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Tuition subsidies are not provided primarily for the benefit of students. In the article Why subsidise tertiary education? we established that tuition subsidies are generally provided by governments in recognition of benefits that accrue to society as a whole from tertiary education. Therefore, the question has to be asked: Is it better to give the subsidies to the student or to the education provider?

Giving subsidies to the student

Giving the subsidy to the student is likely to result in providers that are responsive primarily to students. This is likely to maximise participation effects.

The student stands to gain (often substantial) private benefits from tertiary education. To provide the subsidy directly to the student may result in reduced public benefits from the subsidy since students will seek to influence the tuition offered by providers to maximise their private benefits. In addition, students have incentives to rent seek by excluding opportunities for others to benefit (either directly or indirectly) from their education. After all, the graduate's knowledge and skills are most valuable when others have not acquired them. In addition, providing subsidies directly to students may not be the most administratively efficient way of distributing subsidies, since there are many more students than educational providers. Payment of subsidies to students could entail a large number of individual transactions for government.

There is also the problem of restricting the application of the subsidy to the purposes intended. The subsidy is intended to subsidise the acquisition of education, so providing a cash grant to the student would provide no guarantee that the money was spent on educational needs. The alternative is to provide the subsidy "in kind" by way of a voucher. See the article entitled "What are the key factors in designing a system of student vouchers? for more information on designing a voucher system.

A tuition subsidy voucher scheme that is redeemed at providers means that government must have administrative arrangements with both students AND providers. Since providers effectively receive the subsidy anyway some of the benefits of giving subsidies to students are reduced.

Giving subsidies to the provider

Subsidies can, alternatively, be provided directly to the provider by the government. This will tend to be efficient administratively, and provides for a means for a government to influence provider behaviour.

Providers have reasons for not wanting to maximise spillover benefits. They are dependent on maximising student enrolments, so some types of spillover effects potentially reduce the number of future students that they may be able to attract. However, they possibly have stronger incentives to respond to student demand. For this reason, subsidies direct to a provider may reduce incentives for responsiveness to student demand, providing weaker incentives for participation and creating strong reasons for political lobbying activity to direct the focus away from students and on to government.

The subsidies may be related directly or indirectly to individual student enrolments depending on the desired provider response. However, if government's desire is to maximise participation, thereby maximising the opportunities for spillover effects, then subsidies should be related directly to students normally through an education volume measure related to enrolments.

In some jurisdictions, a mix of incentives will be provided, including student enrolments factors, factors relating to the quality of delivery, management of the institution's financial situation, and perfomance in relation to other government specified requirements.

In the majority of cases subsidies are directed to the provider either on a contractual (purchase) basis or in the form of grants. For more information on how to direct subsidies to providers you should see the section dealing with Funding Tertiary Education Providers.


There are trade-offs involved in making the decision about where to direct tuition subsidies:

Directing subsidies to students would require some form of voucher mechanism and would be likely to create the best incentives for providers to be fully responsive to students, but would involve higher transaction costs and only students would be able to influence provider behaviour; whereas

Directing subsidies to providers would involve lower transaction costs and increase opportunities for government to influence aspects of provider behaviour, but would reduce incentives for responsiveness of providers to student demand, and increase the chance of political lobbying by provider groupings.

This article Copyright 2000 Mike Woods MPP BSc DipTchg, Mike Woods & Associates

Posted by Mike Woods at January 04, 2002 08:48 PM

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Copyright 2002 Mike Woods & Associates