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CHAPTER SIX

FINANCING EDUCATION
6a i).Analyze some the sources of educational finance

As seen in Chapter I, education is an economic good. For education to be supplied, resources are
required. These resources come at a cost and thus the need to address the issue of financing
education. As seen earlier, education has got social costs and private costs. This lectures will
look at different sources of educational financing and the accompanying challenges.

FINANCING EDUCATION

Sources of educational finance:

1. Public sources

This is support channeled to education from public coffers/government budget. The government
raises money for financing education either through general taxation or specific education taxes.
Under general taxation, the education sector receives its share of the national budget alongside
other sectors. On the other hand, education taxes include, for example, payroll taxes.

This is a tax levied on all firms exceeding a certain size and it is quite common Latin America
where it is 1% of the payroll. A similar example in Kenya is the Industrial Training levy.

2. Private

This is support channeled to education from non-governmental sources. This includes:

 Direct financing, e.g. fees paid by students

 Indirect financing, e.g. direct labour: For example, local communities may undertake to
build a school or to provide goods or services in kind.
 Endowments/donations from NGOs, FBOs, CBOs and other philanthropists.
 External aid, e.g. World Bank loans and credit, aid from bilateral and international
agencies etc. For example, the FPE programme in Kenya has benefited immensely from external
aid.
 CHAPTER SIX

FINANCING EDUCATION
6a ii). Explain the rationale for financing education in the Public Sector

Rationale for Financing Education in the Public Sector:

Education is considered as both a private and social investment which is shared by individual
students, their families, employers, government and other social groups e.g. NGOs, FBOs and
CBOs. On the one hand, the high private rates of return to educational investments at all levels
justify large investments by individuals and their families through immediate or deferred cost
sharing. On the other hand, there is a strong case for government (Public) funding of education
due to a number of reasons, namely; income distribution, capital market imperfections,
information asymmetries and social benefits/externalities. Consequently, many governments are
involved the provision of education at all levels, an activity which in many cases takes up a
significant portion of public expenditure. Indeed, on average, public investment in education
accounts for about 2/3 of all educational spending in many countries.

(numbering has issues)

1. Income Distribution:

Education can reduce income inequality by promoting productivity gains in agriculture and
facilitating the absorption of labor into the modern industrial and service sectors. Equality of
distribution of education usually results in equality of distribution of income. Thus, education
opens new opportunities for the poor and so increases social mobility. Normally,, not all groups
in society can afford to meet the direct and indirect costs associated with investing in education
and the state/government, therefore, has a role in promoting equality of opportunity. If education
were provided under pure market conditions, only those who could afford to pay tuition fees
could enroll. This would result to not only underinvestment in education from the social point of
view but also to the preservation of income inequalities from one generation to the next as
education itself is a major determinant of lifetime income (60%)

2. Capital Market Imperfections

In many countries, the private cost of education, is beyond the means of many poor families.
Most credit markets do not provide an effective solution because of strong imperfections that
reduce participation, especially of the very poor people. Ideally, the financial constraints can be
 overcome by borrowing given the high private rates of return to education. However, there are
high risks for both borrowers and lenders in educational financing and banks and other f
financial institutions do not accept the promise of future earnings as collateral. The failure of the
capital markets thus affects not only the lower income groups but also middle-income groups
that cannot finance tertiary education without credit. To mitigate capital market imperfections,
many countries have established government funded  Student  Loans Schemes which offer low-
interest loans to higher education students, e.g. the Higher Education Loans Board (HELB) in
Kenya which gives loans to university students.

3. Information Asymmetries:

Research has shown that parent with little education are usually less informed than better-
educated parents about the benefits or quality of education. In the Uk, working-class parents tend
not to encourage their children to aspire to a university education (Barr, 1993). Furthermore, the
Capital Market for education is far from perfect. Students from poor households are
understandably reluctant to saddle themselves with debt or to enter fixed obligations because
they do not know their future incomes. Additionally, students from poor backgrounds tend to
underestimate their prospects.

On the other hand, lenders hesitate to accept risks backed only by the uncertain future incomes of
reluctant debtors (Arrow, 1993)

4.  Externalities/Social benefits:

Proponents of public expenditure on education argue that the benefits of education accrue not
only to its direct recipients but also to the society at large. In the absence of government
provisions, expenditures on education are smaller than would be desirable. According to an
adaptation of the growth theory, a worker’s productivity is affected by the average level of
human capital as well as by the worker’s own human capital (Lucas, 1988). Therefore, the state
invests in the education of its citizens due to the following spill-over benefits:

1. Reduction in fertility for women: – the more educated a woman is, the lower is her
fertility. Education influences fertility through higher age of marriage for women and increased
contraceptive use. Thus, education plays a major role in controlling population growth.
2. Improved health: – the more educated the parents, especially the mother, the lower the
maternal mortality and the healthier is the child.
3. Better social relations: Education brings together people from different social-cultural
backgrounds thus creating social cohesion.
4. Reduction in crime rate

Challenges Facing Public Financing of Education:

1. Misallocation among education sub-sectors:

Public spending on education is often inefficient when it is misallocated across levels and within
levels. In low and middle-income countries, the rates of return to investment in basic education
(primary and lower secondary)are generally greater than those to higher education. Therefore,
basic education should ideally get priority when it comes to public spending in education
especially in countries that are yet to achieve universal enrolment in basic education. However,
in most of these countries, spending per student is titled in favour of higher education students
were subsidization is till very high. This subsidization increases the demand for higher education
even though education at that level is generally less efficient for society as a whole in countries
that have yet to achieve UPE and basic secondary education. Subsidization of Higher Education
is most acute in Africa. Although private rates of return to higher education are 2.5 times higher
than social rates, public spending per student in higher education in Africa is about 44 times
spending per student in primary school.

2. Misallocation within subsectors

Inefficiencies which are prevalent within all education sub-sectors reflect an inefficient mix of
input such as staff and instructional materials. For example, in Kenya and man other developing
countries, about 80% of the public education budget is consumed by salaries for teachers and
education personnel leaving very little for the acquisition of vital teaching-learning resources.
Schools in low and middle-income countries could save costs and improve learning by
increasing student-teacher ratios. They would thereby use fewer teachers and would be able to
allocate resources for teachers to other inputs that improve achievement e.g. textbooks, in-
service teacher training etc. the scope of improving efficiency through modest increases in
student-teacher ratios is enormous because teacher costs typically account for 2/3 of total
spending in education in most developing countries.

3. Inequitable public spending:

Public spending in education is inequitable when qualified potential students are unable to enroll
in institutions due to lack of educational opportunities or because they are unable to pay or obtain
financing, e.g. in Kenya only 10,000of the 60,000students who qualify for university admission
get government funding.

Similarly, although public spending on primary education generally benefits the poor, total
public spending on education in low and middle-income countries often favors the rich mainly
due to the fact that relatively fewer poor children attend secondary and higher education
institutions. Spending more public funds per higher education students than per primary student
is inefficient in most countries as the social rates of return to primary education are higher than
those of higher education, especially in counties with less than universal primary and secondary
enrolments. It is also inequitable that those students who gain access to higher education receive
a larger absolute subsidy that those at lower levels bearing in mind that higher education students
come disproportionately from richer families which are better able to pay for higher studies.

4. Inadequate funds for education.

Although many developing countries devote almost a 1/3 of their national budgets to education,
the funds are in a majority of the cases inadequate due to the numerous educational needs at all
levels of education. This usually results to a thin spread of the financial resources allocated to
education thereby comprising effectiveness.

CHAPTER SIX

FINANCING EDUCATION
6a iii). Examine some of the challenges facing public financing of education

Challenges Facing Public Financing of Education:

1. Misallocation among education sub-sectors:

Public spending on education is often inefficient when it is misallocated across levels and within
levels. In low and middle-income countries, the rates of return to investment in basic education
(primary and lower secondary)are generally greater than those to higher education. Therefore,
basic education should ideally get priority when it comes to public spending in education
especially in countries that are yet to achieve universal enrolment in basic education. However,
in most of these countries, spending per student is titled in favour of higher education students
were subsidization is still very high. This subsidization increases the demand for higher
education even though education at that level is generally less efficient for society as a whole in
countries that have yet to achieve UPE and basic secondary education. Subsidization of Higher
Education is most acute in Africa. Although private rates of return to higher education are 2.5
times higher than social rates, public spending per student in higher education in Africa is about
44 times spending per student in primary school.

2. Misallocation within subsectors

Inefficiencies which are prevalent within all education sub-sectors reflect an inefficient mix of
input such as staff and instructional materials. For example, in Kenya and many other developing
countries, about 80% of the public education budget is consumed by salaries for teachers and
education personnel leaving very little for the acquisition of vital teaching-learning resources.
Schools in low and middle-income countries could save costs and improve learning by
increasing student-teacher ratios. They would thereby use fewer teachers and would be able to
allocate resources for teachers to other inputs that improve achievement e.g. textbooks, in-
service teacher training etc. the scope of improving efficiency through modest increases in
student-teacher ratios is enormous because teacher costs typically account for 2/3 of total
spending in education in most developing countries.
3. Inequitable public spending:

Public spending in education is inequitable when qualified potential students are unable to enroll
in institutions due to lack of educational opportunities or because they are unable to pay or obtain
financing, e.g. in Kenya only 10,000of the 60,000students who qualify for university admission
get government funding.

Similarly, although public spending on primary education generally benefits the poor, total
public spending on education in low and middle-income countries often favors the rich mainly
due to the fact that relatively fewer poor children attend secondary and higher education
institutions. Spending more public funds per higher education students than per primary student
is inefficient in most countries as the social rates of return to primary education are higher than
those of higher education, especially in counties with less than universal primary and secondary
enrolments. It is also inequitable that those students who gain access to higher education receive
a larger absolute subsidy that those at lower levels bearing in mind that higher education students
come disproportionately from richer families which are better able to pay for higher studies.

4. Inadequate funds for education.

Although many developing countries devote almost a 1/3 of their national budgets to education,
the funds are in a majority of the cases inadequate due to the numerous educational needs at all
levels of education. This usually results to a thin spread of the financial resources allocated to
education thereby comprising effectiveness.

CHAPTER SIX

FINANCING EDUCATION
6a iv). Examine the concept of diversifying sources of Financing Education

Diversifying Sources of Financing Education

During the 1960 and 1970s, most of the expansion of education in many countries was financed
by increased public expenditure on education which rose in relation to national income and
public expenditure as a whole. However, from the mid-1970s, public investment in education
slowed down due to a number of factors. One, many countries suffered serious budget deficits as
a result of the “oil shock” which led to a sharp increase in the prices of oil seriously affecting the
terms of trade and increasing and international indebtedness of oil importing nations. Secondly,
other sectors such as health, population, nutrition and rural development began to give education
major competition for public funds
 Thus, education has over the years faced growing financial constraints. The World Bank (1980)
has stressed that the increasing demands on public finance at a time when government funds are
stagnant or even failing in many developing countries can only be resolved by either reducing
the unit cost or diversifying sources of finance(i.e.  finding additional sources of financing
education).

Some of the steps that can be taken to diversify sources of finance for education are:

 Cost-recovery measures: Due to strained public financial resources, many governments

have been forced to introduce cost-recovery measures in the provision of education. This has
mainly been through charging of tuition fees for students, especially at post-primary school
levels. The argument here is that higher education has got higher private benefits than social
benefits and it, therefore, makes sense for the beneficiaries to meet a bigger percentage of the
cost. In Kenya, the cost-sharing system in education was formally introduced in 1988 through
Sessional Paper No. 6 of 1988 on Education and Manpower Training for the Next Decade and
Beyond. Public universities started charging tuition fees in 1991/1992 financial year. To cushion
the poor against dropping out of school due to inability to raise the required fees, many
governments operate bursary schemes and students loan schemes.

 Employers providing or contributing to training: Some countries charge training levies to

firms with a certain number of employees. This levy office collected is used to finance specific
educational programmes. Firms are also encouraged to provide on the job training to their
employees thus relieving the government the burden of providing such training.

 Community involvement in financing education:  Some countries have attempted to

overcome financial constraints by using direct labour to build schools, by allowing communities
to provide goods and service in kind rather than cash payments, and by relying on other forms of
community involvement or self-help. For example in Kenya, many educational institutions have
been developed through the “Harambee system”.

 Income generating activity : Educational institutions have been encouraged to undertake

initiatives that can generate income rather than just relying on the government. For example,
some universities in UK have diversified their activities to engage in profit-making activities
with their local industrial and commercial communities. In Kenya, public universities have
started the parallel degree programmes which charge full fee as a way of generating extra income
to bridge the deficit in government funding. The University of Nairobi has set up the University
of Nairobi EnterpriseServices (UNES), a limited liability company that manages all its income-
generating activities. The National Polytechnics in Kenya generate about 25% of their income
from Income Generating Activities (Njihia 2005). Many secondary schools in Kenya engage in
farming which supplements their budgets a great deal.
Financing of education in the Philippines is mainly by the government (public) and by households
(private), and since the 1990’s there has been a shift in the public/private mix in education financing
towards higher private share. Between 2007 and 2040 the schooling age population of the Philippines is
projected to continue to increase in size and the age structure to shift towards higher proportion in the
age group that attend the tertiary school level.