Efficiency and equity effects of subsidies to higher education

We compare the efficiency and equity effects of three financing systems for higher education: the traditional tax-subsidy system, where education subsidies are financed from general taxation; loan schemes; and a graduate tax. We find that efficiency and equity targets cannot. be simultaneously achieved by the traditional tax-subsidy system, and that both loan schemes and a graduate tax fare better. When education outcomes are uncertain, the graduate tax is to be preferred to a pure loan scheme because of the greater insurance provided by the former and because it tends to be preferable to an income contingent loan system.