One incredibly cool thing about this week’s budget is that it creates a policy experiment that may settle some age-old questions about financial barriers to education. I speak of course of the abolition of the in-study income clawback.
When people talk about “financial barriers” to education, they are usually conflating two separate phenomena. The first has to do with return on investment: if prices rise too high, students will say they are not interested because it’s more money than it’s worth. Usually this is phrased as a matter of “I’ll to take on too much debt”, though the problem actually isn’t debt-related (borrowers and non-borrowers alike pay the same amount – a bad deal is no less crummy if you’re paying it out of pocket rather than resorting to loans). The second has to do with liquidity: students might like to take a course, even if its expensive, but they simply can’t scrape together enough cash to pay the fees and keep body and soul together. The solution to the first problem is to lower tuition and/or provide more grants. The solution to the second problem could also be to provide more grants, but loans could probably achieve the same thing a whole lot more cheaply.
The thing is, when we talk about students having “financial barriers”, we never really specify which of these two phenomena is the main issue for students. And this is a problem because it means we may not be getting the policy response right. If a student has $20,000 in debt, and you have $1,000 to give them, does it make more sense to hand them the $1,000 and let them spend it how they like, or should you use it to reduce their debt?
The abolition of the in-study income clawback actually gives us a heaven-sent chance to understand how all of this works in practice. The way the threshold currently works is that students get to pocket $100 a week with no clawback. Everything above that amount is clawed-back at a rate of 100%. In this way, up until now, work and loans have been perfect substitutes – working more doesn’t increase the amount of money you have to spend, it just means you have less debt.
But now, suddenly, work and loans are no longer substitutes. Students who work just got handed a whole bunch more money in the form of larger eligibility for aid, which will usually be met through loans (though some will find their extra need met by remissible loans, which are essentially grants). How they use it will tell us a lot about what students actually care about. If they keep all that new money – that is, if they maintain their work hours, take all the new loan money, and spend it – we can infer that the main issue for students is not debt, not return on investment, but liquidity. On the other hand, if they choose not to borrow the extra money, it tells you that, in fact, debt and rate of return are the bigger issues. Similarly, we can test sensitivity to borrowing by comparing the behaviour of students whose extra aid is made up of repayable loans vs. those whose loans will be forgiven: if there is no difference between the two, it’ll be a pretty good indication that students prioritize liquidity over lower debt.
For what it’s worth, my money’s on students caring more about the short-term than the long term: I predict they’ll take the extra money and spend it. That will make life tougher for advocates of tuition reduction over greater loan remission: if the evidence suggests that students prefer to consume more in the short-term rather than save for the long-term, why should governments do anything other than provide greater liquidity through loans?
Though it probably isn’t what students had in mind when they lobbied for this measure, the learning opportunity afforded by this policy experiment is a golden one. Let’s hope a research plan exists that will help us monitor the results so as to better understand students’ preferences.