The fragile global economic situation as well as the sizeable public and private sector debts have added to the general clamour around the financing of studies. What would be the most appropriate solution? The present article dwells upon the current study financing system in Latvia as well as briefly outlines the reforms proposed so far.

Current study financing model in Latvia

The current system is based on central planning in allocation of budget places governed by the Law on Education and the Law on Institutions of Higher Education. Section 12, Part (2) of the Law on Education stipulates that the state covers the fees for the acquisition of education for a specified number of student positions which is set once every year. The number of study places to be financed from the funds of the State budget in an institution of higher education are determined by the Minister for Education and Science on the basis
of a proposal of the Council of Higher Education (Section 51 of the Law on Institutions of Higher Education). It was decided in January this year that 19 353 places would be funded from the budget in the academic year 2013/2014. Roberts Ķīlis, the Minister for Education and Science, believes that the current study financing  system is a problematic one and should be changed.

Problems with the current system

In May 2011, the Strategic Analysis Commission presented a report “Financing Higher Education: A Model for Reform” prepared by Vjačeslavs Dombrovskis, explaining the drawbacks of the current financing model and proposing alternatives, with a particular focus on the solution according to which the state does not pay any tuition fees for students. Although R. Ķīlis has conceptually supported the application of such a model, the specific shape of the new study financing model remains unclear.

The report prepared by V. Dombrovskis highlights three reasons why the current system should be changed. First, it is stressed that it’s an ineffective system. Central planning in allocation of budget places means that the higher education institutions focus on being granted the budget places rather than on active identification of what would be the skills that students would need most after graduation and on adequate improvements of the study programmes so that they would supply those specific skills. Moreover, as budget places are granted to public higher education institutions only, the competition amongst students is reduced by at least 19 thousand. Second, V.
Dombrovskis reasons that the current system is incorrect with respect to the underprivileged layers of the society. That is, the best results at the centralised exams are shown and hence the opportunities to study using the state budget funding are obtained by students coming from relatively affluent families. This can be explained by the fact that those families have better opportunities to send their children to city schools and pay for out-of-class training to improve their knowledge and skills. People with a higher education earn relatively more and their living standards are higher than those of persons who finish their formal education right after school. Nevertheless, within the framework of the existing system everyone pays for the budget places (through taxes), including those who will never enrol in a higher education institution. The last reason why the currently existing study financing model should be changed, as outlined by V. Dombrovskis, is its inability to finance higher education adequately. Using the existing financing model which is based on tax revenue, Latvia has one of the lowest financing levels for higher education in Europe. As tax revenue is not likely to increase within the nearest future, one can assume that financing for higher education will also be hardly raised soon and will remain low.

Proposed study financing reform

The proposed option for the study financing model is based on the idea of cancelling all budget places at higher education institutions, at the same time avoiding the problems observed in systems with an absolutely free market for drawing financing for higher education. A higher education financing model with no allocation of budget places and students having to finance their studies in full is applied in the United States of America (USA). The benefit of this solution is that high level higher education institutions with plenty of resources have been established, yet students very often suffer as they undertake excessively large credit commitments to pay for their education. In a situation where tuition fees are the sole responsibility of students, a free market exists and both the state and the private higher education institutions have to compete equally for students by offering them study programmes which would be the best suited to prepare them for the labour market. Consequently, higher education institutions are able to attract the most gifted and diligent students and prepare them for a successful career, afterwards getting financial support from their graduates in the form of donations. The higher education institutions of the USA constantly rank amongst the best world-wide. Moreover, their reputation makes them a particularly attractive destination for the best teaching staff of the world. It is clear that the graduates of the higher education institutions highly appreciate the education provided by those institutions. For example, in 2012 Stanford University was the first university in the USA to receive over one billion USD in donations within a year.

It has to be recognised, of course, that the higher education financing model of the USA is not deprived of drawbacks, the most important of which is the high tuition fees and the related rise in borrowing. Since 1985, tuition fees in the USA have increased five times on average, and this rise has exceeded that of the inflation rate 2.5 times within the given period. The overall student debt has reached 1.1 trillion USD since 2007, largely aggravated by the reduced opportunities of the parents of students to finance the education of their off-springs following the financial crisis of 2008.

The conclusions prepared by V. Dombrovskis offer a system with no central planning of allocation of budget places, at the same time avoiding the problems currently observed in the USA. The proposed system would have tuition fees established for all study programmes, which students could pay by taking a loan from the state. They would have to repay the loan only after they reach a certain level of income. Currently, such system is operational in Australia, New Zealand, South Africa as well as the United Kingdom.

Although Roberts Ķīlis, the former Minister for Education and Science, has conceptually supported this financing model, the details are yet unclear. Option 2 of the Action Plan to implement the higher education and science reforms provides that proposals for the development of an optimum higher education financing model should be prepared by the end of this year, while the regulatory framework for the implementation of this model should be prepared by 1 December 2014. Hence the new financing system could be implemented in practice starting from the academic year 2015/2016 at the earliest.

FYI: An overview of tuition fees, numbers of students as well as the breakdown of students into those who study using the state budget financing and those who fund their studies privately is available in the following infogram prepared by Dynamic University.