Commencing in 1984, the Labour Government in New Zealand introduced sweeping macroeconomic and microeconomic reforms (a process that has been continued by the National Government who took office in the latter part of 1990). Amongst other things, protectionist import barriers were torn down, the free trade pact between Australia and New Zealand was considerably extended, the New Zealand dollar was floated, various State assets were sold, some government-owned entities were corporatised, and a programme was instituted aimed at reducing the budget deficit and the chronically high levels of international debt. Major reforms were also introduced in the entire education sector. This paper discusses the economic rationale for the changes in the funding of tertiary education. I commence by stating briefly the major changes that have recently been introduced in tertiary education in New Zealand. Thereafter, I examine the economic rationale underpinning the reforms in tertiary education. Attention is given to the following aspects seriatim in the remainder of the paper: division of costs between individuals and society; the issue of variable subsidies across courses; differential subsidies for younger and older students; the funding of living allowances; and student loans. A short conclusion follows.