1 Means-testing and Parental Responsibility Prof. Dr. Frank Ziegele

2 content rationales, starting points, preconditions for means-testing „institutional design“ of means-tested systems example Germany (GER)

3 Individually targeted subsidies in a broader context different forms of subsidies to individuals (students, parents) in the higher education context means- or need- oriented according to political preferences (gender, region,...) induce incentive effects (educational savings…) internalize externalities (GER: „Kindergeld“, tax reductions - adverse means-testing!) focus

4 rationales for means-testing starting point: cost-sharing and financial crisis of public budgets  shift from institutional to individual subsidization concentrate subsidies on relevant groups efficient (=targeted) method to reach redistributive goals enable cost-sharing without access barriers for socially disadvan- taged create a precondition for cost-sharing through means-tested variation of cost share

5 possibilities for means-testing in student finance means-testing of subsidies means-testing of loans tuition fee subsidy maintenance subsidies reduc- tion no pay- ment specific subsidies (housing, free meals..) general maintenance grant GER access to loans loan conditions (interest) repayment schemes tax deductibility income contingent repayment

6 some conclusions variety of possibilities to realize means-testing, clear concept needed! income contingent loans (ICL) also include means-testing, not according to family income but to lifetime income of academics ways of means-testing with ICL: debt forgiveness, lowering net present value of repayment for low incomes by longer terms, progressive repayment

7 criteria for choosing out of the possibilities distributional goal: redistribution between households of different income levels (e.g. fee reduction) vs. open access (ICL possible) normative orientation: student as part of family (e.g. access to loan according to family income) vs. student as independent individual on career path (ICL) efficient combinations (e.g. students eligible for maintenance grant get automatically fee reduction: loan for maintenance purposes is enhanced by volume of tuition fees)

8 criteria for choosing out of the possibilities districutive vs. fiscal goals (e.g. ICL with means-tested access - double means-testing because of equity + targeting) special purposes (e.g. solving housing problems) vs. subsidization without distortionary effects (e.g. general maintenance grant)

9 preconditions for means-testing acceptance for principle of cost-sharing according to ability to pay acceptance of government authority to reveal ability to pay existence of systems of income/wealth calculation (tax system, limited „shadow economy“) existence of administrative capacities, agencies (tax authorities, social insurance, special administration)

10 „institutional design“ of means-testing find a proper indicator for ability to pay income wealth categorial indicators gross vs. net income, taxable income GER Kindergar- ten: gross income threshold for integration? excemptions (housing)? only financial assets? developing countries: telephone, electricity, car as assets e.g. children, illness, ethnicity GER: tuition fees for long term students criteria for choice observable? incentive effects? manipulations? efficiency in targeting? combinations?... conflicts, trade-offs

11 further design tasks decision makers parental respon- sibility time structure federal vs. state systems (GER: federal) governmental or institutional level limitations (first academic degree-BMS!, age, marriage) signal for responsibility in case of ICL one-time calculation (+ reporting duties) repeated calculations (time horizons?)

12 further design tasks information sources incentives testing scheme self estimation proof with documents external sources (e.g. banks, GER) e.g. regular audits penalties income/wealth calculation aggregation of income (e.g. divorced parents) income limits

13 further design tasks benefit scheme communi- cation, services need- testing lump sum under certain income threshold diminishing subsidies with increasing income volume of reduced cost shere informations about system (campaigns) services, assistance in application process (GER: ad- ministration vs. student unions) e.g. means-tested access to maintenance grant, but need-oriented calculation of grant (GER: living alone/ with parents)

14 Example BAföG: means-testing of maintenance grant criteria: income + wealth (student, parents, spouse) income: according to taxable income, proof by tax declaration (parental income: 2 years before), possibility of lowering on request if current income is substantially lower (preliminary grant) wealth: only student, tangible + intangible assets, free: € € (spouse) € (per child) comparison between income + wealth (per month and need (per month), need minus (income + wealth) = volume of grant

15 student income/wealth0,-- € + parental taxable income (per month) ,-- € - expenses for social insurance (differentiated if employed or not, employed parent: 21,5 %, max € p.y.) - 866,-- € - taxes actually payed (income + church tax) ,-- € - special expenses of house owners (tax law) - 0,-- € income according to BAföG2.734,-- € - basic allowance (differentiated living together/separate: € vs. 960 € €) 1.440,-- € - allowance for other children, receiving no BAföG (435 € per child) 435,-- € net income according to BAföG859,-- € Example BAföG: means-testing of maintenance grant

16 net income according to BAföG859,-- € - 50 %- 429,50 € - 5 % per sister/brother (receiving no BAföG) - 42,95 € Ability to pay per month386,55 € Example BAföG: means-testing of maintenance grant

17 basic need per month (differentiated: living alone(with parents) 348,-- € + payment in case of high housing costs (max. 64 €) + 58,-- € + health insurance+ 0,-- € + special costs for studying abroad (study in Russia: 130,-- €) + 130,-- € total need per month536,-- € - ability to pay per month386,55 € BAföG payment149,45 € Example BAföG: means-testing of maintenance grant

18 maximum payment period: mormal study time (mostly 9-10 semesters) further allowance possible for special hardships (bureaucracy!) changes possible every 2 years independence of students (no parental income included): more than 30 years old, more than 5 years of work Example BAföG: means-testing of maintenance grant

19 Conclusions cost-sharing makes means-testing inevitable analysis of preconditions necessary design tasks, but always trade-offs, systems must remain imperfect variety of alternatives (incl. ICL)