In sharp contrast to many of its Latin American neighbours, Chile has one of the most market-driven and privately funded higher education systems in the world.

It has also seen a tenfold increase in student numbers since the early 1980s.

Before that, the country's two public universities - the University of Chile and the State Technical University (now the University of Santiago) - and a small number of private (mostly Roman Catholic) institutions all received high public subsidies of up to 90 per cent of their income.

But funding declined in the decade following the 1973 coup d'¨¦tat in which the democratically elected government of Salvador Allende was overthrown by military leader Augusto Pinochet.

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Universities responded to the decline in state funding by gradually raising tuition fees and cutting student numbers from 150,000 to about 100,000.

According to Andr¨¦s Bernasconi Ram¨ªrez, academic vice-rector of Andr¨¦s Bello University, one of Chile's largest private institutions, the military junta's higher education policy had two main drivers.

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One was the neoliberal belief that it was "healthy for institutions to diversify their funding base and to make students pay for the private returns they got from their investment in higher education".

The other was General Pinochet's perception of universities - especially giant public ones - as wellsprings of dissent against his regime.

But the military dictatorship also valued education as a source of economic growth. While General Pinochet's 1981 higher education reforms were intended to address the perceived political threat posed by the public universities by giving autonomy to their regional campuses, they also introduced a generous system of "solidarity loans" to cover students' tuition fees.

Interest rates were enshrined in law at 2 per cent and repayment levels were pegged to graduate income, with any outstanding debts cancelled after 14 years.

General Pinochet also encouraged the establishment of private universities to meet the burgeoning demand from school leavers for more university places.

Despite the fact that no state funding was offered, Professor Bernasconi noted, 38 private institutions were subsequently founded, taking the current number of universities in Chile to 63.

The return of democracy in 1990 did not lead to public funding flowing back into the public universities. Only 11 per cent of their income currently derives from block grants.

"The total funding for higher education from the Chilean government is about ?1 billion a year, which is the budget of a mid-sized university in Brazil," Professor Bernasconi said.

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"The (post-1990) democratic government realised it had such a huge problem with primary and secondary education that higher education was never a funding priority."

Hence, tuition fees in Chile remain among the highest in the world when adjusted for its per capita gross domestic product, which stands at about ?9,000, compared with more than ?22,000 in the UK and more than ?29,000 in the US, according to the Organisation for Economic Cooperation and Development.

Fees vary according to the course and the prestige of the institution, but start at about ?2,000 a year at a public regional university; about ?5,000 at the University of Chile (now based entirely in Santiago, with fewer than 30,000 students); and up to ?6,000 at leading private universities.

According to Professor Bernasconi, the most prestigious universities are populated almost exclusively by students from families in the top 10 per cent of the nation's income range.

This was not so much because the others could not meet the fees, but because they could not afford the private school education that was almost indispensable to gaining the necessary entry grades, he added.

"It is very unfair but that is the way it is," Professor Bernasconi said.

Despite this, there is little student opposition to current fees.

"Paying back loans is part of the culture already," he said. "It was probably a shock in the first decade, but fees did not rise immediately to their current levels. Little by little, they have been increasing by more than inflation."

But it was widely acknowledged as a concern that, by the mid-2000s, the vast majority of university students were studying at private independent institutions, with many more at private post-secondary technical colleges. None was entitled to any state help with fees.

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This was seen as discriminatory. In 2006, the newly elected left-of-centre government led by Michelle Bachelet decided that it had to act.

Commercial loans for all

One option was to extend the existing public loan scheme. But, according to Jos¨¦ Joaqu¨ªn Brunner, director of the Centre for Comparative Education Policies at the private Diego Portales University, the government deemed such a move unaffordable - particularly in light of low repayment rates.

Instead, it launched a new loan scheme financed and administered by commercial banks, with an interest rate of about 7.5 per cent and no time limits for repayment or indexing of payment levels to income.

The loans are underwritten by universities until students graduate; after that, the responsibility passes to the government.

According to Professor Joaqu¨ªn, the hope was that private management would lead to an improvement in repayment rates.

Incentives for universities to keep increasing tuition fees are checked by a cap on the maximum available loan, which is raised each year in line with inflation.

However, since the scheme is also open to students at public universities, those students can use it to double their borrowing.

Some private universities, including Professor Bernasconi's institution, charge fees of about double the maximum loan amount, requiring students to make up the shortfall from their own funds if they are unable to secure scholarships.

"But we couldn't go much higher, even if we needed the money for our development, because it then becomes a severe problem for students," Bernasconi said.

"So, in practice, the loan ceiling operates like a cap because if the gap widens too much, you run into trouble with student recruitment.

"Students would rather go to cheaper institutions to save the uncertainty of funding that gap for the six to seven years it typically takes to finish undergraduate degrees in Chile."

Professor Bernasconi argued that the loans scheme had been instrumental in allowing the expansion of Chilean higher education to continue unabated, with annual enrolment now pushing towards the one million mark.

Before the Bachelet government's reforms, he said, he had thought "we were reaching a limit of about 600,000 in terms of people's capacity to pay."

Fears that the scheme would encourage universities to lower their standards to avoid incurring liability for dropouts' loans have not been realised, Professor Bernasconi added.

"Academia goes one way and the financial side another," he said, adding that the liability applied only in the tiny minority of cases where dropouts did not re-register at other institutions within 18 months.

But he noted that the new right-of-centre government of Sebasti¨¢n Pi?era, which came to power last year, had asked the OECD and the World Bank to conduct an in-depth review of the loan scheme amid concerns about the extent of the state's financial liability.

"The results are not public yet, but one of the authors said that if a major economic crisis were to hit Chile that led to a downturn, the risk of widespread default would be significant in terms of the fiscal consequences for the government," he said.

But he also said that political concern would be assuaged by the fact that it will take a decade before there are a "substantial" number of private loans outstanding.

"You know what politicians are like," Professor Bernasconi added. "It will be someone else's problem by then as far as they are concerned. They will kick the problem to the next administration to deal with."

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paul.jump@tsleducation.com.