We need a fair means test for third-level grants

The means test for grants should be based on the definition of income for tax purposes

Tue, Mar 19, 2013, 06:00

Third-level education is one of the best investments that one can make; this is increasingly realised by Irish people. OECD figures show that third-level attainment in Ireland in the 25-34 age group at 48 per cent is the second-highest in the OECD, after Canada. This compares with only 20 per cent in the 55-64 age group, where we are below the OECD average.

The advantages flowing from education are shown clearly by the fact that in 2011 those in the labour force who have finished only primary education are more than three-times more likely to be unemployed than those with a third level qualification. All the international evidence is that education pays.

While in an ideal world we might choose to provide education at all levels to everybody free of charge, the reality is that resources are constrained. Indeed, if we have more money to invest in education, the evidence suggests that the priority should be given to preschool education, where the economic and social returns are greatest.

Given that there are large private benefits from third level education, it is not unreasonable to expect that those who can afford to contribute should do so. Equally, poorer students should be supported by the taxpayer.

To achieve this we need a means-tested grants system which is fair and well targeted so that it focuses on those in need.

The current scheme is not well targeted. Just under half of students at third level receive grants and there is a widespread perception that PAYE taxpayers are discriminated against.

Prior to 2012-13, the means test for student grants was administered by local authorities who did not have resources or expertise in assessing income.

The administration of the means test led to the perception that the self-employed, including farmers, had an unfair advantage in obtaining grants while the children of PAYE earners with modest salaries failed to qualify for grants.

Definition of income
This perception was widely shared 20 years ago when the review group on student support schemes was established to look at the question of a proper means test for third-level grants. It also led to the popular demand for free third-level education in the 1990s.

The group found that the means test was defective: what was regarded as income was not what one would properly regard as income and no account was taken of capital assets. These same defects are still there today.

The current income test is a mishmash of income and capital. Items which are taken into account, but should not be, include lump-sum payments from retirement and redundancy, sums from disposal of assets, and gifts and inheritances.

In addition, normal depreciation of capital assets used in a business, while allowed for income tax purposes, is not allowed in the means test for grants.

I suggest a much better approach is that the grants means test for income should be based on the definition of income for tax purposes, excluding incentive reliefs.

A controversial recommendation of the review group was that, in addition to an income test , there should be a capital assets test.

This was based on a very clear view of education as a capital investment that could be prudently financed by income accruing from the assets, or by disposing of capital assets, or by borrowing against the security of those assets. In effect, the inclusion of a capital test would ensure fairer treatment of applicants with comparable capacity to fund their higher education. Ideally, the capital threshold should be set at a relatively high level so that it does not apply to most applicants and a wide definition of assets should be included.

This would be a simpler and better approach than adopting a low threshold and then excluding large classes of assets.

Such a system would be much fairer than what we have now.

Donal de Buitléir is director of publicpolicy.ie and was chairman of the 1993 review group on student support schemes . The views expressed are personal.