Student Loans: An Effective Instrument for Cost Recovery in Higher

Governments and universities have trouble reconciling the goal of keeping high-er education widely accessible with the need to retrieve some of its costs from students. Student loans offer a plausible solution to the problem. But loan pro-grams turn out in practice to have been a disappointing instrument of cost recov-ery: analysis of twenty-three programs found that students repay only a small portion of the value of the original loan. Subsidies, high default rates, and high administrative costs have eroded the value of repayments. Sometimes loan pro-grams have proved as expensive as outright grants. This article argues that most loan programs could be reformed to improve fi-nancial effectiveness—through targeting, charging positive real interest rates, designing repayment plans to take account of the likely pattern of graduate earn-ings, and ensuring that the oversight institutions can and will collect. Or govern-ments could explore alternative devices for cost recovery, such as a graduate tax. This approach levies a higher income tax rate on beneficiaries of government-subsidized higher education and thus preserves the idea, implicit in loan pro-grams, of paying for education with future earnings. As part of an effective tax system, a graduate tax could bring in significantly more revenue than traditional loan programs. In the past thirty years, the most fundamental change in higher educationpolicies throughout the world has been the attempt to democratize access.Rapidly expanding primary and secondary school enrollments, increased demands for skilled labor, and the growing perception of higher education a