Financing the Future

“My parents didn’t go to university,” Monica Carvajal says as she marches through Santiago with thousands of other students. “I’m lucky, because I do. But I don’t know how I’m going to pay for it and I think it’ll be even harder for the next generation of students, for my children.”

Monica’s concerns are shared by many. As Chileans become richer, more of them can go to university or pay for their children to go – a luxury they could not afford themselves. What was once the preserve of the elite, is now an aspiration for the majority. Whereas in 1990 there were 250,000 students in Chilean higher education, there are now over a million. Seven out of 10 students at Chile’s colleges and universities are the first members of their families ever to extend their education beyond high school.

That is tremendously positive for the country but also puts an enormous strain on finances. “Progress brings its own problems,” says José Joaquín Brunner, an educationalist and former government minister. “Every student who leaves university now knows they will have to compete for jobs with a great mass of graduates, all equally well qualified.”

In a bid to cope with the rapid expansion in demand for higher education, the state has ploughed more money into the system. Between 2006 and 2010, state funding rose by 19% a year in real terms, easily outstripping the increase in state spending on education as a whole. In 2010, 17.6% of public spending on education went to higher education.

And yet still it seems to be insufficient. Universities and colleges say they are cash-strapped, and students like Monica are sinking into debt.

According to the OECD, Chile spent 2.2% of its GDP on higher education in 2008, well above the OECD average of 1.5%, but it says more state funding is needed. That’s because Chile has one of the most privatized tertiary education systems in the world, and the state’s contribution is relatively small.

Of the amount spent on higher education in 2008, just 14.6% came from public sources. In the United States the figure is 37.4% and the OECD average is 68.9%. In Chile, in contrast to most countries, the vast majority of funding comes from students and parents in the form of hard-earned cash and loans that have to be repaid. Relative to per capita wealth, Chile has some of the highest tuition fees in the world.

The challenges facing Chile’s higher education system are not solely financial. Structural reforms are needed too. These include simplifying funding, reforming the system of scholarships and loans to ensure students do not leave university with huge debts, demanding more accountability from universities to ensure they spend money wisely, and better regulation to improve teaching standards and ensure students graduate with vocational skills that will help them find jobs.

Without the prospect of such reforms, the so-called “Chilean Winter” of student protests could drag on well into the summer.

Three-tier system

About one third of Chile’s higher education establishments are universities, but high-school graduates in Chile can also go to technical institutes or colleges. This year, for the first time, the number of students entering these types of programs surpassed the number starting university.

The funding mechanism for these places is fiendishly complicated. According to the OECD, “Chile offers a unique combination of financing characteristics and approaches which are hard to find anywhere else in the world.” Many observers are less polite, describing the system as archaic and unfair.

The only higher education institutes eligible for direct state funding are the 25 universities that belong to the Chilean Council of Rectors (the CRUCH in Spanish). They include the country’s most prestigious centers of learning, the University of Chile and the Pontifical Catholic University. Sixteen of the CRUCH universities are public while nine are Catholic and/or private.

Chile’s other private universities, including Adolfo Ibañez, Andrés Bello, Alberto Hurtado and Diego Portales, are ineligible for direct state funding but can compete with the CRUCH universities for indirect funding to supplement their tuition fees.

This division is historical. It dates from 1981 when the military government enacted major education reforms. But many, including Gregory Elacqua, director of the Public Policy Institute at Diego Portales University in Santiago, say this system is outdated.   

“The separation of CRUCH and non-CRUCH is ridiculous,” says Elacqua. “Private universities should be able to compete with public universities for public funds.”

In particular, regional universities which are often attended by first generation students from poor families, are not able to compete for public funding, he says.

“We should be focusing on which institutes produce the best quality, not whether they belong to the CRUCH or not,” says Elacqua.

In their defense, the CRUCH universities say they need direct funding because, unlike vocational institutes and many private universities, they invest heavily in research that benefits other universities and, indeed, the entire country. Without such funding, they say, research will dry up and universities will become little more than factories, churning out graduates at the lowest possible cost.

One big criticism of Chile’s funding system is that the state allocates money to universities on the basis of historical criteria rather than results. Last year, 95% of direct state funding was allocated this way and only 5% was performance-based. That means that old, established universities, like the University of Chile and the Pontifical Catholic University which together receive around 33% of total funding, effectively get money simply for being old and established. As a result, Elacqua at Diego Portales says they have no great incentive to improve their standards.

This is one thing the government wants to alter. “The funding system should follow the same historical logic but with some perfections,” says the Undersecretary for Education, Fernando Rojas. “We want to make more funds available, but in the form of performance-based agreements with clear indicators and targets.”

That means ensuring that institutions meet quality standards. The Education Ministry plans to create the Superintendence for Higher Education later this year, which is designed to improve regulation and make the funding system more transparent.

To profit or not to profit?

Another big division in higher education concerns profit. Chilean universities, whether private or public, are prohibited from making a profit but institutes and technical colleges are not. Again, this is a historical anomaly which many feel should be rectified.

But in reality many universities do make money, to the indignation of students, by exploiting loopholes in the law. Harald Beyer, an economist and education expert at the Center for Public Studies (CEP) in Santiago, estimates that over 40% of Chilean university students graduate from universities whose “not-for-profit” claims are dubious.

Francisco Marmolejo, a Mexican advisor to the World Bank and OECD who helped compile a comprehensive study of Chilean tertiary education, agrees. “It’s stupid to pretend that profit doesn’t exist in the system at the moment,” he says. But rather than trying to close the loopholes, Marmolejo says that Chile should come clean and simply allow its universities to make money.

The problem is that the leaders of the student movement are unlikely to agree on ideological grounds. But the students’ alternative – an entirely not-for-profit system – is equally problematic. Chile’s institutes and colleges are allowed to make a profit and, indeed, 87% of them are for-profit entities, so why should they now be told that the rules have changed?

For reasons dating from the educational reforms of the 1980s, and despite the students’ objections, Chile is likely to continue with a mixed profit and not-for-profit system, at least for now. The key, therefore, is to make it more efficient.

Ringing the changes

One way of doing that would be to improve the accreditation system. At present, Chilean higher education institutes must meet certain quality criteria set by the National Accreditation Commission. But many, particularly institutes and colleges where resources are scarce and teaching is sometimes poor, regularly fail.

Many colleges do not even apply for accreditation, saying the process is too expensive. In 2009, only 54% of college graduates studied at accredited institutions. The rest went to institutes that are effectively outside the system and therefore unregulated.

Aside from accreditation, the big challenge is to raise standards and improve the curriculum. “We spoke to employers and asked them if graduates had the skills they needed,” Marmolejo recalls. “The answer was often ‘no’.” 

Corporate governance is another area where there is room for improvement, and here Chile can learn from the United States.

At traditional US universities, board members include businesspeople and Nobel Prize winners as well as academics. Places like Harvard, Stanford and Yale are non-profit institutions structured like charities, but run like businesses. In contrast, Chilean universities are run by their own academics, with relatively little accountability.

“They are effectively self-governed and, as such, they are subject to all sorts of bureaucratic state controls,” Beyer says. “We need to move towards an American model, in which universities are effectively controlled by outsiders.”                                                                                                            
Endowments and alumni donations are another significant source of funding for US universities. Harvard’s board manages around US$27 billion in endowments. There is no such philanthropic culture in Chile, and it will be hard to create one overnight, but some universities are trying and Beyer says the government should encourage them.

Scholarships and loans

These structural changes, if implemented, would alter Chile’s universities and colleges but would not directly help students whose main concern is how to graduate without accumulating large debts. Here, reform to the system of scholarships and loans is essential.

At present, aspiring university students can apply for a bewildering array of grants. There are scholarships for the sons and daughters of teachers, for the victims of human rights abuses under the military dictatorship, for the children and grandchildren of those victims, for the Mapuche and Chile’s other ethnic minorities, and for people who live in remote parts of the country like Easter Island and Aysén. Many students have no idea which scholarships they are eligible for and the OECD says the list should be simplified.

The student loan system is also complex and cripplingly expensive. According to the OECD, the average British citizen spends 2.9% of their salary paying off student loans once they graduate. In the United States, the figure is around 5%. But in Chile, it is 15% or more, every month for up to 20 years. Many graduates simply cannot afford that burden of debt.

The type of loan students are eligible for depends on whether they study at a CRUCH or non-CRUCH establishment. Again, the historical division is significant and anachronistic. Students at CRUCH universities can apply for Solidarity Fund loans. These are issued by the state, come with interest rates of around 2% and are income-contingent, meaning that graduates who fall on hard times can repay them more slowly.

Students at non-CRUCH establishments, on the other hand, have no such luxury. Their state-backed loans, known as CAEs, are financed by banks, come with an average interest rate of 5.5% and are not income-contingent. If graduates lose their jobs or suffer a drop in earnings, they still have to meet their repayment obligations. In a recent concession to the students, the government agreed to lower the interest rates on these loans. But many observers say it should go further and merge the two systems.

Ultimately, Chile should perhaps consider moving to a different system altogether, and here Australia might serve as an example. Its loan system is admired worldwide and has been copied in the UK, New Zealand and Hungary.

In Australia, the state lends money to students to cover the cost of their studies and then claims it back as a tax once they are working. The rate at which each graduate repays depends on their earnings, but it usually amounts to no more than 6% of their salary. The beauty of the system is that the tax is collected at source, which means it cannot be evaded. In contrast to Chile, almost all student loans in Australia are repaid in full.

The private sector, here to stay?

Whether students like it or not, the private sector will continue to play a significant role in Chilean higher education. It is deeply entrenched in the system and, in any case, the global trend is towards more private involvement in education, not less.

Given that, Chile could look to Japan and South Korea for ideas of how to improve standards. Like Chile, and unlike most OECD countries, their higher education systems are heavily reliant on private funding.

Chile’s students are receiving more financial help than ever before. Last year, for example, 216,000 students, or 23% of all undergraduates, received a CAE loan. The World Bank estimates that, without that help, over half of those students would not have been able to study. Next year, the government plans a huge increase in the number of scholarships, particularly for students from poor families.

But demand keeps growing. The World Bank estimates that by 2016, 460,000 students in Chile will have CAE loans, more than double the current number.

If Chile is to meet that explosive demand, it must implement radical reform, look abroad for inspiration and make a break from the past.

Gideon Long is a freelance journalist based in Santiago.