Educational finance is the financing of educational institutions and, depending on their ownership, they can be either privately or publicly financed. Privately owned institutions receive funding from tuition fees, sponsors' contributions, private donations and grants, while governments directly allocate funds to public institutions. Financing provided by the governments is especially common in developing countries therefore it is subject to the economic situation of the country and its fiscal resources. Investment in education, in turn, boosts economic growth and employment and affects the future prosperity of the nation as a whole. By investing in human capital each country aims at increasing individual productivity and thus raise students' future earnings which will result in higher tax payments.
Educational institutions are mainly funded by students and their parents, employers from the private sector, government tax revenue or they rely mostly on private donors. Funding can be direct, that is through recurrent grants, capital grants and taxes or through student tuition fees and other charges which are the main source of revenue for institutions. A small number of institutions are funded through loans. A school or university can choose between one or more of those funding sources.
Public institutions are usually funded by national governments through direct transfers of tax revenues. Therefore, public universities are either absolutely free or charge low tuition fees regulated by the state or federal governments. Often such institutions are owned and administered by the state, but in some cases they maintain their institutional autonomy to decide on governance, tuition and student enrolment. Some private universities may also receive public funding in the form of tax breaks and government loans and grants for students from disadvantaged backgrounds. Similarly, private donations are given to students who choose to attend public educational institutions.
Private educational institutions are funded mainly by the fees they charge students, research grants and contracts and private donations from alumni and philanthropists as a result of commercial activity and fundraising campaigns. Public funding of private institutions occurs in cases when the government provides students with tax-funded vouchers as a way to maintain equitable access to education. Students decide where to spend those vouchers but they usually choose private institutions where tuition fees are considerably higher and they cannot afford them without financial aid. Often the students who receive the vouchers come from poorer households and have limited opportunities for access to education. In those cases private institutions receive both direct tax funding from the state and private funds even though they are not run by the government. Since private institutions rely mainly on private funding and not on state aid, they are independent and have control over their curriculum, student admissions and tuition fees.
The educational challenges that each country faces are to provide equal access to education for students from different economic backgrounds and to increase funding sources for institutions. Since a considerable number of educational institutions rely on funding coming from tuition fees governments need to provide sources for funding students. Again funds can come from private sources such as the student's parents or from a private sponsor such as a private company or current employer. In countries such as the United States and the United Kingdom students work and study at the same time so that they can cover their expenses or unsubsidized loans with current earnings. Numerous banks offer student credits and loans to those who could not receive any assistance either from the chosen institution or from the state. Students also have the option to receive subsidized loans which are awarded on the basis of financial need and the government covers the interest until the student can afford to start repaying the loan.
Governments also provide tax-funded scholarships or grants for economically disadvantaged students or the institutions themselves give scholarships based on merit and achievements. Philanthropists or private foundations donate not only to the institutions, but they also sponsor individuals of their choice throughout the course of their education. In some countries students receive government tax breaks on educational spending. In Sweden, for examples, most universities are free of charge because they receive tax funding from the state. Loan schemes were introduced in the mid-1960s, but the possibility of student indebtedness led to reforms which increased the tax-funded support for students and introduced income-contingent repayments. In contrast, students in Australia pay only one fifth of the tuition fee in the form of "student contribution" and the government pays the rest. In case they pay the amount at enrolment they are also offered a 15% discount.