Equity and Efficiency Effects of Different Funding Arrangements for Higher Education: A Calibrated Analysis Applied to Israel

We construct a macro-model of an economy with skilled and unskilled labor, and a centralized system of higher education, calibrate it to the parameters of Israel’s economy and university system, and then use it to simulate different modes of financing higher education so as to gauge their effect on output, distribution and mobility. We find that student loans by themselves have a small effect on access to higher education. Substantial increases in enrollment and graduation rates of students from low-income households require targeted tuition and living subsidies, and even these leave substantial gaps in enrollment and graduation rates between students from different social strata. Efforts to achieve more egalitarian access to higher education should begin at an earlier age.