US Can Learn From German Tuition and Student Loan System

Discussions about college affordability circle around lowering tuition fees, providing more financial aid, and in general easing the financial burden on students and parents. Nearly all educators, administrators, and politicians have accepted the premise that students should pay for their college education.

However, this notion is not as old as some people think and emerged only in the 1920s and 1930s, when college education became a privilege for the rich. It is not – as the example of Germany shows – without alternatives.

The case of Germany shows us that the move towards high tuition rates for colleges was not inevitable. The absence of college tuition does also not mean that the state pays more for education. In fact, the United States paid $15,720 per student in 2013, while Germany paid only $11,545. College tuition is thus no guarantee for lower state expenses.

The German system of higher education also provides us with a model for a financially and socially balanced student loan system that gives financial incentives to students to finish their education on time, and that rewards high academic performance.

Historical Background

Around 1900, college education in the United States and Germany followed a very similar path. In both countries only a small percentage of the population attended college. In the United States, it was between 1 and 2 percent of the college-age population, while in Germany the number stood at about 5 percent. Attending college was costly, and universities in both countries charged tuition.

Attending one of Germany’s state universities cost about 120 marks ($480) per year. American state universities were by comparison much cheaper since they charged annual tuition in the range of $0 to $60 per year. Even private colleges such as Harvard, which charged only $150 per year in 1900, were by comparison significantly more affordable.

German parents did not only pay tuition for their son’s education at state universities; they also paid for their sons’ education at public schools such as the Gymnasiums that prepared students for college. Annual tuition for public schools in Prussia in 1900 run between 80 and 120 marks per year ($320-$480). That was far above the costs for private preparatory schools in the U.S. at that time.

In both countries, college students received extensive support in the form of scholarships and tuition waivers that came from endowments created by wealthy donors. This financial support was so extensive that at some colleges about half of all students received financial aid. Many students in the United States and in Germany effectively obtained their college education for free. Their tuition was paid for from funds made available from these endowments.

Only in the late 1920s did both countries begin to grow apart. And the reason was not financial but cultural. While German universities did not increase tuition during that time, American universities saw enormous tuition increases first at private and then at public universities. These increases were driven not by financial and economic considerations, but rather by Social-Darwinist beliefs in the “survival of the fittest.” Once the notion that a student should pay for his education was introduced into the American system, tuition grew moderately from the 1940s to 1980s.

In Germany, by contrast, tuition went out of favor after World War II. It was first abolished in East Germany and also legally banned in West Germany as of 1976. Attending university had become free for all. The split of Germany into two countries – capitalist West Germany and Communist East Germany – caused both sides to compete in the sphere of social welfare. Therefore, both countries introduced generous financial aid systems that provided college students with living stipends.

East Germany introduced in 1950 a basic scholarship of 130 marks for students from working-class families. This financial incentive was intended to induce first-generation college students to pursue an academic education. With time the value of these scholarships was increased, and the limitation of first-generation students abolished. By the 1980s virtually all East German college students received a living stipend.

West Germany introduced in 1971 a comprehensive system of student loans (Bafög). Under this system, all students were entitled to government-sponsored student loans. However, the awarding of the loan, as well as the loan amount, was determined by the financial needs of the student and the income of his parents. Initially, about half of all students received these student loans.

This student loan system underwent significant changes since it was introduced. In the beginning, it was an interest-free loan that students had to repay after graduation. In 1990, after the unification of West- and East Germany, the student loan system was revamped. Fifty percent of the student loans were treated as a scholarship, which students did not have to repay. The other half was considered an interest-free loan.

Students could be forgiven parts (up to 20 percent) of this loan if they finished their college education ahead of schedule and/or were among the best students (top 10 percent) of their class.

Since their introduction, the number of student loan recipients has steadily declined from about 50 percent of all students in the 1970s to about 25 percent of all students in the 2000s.

Student loans are, however, not the only source of income for German students today. Germany has a vast network of public and private foundations that provide scholarships to college students. Among these foundations are the Konrad Adenauer Stiftung and the Friedrich Ebert Stiftung.

The early 2000s saw a brief and unsuccessful experiment in reintroducing tuition fees for college. Several states including Hamburg and Bavaria (re)introduced college tuition in 2006 and 2007 respectively.

However, resistance from students and politicians forced universities to abandon tuition charges after just a few years. Bavaria was the last state to abolish tuition for state colleges in 2013. One of the main concerns was that there was no funding source for tuition waivers as they had existed at the beginning of the 19th century.

Today, only private colleges such as the Bucerius Law School in Hamburg ask their students to pay substantial tuition fees. Students at this college are asked to pay 4,000 euros per trimester. After four years of college education, students owe 48,000 euros in tuition fees. That is a significant amount for a German student given that the average annual income in Germany stands currently at 33,000 euros.

Since scholarship support is limited and foundations such as the Konrad Adenauer Foundation cannot provide sufficient funds to cover tuition expenses, the Bucerius Law School developed an innovative student loan model. Graduates can enter a “study first, pay later” contract. This contract allows them to obtain their law degree from this college and pay the tuition later. After graduates have obtained secure jobs and have reached a minimum annual income of 30,000 euros a year, they are expected to pay nine percent of their total annual income for a maximum period of ten years to the college.

The Bucerius Law School is among a small number of private colleges that offer college education at a cost. In 2017, there were 125 private colleges, which represent a quarter of all colleges and universities in Germany. These colleges are very small and highly specialized. They train about only five percent of the total German student population.

Lessons to Learn

If society accepts the notion that students should shoulder the costs or parts of the costs of their education, it might also be reasonable to provide the students with reasonable terms of how to pay for these education costs. It might be true that a college degree will lead in the long run to a better-paying job and higher income over the lifespan of the individual, but student loans can pile up and put a financial burden upon individuals who struggle with repaying their loans.

It is in the best interest of a society that embraces the model of the consumer economy and expects all its members to participate in the consumption of goods, to provide ways in which that is possible. Too many Americans are currently overburdened by student loan debt, which has in recent years become the second-largest type of debt for American households, and are forced to postpone the founding of a family, the buying of a house or of a car.

The German model of student loans, which come interest-free, give students a five-year break before repayment begins, and which reward academic performance by lowering the amount owed, might be a model for Americans to consider. It would provide incentives to achieve high grades, finish on time, and pave the way for loan repayment. It would also allow college graduates to participate in the consumer economy and thereby contribute to economic growth.