The Chilean idea to transition from a student loan system to a progressive graduate tax represents a significant development in the financing of higher education. Though designed to reduce student debt and promote equity, this reform prompts concerns regarding institutional autonomy, financial sustainability, and redistribution of costs. We examine the implications of the proposed Higher Education Fund (FES), situating Chile’s experience within the context of global debates on access, cost, and quality in higher education.

In 2018, Chile enacted a landmark higher education reform through Law 21.091, which significantly restructured the regulatory and institutional framework, quality assurance, and financing. At the heart of the reform was a gradual shift from private to public spending, establishing limited free education as the cornerstone of student financing. These changes underscored the increased role of the state as the primary regulator, evaluator, and investor in the system.

In 2024, the government introduced a new bill with the intention of reforming the existing student loan system. The proposal aims to align the funding model with the principles introduced in 2018 by replacing traditional student loans with a progressive tax on graduates’ income. Nevertheless, this proposal has given rise to considerable public and political debate concerning its feasibility and implications for Chile’s higher education system. This article presents a critical assessment of the potential impact of this reform and its broader implications for the system’s sustainability. Concurrently, this contribution aligns with the global discourse on student finance, offering insights into the design of systems that effectively reconcile the inherent tensions within the triangle of access, cost, and quality.

The Student Loan System and Its Legitimacy Crisis

Chile has one of the highest participation rates in terms of higher education in the world, above the OECD average. This achievement is largely attributed to the Crédito con Aval del Estado (CAE), a loan system introduced in 2006 that allows students to finance their education through loans guaranteed by the state. According to the official data of the Chilean government, the program has already facilitated access for more than 1.2 million students, benefiting in particular low- and middle-income families attending private institutions.

Initially, the CAE imposed restrictive conditions, such as interest rates of nearly 8 percent. Over time, these conditions were relaxed, with interest rates reduced to 2 percent, payments capped at 10 percent of monthly income, and repayment periods ranging from five to 20 years. However, student protests in 2011 highlighted the shortcomings of the system, particularly the heavy debt burden on families. The protests catalyzed policy changes, introducing free education for 60 percent of the most vulnerable students during the administration of president Michelle Bachelet in 2018.

Despite this, the CAE remained for students who did not qualify for free education. By 2023, 27 percent of borrowers were studying or in a grace period, while the remaining 73 percent—about 896,000 people—were in the repayment phase. Among graduates, 78 percent had completed their studies, while 22 percent had not. The average monthly payment was about USD 34, with debts ranging from USD 3,288 for dropouts to USD 6,780 for graduates.

Although amendments improved the terms of the CAE, its association with student debt, the involvement of private banks as intermediaries, and the high costs for the government due to the involvement of private banks continued to fuel criticism. Public discourse increasingly framed the system as unsustainable, reinforcing calls for a model that eliminates debt as a mechanism for financing higher education.

The proposed Fondo para la Educación Superior (FES): A Critical Analysis

The proposed Fondo para la Educación Superior (“Higher Education Fund” in Spanish) represents one of the most ambitious reforms in Chilean higher education. It proposes to replace traditional student loans with a progressive graduate tax based on income. Graduates earning more than USD 515 per month would pay marginal rates of up to 15 percent, capped at 8 percent of income above USD 3,090 for a maximum of 20 years. By eliminating loans, the FES aims to reduce the financial burden on students and families while redistributing the costs of higher education more equitably.

However, there are significant challenges to this proposal. The FES’s reliance on government funding raises concerns about the autonomy of higher education institutions. Eliminating cost-sharing and introducing regulated fees could make universities more dependent on government funding, exposing them to budget fluctuations and government policy priorities. This dependence risks undermining institutional diversity and self-governance, which are crucial to meeting the diverse needs of academic and social communities.

The financial sustainability of institutions also remains in question. Experience with free tuition policies has shown that centrally set fees often underestimate real costs, forcing universities to operate on tight margins. It is estimated that the current free tuition model results in annual revenue losses of around USD 110 million, with the FES potentially contributing an additional USD 70 million deficit. Such constraints could affect the ability of institutions to maintain quality standards and respond to growing academic demands.

The FES’s income-based contribution model introduces further complications, including potential inequalities among beneficiaries and disincentives for high-earning professionals. This unprecedented “professional tax” could be perceived as burdensome and push graduates toward private funding alternatives or tax evasion. The redistributive basis of the system, which relies on higher earners subsidizing lower earners, faces economic and political risks that could jeopardize its long-term fiscal sustainability.

Future Considerations and Challenges

Chile is at a critical juncture in the design of public policies for higher education and research. A clear, strategic vision is essential to align institutional capacity with national priorities and to ensure the inclusiveness, quality, and sustainability of the system.

Higher education must be seen not only as a mechanism for equitable access, but also as a cornerstone for the generation of advanced human capital and knowledge. A national strategy is needed to integrate these objectives and articulate the institutional role in promoting societal progress. At the same time, funding frameworks need to balance demand- and supply-side considerations. While student-centered initiatives such as FES promote access, they risk undermining institutional viability if they diverge from the realities of operating costs. A dual approach is needed to ensure equitable access without compromising educational quality.

So far, there is no solid technical basis for the proposal to replace the student loan system with a professional tax and by limiting private contributions. Rather, the proposed reform seems to respond to an ideological opposition to student debt through the logic of cost-sharing. In the short term, however, the implementation of the FES would mean a significant reduction in revenue for both state and private universities, with the latter being the most affected. In the medium term, the system could experience a decline in quality and level of activity, as there is no guarantee that the public sector will be able to compensate for the deterioration in the private sector.

It is imperative that the government reaffirms its commitment to ensuring equitable access to higher education while adopting a more pragmatic and flexible approach to the mechanisms for achieving this goal. This entails acknowledging educational loans as a legitimate instrument, one that can incorporate principles of solidarity and progressivity, and contemplating private copayments as a supplementary source of financing. For a developing country like Chile, a cost-sharing model would enable the country not only to enhance access to higher education but also to reallocate public resources to the most vulnerable groups and to strategic areas for national development.

Funding for research and development requires special attention. Chile’s investment in this area, at just 0.3 percent of GDP, is well below the OECD average. Addressing this underfunding is essential to strengthen universities as centers of innovation and long-term knowledge production.

Preserving institutional autonomy is another key challenge. Increased reliance on public funding requires safeguards for the independence of universities. Institutions must retain control over their resources, priorities, and governance to adapt to changing academic and societal needs. Achieving this balance requires transparent and accountable funding mechanisms.

Finally, funding reforms must be designed as part of a comprehensive development strategy. Without this alignment, policy inconsistencies could undermine long-term goals and limit the effectiveness of implemented initiatives. Combining a clear national strategy with appropriate financing models is not only desirable, but essential to address the current and future challenges facing Chile’s higher education system.

Mario Alarcón is assistant professor at Diego Portales University, Chile, and heads the master program in management of higher education institutions. E-mail: mario.alarcon@udp.cl.

José Joaquín Brunner is professor emeritus at Diego Portales University, Chile. He is also the UNESCO Chair in Comparative Higher Education Systems and Policies and is responsible for the doctoral program in higher education, which is offered jointly by the University of Diego Portales and the University of Leiden, The Netherlands. E-mail: josejoaquin.brunner@gmail.com.