more mature systems of higher education such as in the United States and United Kingdom. As Levy (2008) and Sam (2011) argue that private contributions are not a substitute for public funding, rather, private contributions are vital element in the development of higher education beyond the basic expenditures. Hence, the contribution of private resources to higher education should not be limited to only private HEIs, it should be a general resource strategy of society to mobilise resources from different sources in order to meet specific needs (Cheng, 2008).
The Figure 2 illustrates the revenue diversification model which reveals that industry can contribute to university finances directly or indirectly through sponsored students and research councils. Since the revenue diversification implies also diversifying the activities of the university system, this process may lead to a change in the role of universities away from traditional teaching for degrees and research. As an example, we can provide the Acherman and Brons (1989) arguments: “If revenue diversification is pressed too far and on too broad a front, then serious issues concerning the appropriate role of the university may arise”.
Figure 2: Financing University: Revenue diversification
Government

Research Councils
Grants Commission
Public Sector

University System
Loan Agency

Students
Industry
Alumni
Private Sector

Private institutions of higher education
An important improvement that has influenced from the quest to diversify universities funding has been the growth in private sector participation. In the 1990s, significant growths in private schools and HEIs have been followed in almost all developing countries (Albrecht and Ziderman, 1995). The main reasons for the expansion of private HEIs are explained by the World Bank (2009) working paper which says that the higher education participation rates remain low in many developing countries and public universities struggle to absorb growing numbers of secondary school graduates. The public HEIs face ongoing challenges, including lack of teaching and research resources and funds, and loss of qualified stuffs to the high level income countries. Thus, the inability of public sector educational institutions, especially in developing countries, to absorb growing numbers of individuals at all levels of education has seen the emergence of private schools and universities (World Bank, 2009).
Studies by Levy (2008) reveals the significant expansion and enrolment in private higher education in the last decades, noting for example, significant growth in the Middle East and North Africa, in several Eastern European countries, in Asian countries such as China, Thailand and Vietnam, and in Latin American countries. Other sources confirm this, for example: In Brazil between 1997 and 2003 the amount of private HEIs increased from 689 to 1652 with student enrolment increased from 970,000 in 1994 to 2.4million in 2002 (Bertolin and Leite, 2008). In Malaysia, the number of private universities rose from 156 to 706 between 1992 and 2001 (Marimuthu, 2008), and student enrolment increased approximately from 320,000 in 2006 to 484,000 in 2009 (Ministry of Higher Education, Malaysia). The number of private universities and colleges in Pakistan grew from 6 in 1994-95 to 54 in 2005-06, while enrolment grew around 40 per cent between 2001-02 and 2003-04 (Larocque, 2008). Private HEIs make up a very large proportion of Korea's education institutions. Approximately 87 per cent of all Korean HEIs are private and 75 per cent of higher education students are enrolled in private institutions in 2009 (KOSIS, 2010).
All this evidence above reveals that the growing importance of private institutions in increasing the participation rates in post-secondary school education. In terms of efficiency, private HEIs have been generally more efficient in the use of resources than public universities. For example, in Jordan, Al-Salamat et al. (2011) argue that the cost per student in the public HEIs averaged at about 14 per cent higher than the corresponding cost in the private universities.
The several Asian countries such as India, Pakistan, Bangladesh and the Philippines have encouraged the establishment of a considerable number of private HEIs by providing regular annual government operating and financial supports (Albrecht and Ziderman, 1995). In Japan, private universities also have had regular state operating support with proportionate public control over their tuition fees and enrolments. In 2004, Japanese national universities have been turned into public corporations, to be run as semi-independent administrative bodies with much greater autonomy and with the power of setting their own tuition amounts, however with reducing government financial support (Sanyal and Johnstone, 2011).
Among the low-middle income level countries, Israel leads with 76 per cent in the state supported private higher education, and In Europe, an OECD (2004) report reveals that 70 per cent and 60 per cent of private enrolments in the Netherlands and Belgium, respectively, were covered by government supports. In 2004, the government of Tunisia introduced a legal framework to encourage private investment in higher education. This process has led to the establishment of a large number of private universities with state provision (Zaiem 2005). However, the private sector generally discriminates against students from poorer backgrounds due to the introduced or increased tuition fees charged by the universities. Although Johnstone et al. (2008) note that tuition fees generate a substantial proportion of income for most private universities and usually reflect the operational costs of these universities.
In summary, a fully government funded higher education system is not necessarily equitable, particularly when access to universities is socially selective or unequally distributed on a geographic or income basis. Since education is generally have both social and private returns, an education system fully paid by students might prove both inequitable and inefficient (World Bank, 2009). But cost sharing with varying proportions of public and private funding according to the context has economic justification (Jaramillo and Melonio, 2011). Though it is important to indicate here Brown's (2001) view regarding the three potential effects of public and private financial supports to higher education. First, the subsidies will increase the total resources devoted to education, which may improve teaching quality. Second, if these subsidies allow instructors and administrators of HEIs to be less responsive to student desire, then the quality of education may decrease as a result of higher subsidies. Third, if these subsidies are designed to satisfy the goals of private funders or donors and not education goals, then these alternative goals may not be consistent with increased teaching quality.

III. Cost recovery via tuition fees in higher education/Cost-sharing in higher education
Major challenges faced by governments throughout the world, in both low- and high-income level countries, are the reform of finance of higher education in response to pressures of increasing private demand for higher education and heavily constrained public budgets. Recent experience in both high- and low-income countries' economies reveals a world-wide trend towards greater reliance on tuition fees to finance the expenses of HEIs (Woodhall, 2007). As Sam (2011) notes that the charging of tuition fees provide some of the much needed funds for these HEIs and shifting the some of the burden of financing education to students and their parents. Moreover, Barr (2003) states that tuition fees will increase efficiency and quality due to increased competition amongst universities in order to attract more students. In addition, Johnstone (2002) claims that tuition fees are a more equitable way of funding higher education particularly in developing countries were higher education is partaken by few and disproportionately by the students of high income parents as this leads to decreasing the repressiveness of tax financing.
A registration and tuition fees are one way to finance the public cost of higher education. Thus the level of fees varies greatly across the world. The most commonwealth countries and United States have a long tradition of moderate to high tuition fees. However, continental Europe countries those belonged to the Soviet Union and other formerly socialist countries, and former French, Spanish and Portuguese colonies or protectorates usually do not charge or charge nominal tuition fees to students in public HEIs.
According to Jaramillo and Melonio (2011) report that around the Mediterranean, education in most public universities is either free or inexpensive (but students from abroad usually have to pay for their education, even in public HEIs). For example, they note as follow "... Algeria, Egypt, Lebanon, Morocco and Tunisia all have no or low registration fees, apart from a few 'parallel programs'. In Egypt, only some fields of study require payment of significant fees. In Morocco, while the government calls for a diversification of resources in its national education charter, fee remain low". In the region, only Jordan and the Palestinian Authority have adopted a different strategy and rely considerably on private contributions to finance public education. In Jordan, approximately 66 per cent of HEIs' expenses are covered by tuition charges and tuition fees in public universities differ between 1,500 and 3,000 US Dollars per year (i.e., 45 to 90 per cent of GDP per capita). While the state decreased public expenses, the tuition charges were extensively increased over the last ten years (Jaramillo and Melonio, 2011).
Although Menene and Otieno, (2007) argue that tuition fee increases the direct costs of higher education and may further limit enrolment to only those students who are able to pay these charges. For example, in Kenya, a highly subsidised fee of 693US Dollars per year is charged by public universities. But the per capita income is $390, which still makes it expensive for poor families (Menene and Otieno, 2007).
In many lower-middle income countries, the one manifestation of high private returns is the strong persistence of excess demand for higher education. There are more willing students than available places. For instance, in Kenya only 21 percent of qualified secondary graduates became students of HEIs in 1981 (Hinchliffe, 1984). In Nigeria, the average acceptance rate for university education was only 16 percent in 1980 – it was even as low as 8 and 5 percent in business administration and law, respectively (Adesina, 1982). In several Asian countries, such as in Singapore, the average acceptance rate for university education was 43 percent in 1978 (Pang, 1982). In Uzbekistan, in 2000 only 26% of all applicants became students of public universities, while the average acceptance rate in 2010 comprised 14% (Ahmedjanov, 2013).
The available evidence above suggests that excess demand is so great that an increase in fees for higher education would not affect overall enrolments in the most developing countries. Also Psacharopoulos (1984) suggests that students’ demand for higher education is relatively unresponsive to increase in private costs. This implies that, within limits, an increase in fees would mostly reduce excess demand and would not cause a large proportion of those currently enrolled to drop out.
In several countries that have increased tuition fees, but enrolments have fallen less than expected. In Uzbekistan, for example, fees have been increased several times for public universities education since 2004, but enrolments have not fallen considerably (Usmanov and Zulunova, 2008, pp. 29-32). However, Mingant and Tan (1986) point out that “the extent to which fees could be increased depends on such country specific conditions as the degree of excess demand and the elasticity of demand”.
A given the heavy subsidization of higher education in most lower-middle income countries, this is important to start raising fees for instruction. Thus, Psacharopoulos (2004) reveals the two ways of increasing user charges for higher education. First, reducing student allowances – this may be the most appropriate method in countries where both tuition-free education and stipends are available for students. Second, charging for services – decreasing allowances, authorities could start charging for tuition to recover at least some part of the cost of students’ education. Evidence indicates that people are still willing to pay for education after imposing or increasing fees for instruction. In Africa, the private returns to higher education are so high that even after students allowance reduced or education charges imposed (or increased), higher education will remain an attractive personal investment (Eicher, 1985).
In most of the Asian countries, the willingness of students or parents to share the expanses of higher education by paying tuition fees and user charges is significantly strong. The main reason could be the belief that higher education is one of the best options to achieve upward social mobility, particularly intergenerational social mobility in which the household gains by improving the social and economic status of their children (Min, 2002). Though, in many East Asian countries, cost-sharing takes the form of enrolment in private universities (Altbach, 2004; Umakoshi, 2004). Attention to the private education has increased when the public sector has been unable to meet the demand. Though the state HEIs in Korea, Japan, the Philippines and several other East Asian economies have served as the core of the higher education system, the market-oriented private sector has led the expansion of enrolment in East Asia (Umakoshi, 2004).
In Korea, for example, private colleges and universities make up a very large proportion of Korea's higher education sector. Thus, 87 per cent of all Korean HEIs are private and over than 74 per cent of higher education students are enrolled in private HEIs in 2007. Moreover, approximately 62 per cent of private institutions' revenues are generated from tuition fees in 2007, and tuition fees account for only 32 per cent of revenues of national/public HEIs. In 2009, the average tuition fees for national HEIs and private institutions were 4.19 million and 4.89 million KRW, respectively. But, it was 7.42 million KRW at private universities and colleges. Over the past five years, tuition fees increased most at national HEIs with an average rise of 8.6 per cent (see Table 1). But at public institutions the average increase was only 5.7 per cent, while the average increase was 5.5 per cent at private institutions (Korean Foundation for the Promotion of Private Schools, 2009). Table 1: Trends in tuition rates by institution type (2005-2009), in 1,000 KRW | 2005 | 2006 | 2007 | 2008 | 2009 | | Tuition | Increase rate (%) | Tuition | Increase rate (%) | Tuition | Increase rate (%) | Tuition | Increase rate (%) | Tuition | Increase rate (%) | National | 3,115 | 7.3 | 3,426 | 10 | 3,837 | 12 | 4,169 | 8.7 | 4,190 | 0.5 | Public | 3,979 | 6.7 | 4,212 | 5.9 | 4,534 | 7.6 | 4,858 | 7.2 | 4,893 | 0.7 | Private | 6,086 | 5.1 | 6,472 | 6.6 | 6,916 | 6.9 | 7,380 | 6.7 | 7,420 | 0.5 |
Source: Korean Foundation for the Promotion of Private Schools (2009)

Figure 4: Trends in tuition fees in Japanese private and national universities
Source: Ministry of Finance (2010)
In Japan, however, there was an insignificant rise in number of students enrolled at HEIs. At both junior colleges and colleges of technology the number of students slightly reduced between 2008 and 2009. As it revealed in Figure 4, there was a slight rise in the amount of tuition fees collected at private HEIs in 2008, while among national institutions the amount of fees collected reminded constant from 2008 to 2009 (Ministry of Finance, 2010).
Nicolas Barr also supported the idea of imposing a maximum level of fees, he argues that the level of ceiling should be high enough to bring an additional funds and to strengthen competitive incentives. But it should be low enough to allow HEIs with little experience of operating in a competitive environment time to build the necessary management capacity and to preserve the longer-term political viability of the reform (Barr, 2008). Furthermore, Johnstone and Marcucci (2010) studied and described, the several principal form of cost recovering via increased tuition fees and user charges. They are summarized below: I. The introduction of more than nominal tuition fees in public HEIs. For instance, in 2010 that the over 20% of the total operating budgets of Chinese universities were covered by tuition fees and other fees paid by students and their families. II. A dramatically increase in tuition fees, that is, at rates in excess of the increase in actual per student costs. For example, the Indian Institutes of Management and Technology increased their education charges sharply in recent years and this increases lead to shifting greater portion of the instruction costs from state to students and parents. Also, it allows public HEIs to growth enrolments without additional governmental revenue. III. Free or only nominal tuition fees are preserved for a limited amount of highly qualified students through introducing the ‘dual-track’ tuition charge (especially common in former communist countries). But, other ‘less-qualified’ students are enrolled on the basis of the payment of full tuition costs. This system contributes significant revenue for the universities. This form of tuition charge is employed in many lower- and high-income countries, such as Russia, the Eastern and Central Europe, Kenya, Uganda, India and Pakistan. IV. The imposition of user charges on food and lodging, to be paid by students or their families. In lower-middle income countries that food and accommodation was provided for free or at heavily subsidized rates. This type of cost recovering could be more politically agreeable than tuition charges in countries that have traditionally provided free or nominal fees instruction and are meeting resistance from politicians and students to the increasing fees for higher education, since, still need the revenue for those country’s government from some form of cost sharing. This user charges have increased in several countries such as Russia and Ethiopia, which employ dual track tuition charges.
In many lower- and high-income countries that individual’s decision to attend higher education is influenced by the total cost that would be incurred. Albrecht and Ziderman (1995) note that in order to understand how fees in particular affect the people decisions, fee levels should be examined in relation to the overall costs. Thus, the Table 2 illustrates the relationship between fees and two types of private costs for five developing countries that charge fees. Please note the figures are average for all institutions and therefore do not reveal the range of fees.
Table 2: The relationship between fees and two types of private costs Country | | Fees as % of Total direct private expenditure | | Fees as % of total net private economic cost | Colombia | | | | | Public | | 4 | | 2 | Private | | 19 | | 14 | Kenya | | | | | Public | | 11 | | 7 | Private | | 42 | | 30 | Indonesia | | | | | Public | | 10 | | n/a | Private | | 20 | | n/a | India | | 18 | | 11 | China | | 9 | | n/a |
Source: Stager 1989; Tilak 1985; Leslie and Brinkman 1988; World Bank Data
The table above illustrates that in most public higher education system, fees represent a relatively small portion of overall private costs to an individual. For instance, fees constitute between 4 per cent and 18 per cent of out of pocket expenditures for Colombia and India, respectively. Even in private higher education system, fees do not represent a majority of expenditures. In Indonesia’s and Colombia’s private institutions, fees are proportionately lower, representing approximately 20 per cent of private cost. Therefore, as Albrecht and Ziderman (1995) argued that the tuition fees are an important, but not the most significant direct expenditure for higher education. However, non-tuition costs and forgone earnings are much more influence for decision making. Also, Carlson (1992) compared the non-tuition student expense with unit costs for higher education for eleven Latin American countries. The results of these studies reveal that even if tuition fees were increased to 50 percent of unit costs, then the largest financial obstacle to attending universities still would be other non-tuition costs.
Another issue with tuition fee is autonomy in setting own fees by universities, not by government. Thus, Barr (2008) points out as follow "... charges set by HEIs have two strategic advantages: They make funding open-ended and thus increase the resources going to higher education, and by strengthening competition, they create incentives to improve the efficiency with which those additional resources are used , not least the responsiveness of the system to changing patterns of demand". However the economic argument is clear here, the issue is highly contested in political terms. As Barr (2008) notes that fees are not controversial in the United States, in most of the countries in Asia and in many of the former-communist countries of Central and Eastern Europe. But, fees are significantly controversial in Western and Northern Europe.
In 1992 New Zealand introduced twin reforms: fees set by HEIs without constraint on fee levels, and student loans which included income-contingent repayments, charged a positive real interest rate related to the government's cost of borrowing and this loan covered all charges and living costs. However, as a result of political pressures created by worried middle-class families (the main reason for worries of people was that the nominal students debt increased year by year), the scheme was diluted in 2000. On the other hand, without liberalization of setting fees by universities quality and access suffer.
The view of Barr (2008) regarding the independence in setting fees was as follow: "the opposite policy direction - no liberalization - is equally a mistake. Free higher education or low fixed fees create two problems. Quality suffers because the education budget has to compete with other budgetary imperatives and within the education budget, universities compete with preschool, school and vocational educations. As a result, the real funding per student declines." He also mentioned that the access suffers as well, "if places are scarce, middle-class students tend to get them; if places are not scarce, the need to finance a mass system typically means that resources for the pro access strategy are limited" (Barr, 2008).
As it was mentioned above, however, in several countries the idea of tuition fee has been met with some opposition from politicians and students. Its implementation has been slow due mainly to political reason. For example, Eboh and Odasi (2002) note that “the introduction of tuition fee policies led to two very violent student demonstrations between 1976 and 1986 in Nigeria, which claimed the lives of students and swept away two Vice-Chancellors from their jobs”. Therefore, the various loans and grants programs has been introduced across many developing countries in order to mitigate the negative influence of tuition fees and other cost sharing mechanisms on especially poor students.
In summary, the following list of the six suggestions for an effective cost-sharing scheme from tuition and other chargers has been summarised based on the Bruce Johnstone (Johnstone, 2004) studies:
First, government funds should be supplemented with cost-sharing scheme from student and parental contributions, particularly for students living expenses, but also for some part of the educational costs in the form of tuition.
Second, the cost-sharing schemes including tuition charges have to be introduced only after some policies in place for programmes of means-tested financial support and generally available student loan schemes.
Third, the determination of tuition fees should be depoliticised and entrusted to a body independent of the state and the institutions.
Fourth, it should be kept in mind that the need for cost-sharing involves the need for non-governmental revenue now, making the families contribution to tuition an important component.
Fifth, in most low and lower-middle income level countries that the student loan programmes should not be treated as alternatives to an up-front tuition charges. Thereby forgoing the student and parental contribution altogether, which is the characteristic of income contingent loans (it will be briefly discussed in the next section).
Finally, solutions to the financial constraints facing the higher education institutions all over the world should not be sought only at the expanse of governments, graduates, students and parents. Also other methods of generating funds should be discovered.

IV. Delayed Payment Strategies: Student Loan Schemes
Student loan programs have been studied and discussed by many researchers in various forms in the case of both developing and developed countries. The extensive theoretical and comparative literature on student loans has been surveyed and developed by Maureen Woodhall. A particular emphasis of her work has been on the potential role of student loans in lower- and lower-middle level income countries, (Woodhall 1983, 1987, 1990, 1991, 2004). However, Johnstone (2005) has studied student assistance mechanisms in industrial countries. More theoretical discussions have been developed by Mingat et al. (1985) and Psacharopoulos and Woodhall (1985). While most of this literature has been extremely optimistic about the efficiency of student loan scheme, few studies by Albrecht and Ziderman (1993), Barr (1989) and Psacharopoulos (1986) have actually examined their financial impact in lower-middle income countries.
Thus Pscharopoulos (1986) argues that the increasing private costs might keep qualified students from poor families out of university unless they have access to loans or grants for their higher education. He also claims that due to few developing countries have well-functioning capital markets and few students have acceptable collateral, many people cannot borrow to finance their own or their children’s study. Nevertheless, tuition rises and the elimination of allowances in higher education could be supplemented by student loan schemes to improve individuals’ access to financial credit. In addition, Albrecht and Ziderman (1993) suggest that the governments must intervene with student loan programs that allow students to delay payment for their education until after they graduate and thus loan program requires only small payment from their future income. Also, Barr (1989) notes that: “In theory, student loan programs bridge the gap between fees and the ability to pay after the student receives the returns to past investment in higher education”.
In 1989, for example, Australia’s higher education system was confronted with a shortage of resources after expanding access to public universities which was free of charge for all students. In order to finance that expansion, the state decided to impose tuition fees of 20 percent of unit costs. However, these introduced new charges were combined with a student loan scheme offered to all students regardless of their capitals to allow them defer their payments for tuition and then this loan scheme has significantly increased the profit of the universities, (Hope and Miller, 1998). Also in Singapore, the 1988 fee increases were accompanied by subsidized student loans worth about half the value of the new tuition fees (Shantakumar, 1992).
Some study by Pscharopoulos and Partinos (2004) reveal that apart from increased tuition fee and living cost recovery the student loan programs have other positive effects. Competition for places in HEIs would not be longer limited to applicants who can pay for their study. A large number of highly motivated students from poor family would be able to compete for places, as a result, better selection of students for HEIs. Another studies by Chapman (2005) shows that in Argentina, Colombia and Panama, students with loans are more motivated to complete their studies successfully and in the minimum time than are non-borrowers.
It is important to mention that student loans have been either on merit basis or on need basis. Either ways, as Woodhall (2004) states that loans will improve participation rates amongst the economically less privileged in the society, since in effect they pay nothing or nominal fees during the period of their study. Besides, Pscharopoulos (1986) points out that these loans will increase efficiency since students will enrol in the courses with the highest return. Though, Johnstone (2005) notes that any effective loan scheme should be largely need based in order to promote equality, since the implementation of only merit based loan schemes would bring the risk of being awarded mostly by middle-income students. Also Nicolas Barr argues that needs-based awards are a better instrument for widening access, since merit-based grants are likely to be mainly in middle-class benefit because children from middle-class families usually do well on tests and other measures of achievements (Barr, 2008).
Although Albrecht and Ziderman (1995) argue that targeting a more limited program of financial aid to needy students has proved to be difficult in many instances. Since, income reports on family earnings can be unreliable and thus an individual’s capability to pay is not always clear. But, these problems with targeting do not mean that such programs are inappropriate for most countries. The key to a successful program is government determination to implement the targeting of support (Barr, 1989). For example, in 1989 China began to charge tuition and other fees in HEIs and to offer financial aid for students from needy households. The government has controlled and regulated universities and colleges to keep an appropriate level of tuition. At the same time, many types of financial assistance for students from needy families, such as grants-in-aid, the state-subsidised student loans, scholarships, and work-study programmes, have been implemented. Thus the government considerably increased the number of financial assistance available to students from poor households, from less than Y 10 billion in 2006 and to over than Y 30 billion in 2008 (Min, 2008).
As we know that the easiest way to share the cost of higher education for government is to consider increasing tuition fees and other user charges. But this solution brings one main theoretical drawback which is the potential existence of credit constraints. Thus Jaramillo and Melonio (2007) noted that the existence of potential credit constraints means that students from disadvantaged social backgrounds may not only be unable to pay for tuition fees with their savings, however they may also be prevented from borrowing the necessary money due to 'imperfections' of credit markets.
Most of the literature on student loans and credit constraints, however, is based on U.S. and OECD countries data. Unfortunately, there is little scientific evidence relying on data collected in developing countries. Although Johnstone and Marcucci (2010), in their recent report, reviewed a number of student loan schemes in developing countries (see table 3).
According to this loan scheme studies and analysis, Johnstone and Marcucci summarised as follow "too often, the present discounted value of the repayment stream is totally insufficient to cover the cost of the money plus the administration and collection costs quite aside from any level of non-repayment or default. Adding the losses from default and other causes of non-repayment - frequently very great, especially in developing countries - leaves many governments unable to provide loans either in sufficient numbers or in sufficient amounts to meet the dual objectives of widening participation and effecting real cost-sharing."
However, they also noted: "if the design flaws could be solved or ameliorated by more reasonable rates of interest charged on student loans, and if the defaults could be lessened by e.g., better collection practices together with the addition of a governmental guarantee, or credit-worthy cosignatories, or by some degree of borrower risk rating (i.e., not lending to students deemed to be unlikely or unable to repay on the basis of their academic program or likelihood of completion), then - again at least in theory - student loan agencies in low and middle-income countries could tap banks and other entities in the larger capital market seeking profitable uses of their savings, at least for some portion of the annual student lending volume" (Johnstone and Marcucci, 2010). In other words, some student loan schemes are self-sustaining and most of them require annual pubic financing to continue their activities.
Table 3: Student loan schemes in low and middle level income countries
Source: Johnstone and Marcucci (2010)
One of the central theoretical and practical rationales for student loan schemes is to diversify source of funding for universities. However, as noted by Pscharopoulos (1986) that most loans are used not for HEIs funding, but they are used to limit the government burden for student maintenance. Thus, Albrecht and Ziderman (1995) examine the experience in four developing countries (Chile, Colombia, Indonesia and Quebec) where a loan scheme is combined with fees in public universities to help cushion the effect of cost-recovery. He compares the unit instruction costs for higher education with student contribution through direct fees and the present value equivalent of payments via student loans. In these four countries, with some of the highest public sector cost-recovery in the world, government recover only between 2 per cent for Colombia and 14 per cent for Quebec of instructional costs from loan recipients, (Albrecht and Ziderman 1992). In Chile, the net cost recovery from students who repay loans via loans is only 11 percent, (Schiefelbein 1990). Overall, effective cost recovery from loan recipients is extremely low in many lower and lower-middle level income countries.
In most of the lower-middle income countries, however, student loan schemes face challenges such as ineffective implementation, ineffective administrative policies, low loan-recovery ratio and high migration rates of graduates (Barr, 2003). Also Nicholas Barr argues strongly against the use of blanket subsidies which are common with loan scheme in the developing world. Thus blanket subsidies tend to make the scheme expensive in fiscal terms and less sustainable for low income nations.
According to the studies by Johnstone and Marcucci (2010) that students' accommodation and food expenses are usually higher than tuition fees. Since, student loan schemes have been generally limited to cover only tuition fees and in some cases limited to only students in the public universities. Therefore, these loans contribute very little to reduce the financial burden to attending HEIs. But, as Mingat and Tan (1986) noted that the success of cost recovery of student loan scheme depends on the future incomes of graduates. Thus, in Africa, loan schemes perform poorly as compared to Asia and Latin America, since the proportion of loan costs in terms of future salaries is higher and thus much more difficult to bear (Mingat and Tan, 1986).
One of the vital critical determinants of successful implementation of student loan schemes is to utilise repayment mechanisms that best fit the situation of the country. In this regard, based on Salmi and Hauptman (2006) works there are two basic approaches: (1) mortgage-type loans, which represent the more traditional student loan repayments arrangement, are reimbursed on an amortized (equal) basis over fixed period of time, and the amount of time required for full repayment may range from three years to fifteen years. Also those two researchers discussed and noted the Graduated and Extended Repayments Plans as following way; "GERP – as a way of providing borrowers of mortgage-type loans with greater flexibility than what is allowed under fixed amortized repayments, student loan authorities in some countries permit graduated payments (smaller earlier in the repayment period and larger later payments) and/or extended beyond the normal fixed term to reflect more adequately the evaluation of a student borrower's income over the course of his/her working life" (Salmi and Hauptman, 2006). In recent years, governments of United States of America, Venezuela and Mexico, have moved to graduated repayment plans.
Alternative formats for loans, particularly loans with (2) income contingent repayments have received considerable attention and they are discussed in detail by Albrecht and Ziderman (1995); Barr 1989; Johnstone (2005); Woodhall (2004). Such loans with income-contingent repayments are labelled ‘income-contingent loans’ in the literature, in which loans are repaid as a proportion of a graduate’s income each year. Johnstone (2005) stated that “income contingency is an exciting and potentially valuable type of loan contract for many borrowers, which can make debt more manageable and less risky”. He identified the one main advantages of this loan program, which is fixed graduate payment schedules: where the total repayment period is fixed, but repayments are smaller at the beginning and larger at the end of the period, to reflect rising earnings (Johnstone 2005).
Albrecht and Ziderman (1995) argue that “income contingent loans constitute a mechanism for achieving a balance between effective recovery of costs and minimum risk to the borrower. Under such a loan, the size of repayment is linked to the graduates”. He also mentioned that income contingent loans limit debt burden in a given period and this loan are expected to be more favourable to lower wage earners. Since, students with high income have to pay back their loans more quickly; they benefit less from any subsidy. Conversely, students with lower salary receive greater subsidies, since they are able to repay more slowly.
On the other hand, income contingent loans are relatively new area for most of the lower-middle income countries. There have been increased debates and attempts at income contingent loans in Asia, Africa and Latin America indicating its growing importance (Chapman, 2005). However, Chapman and Lounkaew (2010) point out that the main obstacles faced by income contingent loan systems for the institutions of many countries relates to the efficiency of collection and the high administrative costs. Thereby, most developing countries have neither the fiscal nor the administrative capacity for the successful implementation of loan scheme or collection of repayments.
Though Nicholas Barr demonstrated the several possibilities of implementing the income-contingent loans in developing countries (Barr, 2008): "In the form of fixed monthly repayments, but where people can request a lower payment if they can demonstrate that their earnings are below a threshold, as in the Netherlands. Although in principle the least demanding administratively, the approach depends on the capacity to measure earnings; where this is not possible – for example, where informal earnings are widespread – income-contingent repayments become impossible. ... On the basis of a person's last completed tax return, hence lagging by an average of 18 months, as in Sweden and Hungary. ... As a payroll deduction alongside income tax and social security contribution as in Australia, New Zealand, and the United Kingdom. Although preferable in educational terms, since loan repayments track earnings with no lag, this approach is difficult, if not possible, to implement in most developing economies."
He also stated that in a system with income-contingent repayments, the subsidy - offer loans at a zero real interest rate, achieves not a single desirable objective. This subsidy is extremely expansive in fiscal terms. Loans are significantly small due to the resulting fiscal pressures and this harming access. Moreover, the subsidies crowd out university income, harming quality and they are deeply regressive (Barr, 2008): "The subsidies do not help students (graduates make repayments, not students). In a well-designed system, they give relatively little help to low-earning graduates, since unpaid debt is eventually forgiven. Also, they do not help high-earning graduates early in their career: with income-contingent loans, monthly repayments depend only on earnings; thus interest rates have no effect on monthly repayments, only duration of the loan. Thus the major beneficiaries are successful professionals in mid-career, whose loan repayments are switched off earlier because of subsidy than would otherwise be the case. This is not the target group that policy makers had in mind."
Therefore, the two principal ways (mortgage-type and income-contingent repayments) of ensuring adequate repayment levels may not be realistic options for many lower, middle and even for some high level income countries. For these countries, if student loans are viewed as an important component of their financing strategy for higher education, then identifying private organizations and firms with international experience in capitalising student loans and providing the necessary repayment services may be the one realistic way to implement an effective student loan system (Salmi and Hauptman, 2006).
In most of the low and middle level income countries, however, students still continue to have access to scholarships and grants for both tuition fees and living costs. These grants and scholarships are awarded both on needs basis and merit basis. Such schemes are intended to increase access amongst low income students while mitigating the negative impact of the loan scheme. For example, the University of the Philippines combined sharp tuition fee rises with improved financial support to needy students in 1989. The ‘Socialized Tuition and Financial Assistance Program’ (STFAP) has increased both overall institutional revenues and support for needy and academically qualified students (Woodhall, 1989).
The Catholic University of Santiago assesses need, capability and field of study in determining the aid package for each student. After determining the amount of support the student needs, the form of support was based on the field of education chosen by the student. Thus, students in fields that will lead to high incomes after graduation receive loans, while academically qualified students in fields with lower expected earnings receive grants, (Albrecht and Ziderman, 1995).
Admittedly these student loan schemes can help students to finance the private cost of higher education, however, they cannot entirely replace scholarships/grants as a source of financial aid especially for qualified students from poor families. In both lower- and high-income level countries, therefore, scholarship programs remain important since they ease the transition to greater cost recovery in higher education. But their design necessarily varies from country to country.

V. Section, Cost Efficiency... Production cost frontier ... includes econometric analysis and estimations...