Rate of Return to and Price of Higher Education in Turkey: A Case Study of Law Faculty

Keywords The fact that higher education service provides important benefits for individuals and society has resulted in excess demand. This is directly related to a simple economic law suggesting that the demand for goods or services of which price is zero or low will increase until its marginal benefit approximates zero or very close to zero. However, it seems that demand and supply of education is difficult to determine based on the demand-supply and price equilibrium included in economic theory. Investment decision depends on the reciprocal influence of three components; anticipated earnings, cost of the investment and the current interest rate. The higher education having the characteristics of an investment is influenced by these three components. In the study, the price of higher education, with the reciprocal influence, and individual demand of higher education are analyzed within the framework of the sample of Law Faculty. In the conclusion part, it is suggested that the price of higher education is significantly below 1 and this increases the demand of higher education. Demand of higher education Price of higher education Returns to higher education Public finance in higher education Article Info


Introduction
Today, increase in life standard and schooling rate, inadequacy of low grade education in meeting the needs of social and economic life which is becoming more and complicated due to the scientific and technical developments and providing higher education almost free are increasing the demand of higher education continuously. The fact that least developed and developing countries perceive higher education as a means to increase the number of qualified labor power and they have started to have a desire to develop has increased the demand of higher education.
According to the literature, the individual demand of higher education is influenced by direct and indirect costs; net, lifelong returns created by additional human capital provided by higher education; forgone earnings (opportunity cost); education prices; and amount of the expenses for educational materials and tools (Psacharopoulos & Woodhall, 1986: 112;Duchesne & Nonneman, 1998: 212;Yang, 2001: 3;Berger & Kotsal, 2002: 101). In the studies, some results indicating society derives more benefit (return) compared to individuals from primary and secondary education and individuals derive more compared to society from higher education are obtained (Woodhall, 1987;Hicks, 199;Blau, 1996;Card & Krueger, 1996;Rozada & Menendez, 2002). Rate of return values are important factors which both increase the demand of higher education and make calculation of higher education price possible (Aslan, 2002).
Purpose of this study is to estimate the price and rate of return to higher education through the rate of return technique. The study consists of four parts including introduction and conclusion. In the second part, private benefit and cost data in higher education are calculated. The private rate of return is calculated with the data using internal ate of return technique. The price which also determines individual demand of higher education is calculated based on private rate of return and interest rate. 2005 data was used in calculations. The income flow is measured by the calculation of gross and net salaries received by high school and university graduates employed in the public sector. The income is calculated by means of the salary figures of the State Personnel Law No 657. The income flow of high school and university graduates was formed assuming that the government officers obtained no extra income other than their salaries. The data for a lawyer's income was obtained by means of the income account of a university graduate. In the private costs account, direct private cost was calculated based on Law Faculty utilizing four years' education period, indirect costs and waived salaries according to the State Personnel Law. In conclusion part, within the frame of the data from calculations, it is suggested that the price of higher education is below 1 and this increases the demand of higher education.

Methodology
The price of four years' education in Turkey is calculated through 2005 data. First private benefits and costs and then rate of return was calculated. The earnings premia was measured by the calculation of net salaries which would be received by high school (The net salary 528,04 TL) and university graduates (The net salary 873,56 TL) employed in the public sector.
The income is calculated by means of the salary figures of the State Personnel Law No 657 and it was assumed that the government officers obtained no extra income other than their salaries. The earning premium of high school and university graduates was formed and for the return account of university graduate personnel, the earnings data of a lawyer was obtained.
Costs were calculated using 2005 data. Based on four year education's private costs and using foregone earnings according to State Personnel Law, indirect costs were calculated. Faculty Law is the basis for direct private costs.
Internal rate of return was calculated using earnings and cost data. Earnings (Akalın, 1980): The price of higher education was calculated using private rate of return of higher education (r) and return rate of investment (i) (Ataç, 1978): In the calculation, return rate of investment was calculated within the scope of the interest rate implemented to long term bonds (16%) by the Central Bank.

Practice
In this part, income and costs have been calculated including minimum private incomes; direct and indirect costs. The price of higher education was obtained using data from the calculations.

Income Data
The income figures of The State Personnel Law numbered 657 pertaining salaries have been utilized to obtain income data. The net and gross salaries of high school and university graduate personnel in January, 2005 were taken as the basis to obtain private income figures. The net salary was taken as the basis to obtain private income flow of the personnel. Average working period was considered to be 38 years: Average of working periods of a high school and university graduate personnel who was employed in public sector as of 01.01.2005 pursuant to the 4759 numbered Law enacted on 23.5.2002 was taken.
Private income figures were obtained subtracting taxes and other deductions from annual amounts paid to high school and university graduates from the figures of State Personnel Law pertaining to salaries.
The annual figures were obtained multiplying net salaries paid to personnel with 12 and the private income amount was obtained multiplying that of with 38. The income of a university graduate was calculated based on lawyer staff (Table 1)  Cost Data (C) Direct and indirect private costs were calculated under this heading and it was assumed that the salaries did not change in four years. Differently from return calculations, the four years' period was taken as a basis in cost calculations.

Direct Private Costs (DPC)
Direct private costs data was calculated basing on law faculty. In the previous studies (Qıuheng & Delin, 2004;Psacharopoulos, & Patrinos, 2004;Psacharopoulos & Papakonstantinou, 2005) scholarship/loan amount made available by Yurt-Kur (2005) to students was taken as a basis in calculation of direct private costs. However, in this study, differently from other studies (Tek, 1987;Adıyaman, 2004;Kesik, 2005;TED, 2005;Türkmen, 2009), direct private cost of a student was calculated considering also the data pertaining expenses made by families for preparation to external examinations, textbooks taught at faculty law, equipment and materials for the lessons, tuition fees, expenditures related to accommodation, food and transportation. By multiplying the totals from the calculations by 4, the direct private cost was obtained.
The expenses made by the families for preparation to the examination come to an end when the candidate gets into a higher education program. Thus, the expenses for ÖSS were added to direct private expenses for once. Other expenses were calculated assuming a student graduates in four years. Accordingly, direct private cost is (DPC) TL 11.532 TL (Table 2).

Indirect Private Costs (IPC)
The student who prefers to study at a university rather than work would generate an earning and pay taxes to the state if one worked. In the calculation of indirect private cost (IPC), the minimum salary amount for high school graduates provided by the 2005 dated State Personnel Law was considered to be waived income in parallel with the studies done before and the minimum salary was assumed to remain the same in 4 years. The annual cost amount was obtained by multiplying the salary which a high school graduate earns after taxes and deductions by 12 and then multiplying that of by 4, the wanted amount was obtained. Thus, the indirect private cost is (IPC);

Total Costs (TC)
The total costs were calculated by using the results of direct and indirect private costs which sum up to total costs. Total private cost (TPC) consists of direct (DC, Table 2) and indirect private cost (IPC). In direct private cost (DPC) calculation, the minimum salary paid to high school graduates and the minimum private cost, assuming the student stays at the state dormitory, were taken as the basis. Indirect private cost was considered to be fixed and direct private cost was calculated according to the law faculty. Within this scope, the total private cost of a student studying at law faculty was calculated using direct and indirect private data and utilizing the formulation below:

Internal Rate of Return (IRR)
Internal rate of return is the discount rate which equalizes costs to earning (return) and is calculated using the formulation below (Cohn, 1979: 97;Sheehan, 1973: 13).
The r, return and C indicate rate of return, earning difference and cost, respectively. Because the equations which were used to calculate internal rate of return hold n=1,2,3,4….,38, they are equations of the 38 th degree. Their solutions and also examining the roots of the equations are difficult because they have the root 38 mathematically. Thus, a special process was applied in the solution of IRR. By definition, the cost benefit difference is approximated zero to obtain r by giving different values to r. Interpolation is applied to obtain the real rate which approximates to zero (Akalın, 1980: 132;Akgüç, 2002: 56). The Excel software was utilized to apply interpolation operations.
There are private returns and total private costs in the calculation of private rate of return (IRR) (Cohn, 1979: 98;Sheehan, 1973: 14). Private rate of return values were obtained using the formulation below.
Here, total private cost is TL 36.877,92 and social rate is assumed (r) 40%. Accordingly, private rate of return was calculated by applying interpolation within the scope of the returns and costs which a lawyer in public sector will gain until the age of retirement (Table 3).

Price of Higher Education
One of the mainstays of the ideas which explain the mechanism of economic system is that gaining income and maximizing it are the key elements of which determine the behaviors of individuals and enterprises. Possible future returns are one of the important factors which determine the investment decision of individuals and enterprises. Individual encounters three cases within the scope of rate of return (r) and interest rate (i) when it comes to higher education which has the characteristics of investment (Becker, 1967: 2-12;Uluatam, 1987: 145;Unay, 2001:80-81): 1. If the interest rate is equal to return rate (i = r), there is no need for investment as the money deposited in a bank will produce the same profit.
2. If the return rate is higher than the interest rate (r > i), it will be profitable to invest. For this reason the conditions are said to be appropriate for investment.
3. If the return rate is lower than the interest rate (r < i), the investment will not attract profits.
For this reason the resources should be utilized in other ways.
According to this, if r > i in higher education, the demand will increase. In the case of i = r there will be no demand increase. If r < i, the demand will decrease. G. Becker (1967:2-12) tries to explain the price of higher education and uses private rate of return of education (r) and opportunity cost of investment (i) concepts. The author assumes that people believe they will gain more return in higher education compared to the other education levels and considers supply curve is always fixed for analysis convenience.
Accordingly, if individuals demand more human capital when supply is fixed, demand curve will shift to the right. However, if there are free seats in classrooms -that is unutilized capacity-and buildings which can be rented as a school, higher education supply curve could have positive slope. In this case, the more demand of higher education, the more service available (Aslan, 2002: 227).
Amount of education and implicit price of semi public good of higher education take place in In horizontal axis and vertical axis, respectively. The demand curve of semi-public good of higher education is formed considering the assumption of "all other things being equal" which is applied in the other demand curve. The said assumptions are primarily family incomes and preferences as well as prices of other goods and especially rates of individual borrowing, social and economic status, foregone earnings and available interest.
In the study, by utilizing theoretical explanations, price of higher education was calculated within the scope of higher education rate of return data and rate of return of investment as of 2005 for an individual registered at law faculty (i). The interest rate (16%) applied to long-term bonds by the Central Bank in 2005 was taken as the basis in the calculation. The price of higher education for a student registered at law faculty was calculated through P=i/r formulation (Akalın, 1980): As can be seen, the price is significantly below 1 (0,39<1). The Prices could be shown on the graphic within the scope of the data explained theoretically above.

Figure 1. Price of Law Faculty in Turkey
The price (P=0,39) is below 1 for a law faculty student. The fact that the price is below 1 increases demand of higher education. Increase in demand of higher education depends on especially rate of return and magnitude of cost values. The fact that private rate of return is approximately 41% increases the individual demand of higher education.
The fact that most of the expenses are met from public resources; private costs are low and private rate of return is high result in the price is below 1 as a consequence of the mentioned. Demand increases according to what extent the price is below 1. At the point that demand and supply reach the balance, the equilibrium price (P=1) occurs either through the fact that investment rate is equal to rate of return (i=r) or all costs of higher education are met by the one who benefits it (Akalın, 1980).

Conclusion
The findings indicating that private returns are higher than social returns in higher education manifests that it has the characteristics of rather a private good. However, higher education is considered to be a public good and most of its expenses are met from public resources. This decreases "all other things being equal" the private education costs of individuals, consequently increases private returns and creates increase in demand.
The fact that the private rate of return is 41% from the calculations in the study suggests the said explicitly. This result causes law faculties to be demanded. According to a research by YÖK in 1997, 41% of cumulative total of students preferred to study law. According to 2005 data of ÖSYM, law faculties were preferred dominantly and approximately 17% of the students stated that they aimed to study law according to a survey done by TED (2005) in the same year.
It is apparent that the said rate will be higher than 41% if the other components such as providing reputation and providing the opportunity of higher consumption rates which cannot be calculated through economical parameters. Considering salary supplements, social benefits and higher prices in private sector, it can be suggested that private rate of return will increase and thus it is several points higher than it is.
Considering non-monetary benefits, it is evident that private rate of return will be higher in any case. This finding manifests the reason for excess demand of higher education. In other words, increase in demand is resulted by the fact that private rate of return is high and private costs are low. Another reason is that you assumed that the typical individual's expenditures are at minimum level is that higher education is provided free by the state because it is considered to be public good. This practice results in that individuals demand more higher education which is very costly.