Free tuition vs student debt: The public policy paradox

The influence of financial aid on career choice in Chile is a complex issue that involves economic, social and psychological factors, particularly when comparing free education with options like State-Guaranteed Credit (Crédito con Aval del Estado or CAE).

The free tuition policy (‘gratuidad’) in Chile was formally implemented in 2016 as a public policy to improve access to higher education for students from lower-income households. However, its legal foundation was established later through Law No 21.091 on Higher Education, promulgated in May 2018, which explicitly defined the eligibility criteria and institutional requirements for participation in the tuition-free system.

According to Law 21.091, free tuition is granted to students who:

• Belong to households within the bottom 60% of the national income distribution;

• Enrol in full-time undergraduate programmes at non-profit, accredited institutions that are officially part of the gratuidad system;

• Have no prior professional degree or equivalent level of higher education;

• Fulfil academic progress requirements as defined by the institution and regulatory framework.

This policy has eliminated the direct cost of education and expanded access for lower-income students, allowing young people who previously did not view university as a viable option to pursue higher education.

In addition to free tuition, financial support options are still available, such as loans (the CAE and the Solidarity Fund). While these loans enable access to education, they can lead to debt, which may deter some students from applying and can prompt students to prioritise careers with greater employability or profitability.

Access to tuition grants has improved enrolment in ‘riskier’ majors with higher dropout rates, such as STEM subjects. According to Adriano De Falco and Yannick Reichlin’s blog, access to no-strings-attached grants can help mitigate the risks of pursuing higher education.

When analysing the career choice process in this context – balancing personal vocation against economic return – it becomes evident that students benefiting from free tuition feel more liberated to select vocations or pursue careers in social or artistic fields without an overwhelming concern for future earnings. Conversely, students who rely on loans tend to concentrate on careers with high employability and projected income, as they need to ensure they can repay their debts.

Free tuition also encourages enrolment in traditional accredited universities since they are the ones that primarily meet the requirements to access the benefit. Loans allow greater flexibility in the type of institution, including private and technical centres, but with the burden of debt.

However, several higher education institutions in the country which are at financial risk have institutional accreditation results that place them between the ‘advanced’ and ‘excellent’ categories, indicating that the current accreditation processes are not as effective as the affected students and taxpayers might expect and deserve. This situation has worrying implications for students regarding quality professional training.

Another aspect is risk perception. Free tuition reduces the perception of risk when choosing the wrong career since any decision to change path does not imply a direct economic loss. This situation is evident in loan applicants, who are under more pressure to make the right choice from the beginning since changing careers or delaying a change implies more outstanding debt.

The impact on career choice and university

The implementation of free tuition and student loans in Chile has significantly affected career choice and enrolment distribution in higher education. Some of these impacts are analysed below:

• Concentration in institutions offering free tuition: Between 2015 and 2019, the proportion of students from the first six income deciles enrolled in higher education institutions (HEIs) offering free tuition increased from 40% to 60%. This change indicates a significant displacement of vulnerable students to these institutions, influenced by the economic incentive of free tuition.

• Impact on socio-economic diversity: This phenomenon has reduced socio-economic diversity within HEIs that are part of the free tuition system. On average, students from the first six deciles represent 70% of the enrolment in state universities, while in other institutions, they represent less than half of the enrolment.

• Accessibility: Free education has allowed more students, especially those with lower incomes, to access higher education without the financial burden of tuition fees. It has made it easier for them to opt for careers based on their vocation and interests, including STEM disciplines, without the pressure of considering only economic profitability.

• Dropout rates: Generally, students with free tuition have higher dropout rates in the second year than those who finance their studies through loans. However, this tendency varies according to the area of study. For example, in careers related to sciences, social sciences and humanities, dropout rates are lower for students with free tuition, while in areas such as agriculture and services, students with loans show lower dropout rates.

In Chile, approximately 25% of students drop out at the end of their first year of university studies. Many technical careers in STEM areas present a dropout rate of 30.6%, higher than that of professional careers. On the other hand, using student loans continues to influence more pragmatic decisions toward careers with higher economic returns due to the financial commitment involved.

When analysing the effects of the free tuition policy in terms of dropout and graduation, important nuances are observed:

First-generation students (EPG) whose parents have no experience of higher education face more significant challenges when it comes to staying on their course. A study by the University of Chile evaluated the impact of free tuition on the retention of these students in STEM careers.

The results indicate that, although free tuition has improved access, attrition remains high among EPGs, especially during the first semesters.

The literature shows that Chilean universities’ institutional efficiency when it comes to dropout and graduation showed an average efficiency rate of 81.71%. However, no significant differences were specified between STEM and non-STEM careers.

On the other hand, free education has allowed more students to access higher education. However, inadequate academic preparation can affect graduation rates, especially in demanding fields like STEM.

To gain a more comprehensive understanding of the impact of free tuition on graduation rates in these areas, further studies are required to analyse long-term data and consider variables such as the gender and socio-economic background of the students.

A new financing system

The Chilean government has recently proposed to replace the State-Guaranteed Credit (CAE) with a new Public Financing for Higher Education (FES) system. The initiative has two stated main objectives:

• Cancellation of educational debts: The project seeks to reorganise and partially forgive debts associated with the CAE, the Solidarity Fund for University Credit (Fondo Solidario de Crédito Universitario) and CORFO (Corporación de Fomento de la Producción) loans. This forgiveness will be voluntary and based on criteria such as the debtor’s academic situation, payment status and the number of instalments paid.

• To provide a modern financing instrument: The FES is proposed as a modern and efficient system that will replace current student loans, eliminating the involvement of banking entities.

The FES has generated various criticisms from experts, educational institutions and analysts. The main concerns include the impact on institutional autonomy and funding, fears about a reduction in university revenues and inequalities in beneficiary contributions, potential harm to middle-class students, lack of financial sustainability, loss of focus on the country’s educational priorities and significant negative repercussions for the quality assurance systems of institutions and programmes.

One of the most concerning impacts of the FES is its effect on university autonomy. By shifting from direct funding for institutions to a model focused on student demand, universities will be forced to compete for resources based on external criteria often disconnected from their academic missions or regional contexts.

This approach undermines the institutions’ ability to govern themselves, restricting their capacity to set development priorities, design long-term projects and respond effectively to the social needs of their local communities.

Additionally, routing resources through the FES significantly reduces institutional income. Public universities that previously depended on fixed budget allocations now face an uncertain funding system where their financial support is tied to student enrolment numbers or quantitative indicators that do not always reflect the complexity of their academic functions.

The FES has also been criticised for perpetuating structural inequalities. Many of its funding schemes inadequately account for the socio-economic differences among beneficiaries, allowing affluent students to access the same benefits as those in need. Within this framework, public resources lose their redistributive purpose and instead reinforce existing disparities in access to higher education.

A particularly affected group is the middle class. These students do not qualify for the most generous subsidies because they do not meet the criteria for extreme vulnerability. However, they also lack the financial resources to cover educational costs without incurring debt.

This ‘intermediate zone’ leaves them caught between exclusion and financial strain, leading to a contradictory situation: individuals who should not experience difficulties pursuing higher education face significant financial obstacles.

Quantity over quality

The FES is often portrayed as a solution to the issue of university access. However, guaranteeing admission does not necessarily ensure the provision of quality education. By redistributing resources without enhancing institutional capacity, the system faces pressure to increase enrolment without the necessary means to improve infrastructure, hire qualified faculty or expand student support services.

Furthermore, when funding is linked to numerical outcomes – such as employability or graduation rates – there is a danger of undermining the true purpose of higher education.

Universities may be inclined to focus on achieving favourable metrics rather than providing a comprehensive education. This approach threatens academic diversity, critical thinking and the university’s role as a space for reflection and transformation.

Another important consideration is the FES’ financial sustainability. In unstable economies or during periods of fiscal austerity, the state may struggle to maintain the investment levels needed for the fund to fulfil its commitments. This fragility can disrupt students’ educational experiences and create budgetary crises for institutions.

Moreover, the FES model often prioritises programmes that are in high demand in the labour market or are economically profitable. This tendency can marginalise disciplines in the humanities, sciences or social fields that, while less appealing from a market perspective, are crucial for the country’s cultural, democratic and environmental development.

Such a utilitarian view of higher education contradicts the principles of a university committed to serving the common good and fostering free thought.

According to the Education at a Glance 2024 report from the OECD, Chile invests 5.9% of its GDP in education, making it the country with the fifth highest relative investment.

However, there is an imbalance in the allocation of resources. In tertiary education, 2.4% of GDP is allocated, exceeding the OECD average of 1.5%. Secondary education receives only 1.7% of GDP, below the OECD average of 1.9%.

Despite the high investment in higher education, significant problems related to quality, coverage and infrastructure persist in preschool and school education.

In this context, it seems questionable to prioritise a reform in the financing of higher education given the crisis in school education, manifested in the lack of improvements in learning outcomes, increased dropout rates and other problems. It is suggested that it would be more beneficial to invest in improving the quality and management of education at the initial levels and reconnecting with students who have left school.

Carlos Olivares is a higher education consultant based in Chile. E-mail: colivares66@gmail.com

This article is a commentary. Commentary articles are the opinion of the authors and do not necessarily reflect the views of University World News.