Questions about how expensive higher education in Estonia is, how many universities we actually need and who should bear the costs of university education have remained unresolved for several decades. Now, we are once again debating the role of taxpayer contributions and the inclusion of private funding.

Given that participants in this debate often propose solutions without a clear understanding of the financial scale of their implications, the purpose of this article is to make the discussion more informed.

I will review, one by one, the most popular options for saving money and finding additional funding for higher education and attempt to assess their potential impact. Based on the data at my disposal – and, in several cases, lack thereof – these assessments are inevitably imprecise. However, I hope to at least approximate the correct order of magnitude.

Historical context

Unfortunately, it is impossible to discuss the funding of higher education entirely separately from the question of why we need universities and higher education in the first place. Therefore, I would first like to place the issues surrounding university funding into a broader historical context and consider whether it might be feasible to establish some form of minimum or optimal level of higher education that must be funded.

Universities and the education they provide are institutions that significantly predate most modern states. Since the early 19th century, the scale and scope of universities – both in terms of the number of people involved and the financial resources allocated – have grown rapidly in all countries around the world.

An even steeper increase has occurred since the second half of the 20th century, as Western countries gradually transitioned to more broadly accessible higher education. This shift has turned universities into one of the most expensive institutions in modern states, even though universities themselves have never enthusiastically supported such expansion.

There remain many people, both within universities and outside them, who believe a return to an elite model of higher education would be desirable. Under such a model, costs would indeed be lower, the quality of education higher and the work of lecturers more enjoyable.

Nevertheless, the long-term trend shows a dramatic expansion of university education. In the Middle Ages, only a few thousand students attended universities across Europe. By the 18th century, this number had grown to tens of thousands – approximately 20,000 to 50,000 students. By the end of the 19th century, Europe already had around 300,000 university students.

This growth continued sharply in the second half of the 20th century, with the number of students in Europe reaching 10 million, and today, nearly 20 million students are enrolled in European universities.

As one might expect, the relative proportion of students to the general population has also grown exponentially. The dynamics of student numbers in Estonia reflect this pan-European trend.

At the beginning of Estonia's independence, there were fewer than a thousand university students. Today, according to Statistics Estonia, there are around 45,000. The proportion of higher-educated individuals in Estonia's population is slightly below the OECD average. Estonia's education development plan aims to increase this proportion to 45 percent by 2035, which would still be slightly below the OECD average.

Since the second half of the 20th century, the growth in both the total number of students and their proportion within the population has become a global trend. Particularly notable progress has been made by countries that were once considered part of the so-called Third World.

While Western nations appear to have grown accustomed to, and in some cases even weary of, their universities – reflected in stagnant funding – countries like China have made massive investments in their universities, allowing them to significantly improve their academic standing.

It might not be politically correct to state this in Estonian media, but for example, The Economist in its June 13 edition this year argued that China is emerging as the world's leading science nation. Among other evidence, it cites an analysis by Leiden University showing that articles by Chinese natural scientists are becoming the most cited in the world.

According to Higher Education Strategy Associates (HESA), countries like India, Turkey and even Russia are increasing funding for their universities more rapidly than Western nations. In addition to these, South Korea, the United States and Japan are also outpacing European nations in this regard.

If these trends continue, we may be entering an era where Western countries, particularly Europe, no longer dominate in technological, military or other domains. The best knowledge usually leads to the best technology after some time, and the best technology in turn leads to economic, political and military power. Knowledge is power in the most literal sense – albeit with a delay.

Higher education as an investment

Let's take a closer look at why an increasing number of countries continue to invest more and more in universities. I am not referring to compensating universities for inflation-related losses in purchasing power, as we struggle to do in Estonia, but rather to the global trend of rapid growth in university education over the past couple of centuries.

As a side note on Estonian higher education, it is worth mentioning that over the last decade, even the goal of compensating for inflation has not been met. Funding for higher education has dropped from 1.5 percent of GDP to 1.1 percent.

Part of the motivation for rising higher education costs is tied to countries' ambitions to enhance their economic and military influence. Specifically, there is a belief that knowledge-driven economies are more robust and that the added value of an educated workforce exceeds that of an uneducated one.

When considering direct financial returns versus broader economic benefits, the first approach clearly prioritizes allocating resources to disciplines whose graduates could help transition the economy toward high technology.

However, from a broader economic perspective, it becomes evident that a higher proportion of university-educated individuals benefits society at large. This is due to the transformative effects of exposure to scientific thinking, regardless of the field of work or life beyond work.

University graduates are more likely to engage in lifelong learning and self-improvement – qualities essential for any modern workplace. They also place less strain on social and healthcare systems, are less likely to interact with the criminal justice system, earn higher salaries and contribute more tax revenue to the state.

A study commissioned by the Council of Rectors found that every euro invested in higher education yields a sevenfold return, with economic benefits independent of the choice of field. Thus, one key rationale for investing in higher education is to ensure economic growth and competitiveness in the global economic and technological arena, as well as to enhance the overall well-being of the population.

Historically, the exponential growth of universities since the early 19th century correlates with the major strides of the industrial and scientific revolutions. From this perspective, it is evident that Europe and other parts of the world have undergone a comprehensive transformation of almost every aspect of life – from a religious and tradition-based way of life to one centered on scientific inquiry – since the late Middle Ages.

Scientific thinking has become an increasingly significant factor not only in industry and agriculture but also in healthcare, governance, education, communal living, personal routines, communication and everyday life. While traditions, ideologies, and beliefs – along with the behaviors they inspire – persist, particularly in areas like family life and politics, an ever-growing range of other life domains is increasingly shaped by advances in science and technology.

Universities have been the primary institutions for spreading and embedding scientific thinking, its potential and its habits within society. As long as the transition from a tradition-based to a science- and technology-based way of life continues, the need for university education is likely to grow.

It would be a mistake to assume that there exists an optimal quantity or proportion of higher education; rather, it is a trend of continuous growth. Today we need more higher education than we did yesterday, and tomorrow we will need even more than today. This growth trend will persist as long as we aspire to a smarter economy, a more informed societal structure, a healthier population and a longer, more comfortable, and better life – all while believing that these goals are tied to the progress and application of science.

Seeking limits to the optimal volume or resource allocation for higher education is as misguided as it would have been 50 years ago to set an upper limit on computing power, data transmission speeds or telephone prices. Such endeavors fail because we could not have imagined 50 years ago the functions these technologies would serve today.

This is not to say that the desire to curb the growth of higher education spending or to balance its public funding with other societal needs is incomprehensible.

First, geopolitical circumstances compel Estonia to increase defense spending. Population aging necessitates higher expenditures on pensions and healthcare. We aim to transition to green energy while simultaneously maintaining a low tax burden conducive to business development. In this context, the prospect of rapid growth in another costly societal institution may indeed provoke frustration.

Second, we may be reluctant to embrace the changes brought about by a science- and technology-based society. Such transitions bring not only benefits but also challenges, social stress and a sense of the loss of (traditional) values, which can be leveraged as political capital. Additionally, some intellectual trends and patterns emerging in the academic world may evoke alienation.

Third, while we may welcome the transition to a science- and technology-based society, we might not believe universities are the best institutions for disseminating scientific thinking and preparing informed workers and citizens.

Fourth, the expansion of universities can be criticized if we focus on the current labor market's needs – specifically the shortage of less-educated workers – and seek to address this issue not through wage policy but through higher education policy. The idea would be to reduce enrollments in "non-productive" fields, steering young people away from universities and into vocational training, ultimately filling jobs that require less education.

The problems outlined in the first and second points are undeniable. The issue raised in the fourth point is understandable, but the hope of addressing it as described is unrealistic. The proposed solutions belong more to the realm of planned economies and closed societies than to democratic states with open economies.

The third point – how well universities fulfill their role – undoubtedly requires scrutiny. Universities must convincingly demonstrate to society how effectively they fulfill their mission and meet societal needs. The fact that universities have, for the past couple of centuries, served as the primary hubs for embedding knowledge-based thinking does not mean they are inherently or permanently suited to this role.

Certainly, universities are not flawless. Their funding is fragmented, governance complex and the state's expectations and demands often inconsistent or contradictory. Some university staff have given up on adapting to new developments and rising societal expectations or struggle to inspire students. Similarly, some students fail to complete their programs or find time to focus on studies alongside work.

Universities can be overly inert and struggle to keep pace with changing demands. Knowledge transfer remains suboptimal and the teaching of interdisciplinary skills (critical source evaluation, teamwork, argumentation, big-picture thinking, etc.) still falls short of the expectations of employers, society and students themselves, as noted in the Riigikogu Higher Education Support Group's 2021 report on "Trends in Higher Education." A lack of funding certainly does not help address these issues.

Amid all this, Estonian universities – like the Estonian education system more broadly – are highly successful by European and global standards based on every measurable indicator. For now, there are no external institutions capable of taking over the role of universities, although efforts to find such alternatives are undoubtedly underway. Therefore, I dare claim that universities remain the primary institutions producing individuals familiar with knowledge-based thinking and providing knowledge-based input to society.

Sustainable higher education funding level 1.5 percent of GDP

When shaping the state budget, a balance must inevitably be struck between higher education and other sectors, even if that balance shifts over time. While the circumstances outlined above might suggest that funding for universities should increase over time, Estonia's recent history shows a decline in the purchasing power of higher education funding.

Between 2012 and 2021, the share of higher education funding fell from 1.4 percent to 1 percent of GDP, while the proportion of funding allocated to higher and vocational education compared to other forms of education has been declining for a decade.

The challenge now is to prevent further cuts to higher education funding starting in 2027. According to the Council of Rectors, a funding level of 1.5 percent of GDP would meet the needs of a knowledge-based society and align with standards established in leading reference countries. Of course, this need not all come from taxpayers but could be partially addressed through private sector contributions.

A significant positive development occurred in 2022, when the government, in cooperation with the Council of Rectors, agreed on a plan to address the shortfall in higher education funding from 2015 to 2022 following the transition to free Estonian-language higher education. The state budget strategy for 2024-2026 included an annual 15 percent increase in operational support for higher education, amounting to a total increase of €105.2 million over three years. One of the primary objectives was to align faculty salaries with those of schoolteachers.

The first step of this compensation plan materialized in 2024, with operational support for higher education increasing by 15 percent (approximately €30 million) compared to the previous year. However, for 2025, due to the country's economic situation, the government halved the planned compensation, reducing it from €34 million to €17 million.

According to a scenario presented by Minister of Education and Research Kristina Kallas (Eesti 200), operational support for higher education will continue to grow in 2026 – although the exact amount is not yet known. Thereafter, from 2027 to 2030, state funding for higher education is projected to plateau at €284 million annually, rather than the previously agreed €307 million in the state budget.

If this scenario unfolds, higher education funding as a share of GDP will begin to decline from 2027 onward, falling below 1.1 percent of GDP. This will once again lead to a significant loss of competitiveness in faculty salaries.

To address this situation, the Higher Education Financing Task Force, established by the minister of education and research, was tasked with identifying potential funding sources to maintain higher education funding at a minimum of 1.1 percent of GDP. To achieve this, considering projected inflation rates, an additional €30 million annually – or approximately €100 million over the 2027-2030 period – would be required for Estonia's higher education system.

Sources for covering expenditure

1. Tuition

To generate an additional €30 million annually from tuition fees between 2027 and 2030, a tuition fee of approximately €2,700 per student per year would need to be introduced in 2027.

Assuming that tuition fees cannot be applied retroactively to students already enrolled and that introducing fees could reduce the number of first-year students by 10-20 percent, there would be around 11,000 new fee-paying first-year students in Estonian universities in 2027. In subsequent years, second- and third-year students would also start paying tuition.

Under this scenario, the total revenue from tuition fees over three years could range between €17 million and €90 million, depending on the fee amount. Neither extreme is desirable; these figures are provided for informational purposes.

Introducing tuition fees on a limited scale could bring some positive changes, such as greater consideration when choosing a field of study or increased demands for quality education. However, it also comes with significant risks and challenges:

• Low fees (up to €500 per year): Administrative costs might exceed revenues.
• High fees: Access to higher education could decrease, particularly for students from less financially secure families, increasing economic segregation.
• Field-specific exemptions: Political decisions may exempt students from tuition in certain fields, creating inequities. For example, one government might exempt engineering students, another teachers, a third doctors, and ten years later, only law and classical philology students might be paying fees.
• Increased emigration: Introducing fees could lead to more students choosing to study abroad, exacerbating emigration and brain drain.
• Upward pressure on fees: Starting in 2030, further fee increases would likely be necessary, creating a trend of annual tuition hikes, as seen in the United States and the United Kingdom, which both began with modest fees.

If tuition fees are introduced, ensuring that economic circumstances do not hinder access to higher education is crucial in Estonia. The best way to prevent this would be a model similar to Australia's, where tuition is repaid through taxes during post-graduation employment. If upfront tuition fees are implemented, corresponding increases in student loan amounts and grants would be necessary, alongside improved loan conditions.

2. Reducing fragmentation in R&D funding and tying it more closely to higher education funding

The Estonian government allocates 1 percent of GDP to research, development and innovation activities and 1.1 percent to higher education. However, the synergy between these funding streams in relation to universities is only partial.

Around 85 percent of Estonia's public interest-driven research is conducted in universities. Beyond universities, there are also numerous publicly funded research institutions that do not engage in teaching. Instead, they focus on research and development related to products, services and technologies, as well as evidence-based policymaking for ministries.

One potential cost-saving measure could involve finding greater overlap between university and research funding. While some research funding outside universities is likely well-justified and effective, other allocations may be historically arbitrary or of questionable utility.

Even research conducted within universities and funded by Estonian taxpayers is fragmented across numerous funding schemes. The only relatively stable funding mechanism – baseline financing – accounts for approximately 15 percent of the state budget's allocation for research and development, compared to about one-third in Finland.

The remaining funding is divided across a plethora of fragmented, often small-scale, targeted funding mechanisms, each with its own rules for allocation, administration and reporting. An exception is research grants administered through the Estonian Research Council (ETAG), whose rules and administrative requirements are relatively reasonable, although this channel accounts for only 26 percent of public-sector research funding.

At the other extreme of the complexity and efficiency spectrum is research funding controlled by ministries. While the goal of supporting evidence-based policymaking is well-founded, ministries often struggle with administering these funds effectively.

As a result of these complexities and the restrictions associated with different mechanisms, the utilization of funds is often inefficient. Tasks completed under one funding mechanism might not align with those of another, and some allocated funds for research and development go unused due to administrative hurdles.

From the researchers' perspective, the extreme competitiveness and administrative complexity result in significant time spent writing grant proposals. In research and development institutions, universities, and even funding agencies, the fragmentation of funding mechanisms leads to disproportionately high indirect administrative costs, poor planning and career instability for researchers.

Potential savings could be achieved by:

1. Aligning research with teaching activities and shifting funding toward research conducted by individuals also involved in teaching.
2. Streamlining established high-quality research funding; discontinuing internal competition-based funding for well-established, high-quality research within universities and funding such work through university core budgets. For advanced researchers, grant application processes on the same topic should be minimized. This would save considerable effort in writing, reviewing and administering grants for research already known to be of high quality.
3. Reducing the number of domestic funding mechanisms, simplifying funding rules to improve efficiency and improving administration by allocating resources more effectively by reducing complexity in funding schemes.

Due to the above-mentioned issues, it is extraordinarily challenging to gain a clear picture of how the 1 percent of GDP allocated to research and development is spent. However, implementing these measures could intuitively result in savings amounting to tens of millions of euros.

3. High education convergence, reducing institutional diversity and "curbing duplication"

To illustrate the scale of measures in this area, consider the hypothetical scenario of closing Tallinn University. If the unlikely assumption were realized that none of Tallinn University's students or staff would transfer to other universities, this would result in a one-time savings of approximately €32 million, effectively covering the annual funding shortfall for higher education in Estonia.

If, however, half of Tallinn University's students transferred to other universities (and assuming no staff followed), the increased costs per student at other Estonian universities – where expenses per student are higher – would still offset these savings. This is because Tallinn University has the lowest per-student costs.

Closing all "non-responsibility" fields of study in Estonian universities, assuming the same unrealistic premise that no students or staff are relocated, would result in a one-time savings of about €13 million. However, this would lead to the financial collapse of Tallinn University and the Estonian University of Life Sciences.

Politically realistic methods for consolidating higher education and reducing "duplication" would, even with robust and well-coordinated efforts, achieve a one-time savings of only a few million euros at most.

The concepts of "responsibility fields" and "duplication" were introduced in 2013 administrative agreements. Fields of study previously categorized for domestic quality assurance were termed "responsibility fields," and by 2016, they were tied to higher education funding. Over time, the Ministry of Education and Research has made these definitions increasingly vague. As early as 2013, co-responsibility fields were designated, and by 2019, the principle of including non-responsibility areas in funding models was established. Despite the rhetoric, the actual impact on Estonia's higher education landscape has been minimal.

The most significant change has been the ministry's reduction of admissions to bachelor's programs in business and administration at public universities, aimed at limiting the number of students entering this field in Estonia. Since 2013, admissions to these programs have been reduced by 244 slots. However, this did not lead students to choose other fields. Instead, vocational education admissions in the same field increased by 256 students in subsequent years. Candidates maintained their preferences despite state intervention.

This does not imply that labor market demands should not influence university programs, but it is a mistake to assume the Ministry of Education and Research is the most effective mediator of such signals. Many labor market signals reach universities directly through interactions between academic staff and employers or through students' choices and behavior. When employers' needs and students' preferences do not align, universities are often better positioned than the ministry to guide young people. Universities should also engage more actively with employers to incorporate their needs and suggestions. This benefits graduates directly and aligns with universities' core responsibilities.

The creation of study group categories has also led to questionable practices. For instance, broadly defined categories allow for the discontinuation of specific programs without this being considered a breach of agreement. At the same time, universities have a heightened interest in registering all new programs within their designated responsibility fields, even if it means blurring program focuses. The 2019 university laws, which define universities' areas of activity, contradict the responsibility field concept. The main issue with responsibility fields lies in the lack of a satisfactory answer to whether it benefits a democratic society for all practitioners in a field to be alumni of a single university department.

In summary, the concept of responsibility fields is misaligned with the needs of a democratic society and has proven to be an ineffective way to guide the development of higher education. It has not been a productive method for directing university activities under government oversight. If political intervention is deemed necessary to adjust specific fields of study, it would be more effective to make explicit decisions about opening or closing individual programs.

4. Considerably wider implementation of paid English-language higher education for the purposes of profit

In 2023, 2,013 students were enrolled in English-language programs at Estonian universities, covering their own tuition costs. The universities' total revenue from tuition fees was estimated at approximately €10 million.

Universities have adopted varying approaches to tuition fees, but on average, each student generated €4,000 in revenue. At the same time, the average operating cost per student at Estonian universities was €12,800. This indicates that teaching international students currently does not generate a profit for universities.

Making tuition-based English-language programs profitable within three years would be impossible. To generate an annual profit of €10 million, universities would need to achieve a turnover of approximately €50 million. This would require, for example, 10,000 international students paying €5,000 in tuition or 5,000 students paying €10,000 each.

Reaching these enrollment levels would take decades and necessitate a long-term political agreement on talent policy and educational immigration. Universities cannot be expected to recruit students who might not be granted entry by the Police and Border Guard Board.

Increasing the number of international students in Estonian universities should not be pursued primarily as a means of funding Estonian-language education. Instead, it should align with nationally guided talent, migration and population policies. The primary benefit to Estonia would come not from tuition profits but from an influx of skilled labor and population growth aimed at enhancing the country's vitality. However, initiating such efforts would require sustained political consensus.

5. Broader implementation of different forms of adult education (including micro degrees)

Universities' contributions to addressing the growing need for lifelong learning in Estonia represent an important and expanding aspect of their activities. However, the scale of these efforts does not make lifelong learning a game-changing factor in university funding.

In 2022, revenue from various forms of adult education in Estonian universities amounted to €17.4 million. This figure is likely to grow as the demand for lifelong learning increases, but a sharp rise exceeding 10-20 percent annually is unlikely. Nonetheless, this is a significant supplementary source of income that could be enhanced by consolidating adult education activities within universities. In a rapidly changing society, the need for lifelong learning grows with each passing year.

6. Growth in corporate and private donations

In 2022, private sector funding for Estonian universities amounted to €19.9 million, accounting for 4.07 percent of higher education revenues. This funding is likely to grow gradually alongside the development of the business sector in Estonia, but within the current tax policy framework, a sharp increase is unlikely. Changes to tax policy could, of course, alter this situation, and in such a case, I would estimate the growth potential of private sector funding to be considerable.

In summary

Against the backdrop of the exponential growth of global higher education, Estonia appears to have settled for a decline in higher education funding to 1.1 percent of GDP or even lower. It also seems that the government's most ambitious goal is to prevent further decreases in funding.

Whether this goal is sufficient from the perspective of Estonia's sustainability and vitality is not something I will evaluate here. Investment in higher education is a matter of political choices and priorities. Fundamentally, it raises the question of whether we consider higher education an investment or an expense, and whether our system is efficiently organized to serve the interests of society, the state, the economy and the citizens of Estonia.

If we answer negatively to these questions, it would be wise to focus on reforming universities rather than underfunding them. Estonia's universities undoubtedly have the potential to support our aspirations toward a more knowledge-driven society and economy and to maintain Estonia's international competitiveness in this transformation. For this reason, investment in science and education should not take a back seat to defense or infrastructure expenditures, such as railways or offshore wind farms.

The search for €100 million in higher education funding for the period 2027-2030 should be seen as a modest, rather than ambitious, objective. However, this approach is more sustainable than the policies pursued by Estonian governments between 2015 and 2021. Discussions about the inclusion of private funding and the related aspects of social equity are also a positive development.

If the analyses above are accurate, only the first two proposals, and potentially the last (with changes to tax policy), offer significant financial potential. The maximum realization of other proposals would result in either a much smaller amount or too great a setback.

Even the three more promising options would require difficult political decisions at the government and parliamentary level. If the third option is implemented, the share of higher education funding as a percentage of GDP would still fall below 1.1 percent, reducing access to higher education.

In practical terms, I believe it is not appropriate to plan a freeze on state operational support for higher education between 2027 and 2030. Instead, this support should be increased in line with one or more of the following factors: teacher salaries, inflation, GDP or the state's target for the proportion of higher-educated individuals. We should avoid repeating the scenario from 2015-2021.

Alongside increases in operational support, political consensus could enable a combination of the first and/or second measures to improve the quality of higher education. Increasing the number of international students and developing various forms of lifelong learning should be pursued as distinct policy goals, rather than serving the funding needs of Estonian-language education.

The most critical step is to understand why Estonian taxpayers should invest in universities at all. We need to decide how we want to position ourselves in the global movement toward a knowledge-based society and economy. Do we aim to be leaders, remain in the middle or lag behind? Leadership would require allocating at least 1.5 percent of GDP to higher education, while trailing behind would mean 1.1 percent or less.

The second aspect is to determine whether universities are indeed fulfilling their role in securing Estonia's position. Are universities still the primary institutions through which scientific thinking is most effectively disseminated into all areas of life? This requires improved dialogue between universities and society, as well as clearer communication from universities themselves.

To fulfill their mission, universities must implement teaching methods that meet 21st-century expectations, create stronger connections between research and education, play a significantly larger role in knowledge transfer and learn to engage more visibly and effectively in societal matters.

If we decide that Estonia needs higher education to serve the country's vitality and support our aspirations for a knowledge-based society and economy, both funders and universities must commit to moving toward that goal.

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