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