Scholarship scepticism confirmed

Eighteen months ago I was much less full of praise than others for Graham Tuckwell’s $50 million scholarship donation to the ANU. I said:

Like many scholarship schemes, the Tuckwell scholarship will go to people who already have plenty of potential that is unlikely to go to waste. They will go to university anyway, find mentors anyway (one of the claimed benefits of the scheme), and make something of their lives. They are not the people who need help.

Instead, these scholarships are used for essentially wasteful positional competition between universities. The ANU will use the Tuckwell’s scholarships and the associated publicity to try to take top students away from Sydney, Melbourne and other universities that buy talented students .

The announcement today of the 2015 scholarship winners highlights my point. The schools represented from my home state of Victoria (below) hardly suggest that the scholarships are opening up opportunities for the under-privileged. Instead, they are the ANU poaching students from the University of Melbourne.

Melbourne Grammar School, Westbourne Grammar School, Geelong Grammar School, Melbourne High School, Geelong Grammar School, Ballarat Grammar School St Kevin’s College, Presbyterian Ladies’ College

As I said last year, there are much worse ways a rich man could spend his money. But there are also much better ways.

Update: A reader who likes empirical data has sent me the socioeconomic background data of the successful schools. Three of the students are from schools that have more than 25% of their students from low SES backgrounds. But that isn’t enough to change the overall picture of massive over-representation of the top quartile.

SES schools

Will private schools suffer from university fee deregulation?

In The Australian this week, Buly Cardak suggested that university fee deregulation could undermine private schools. Under the current system he suggests that parents pay large sums to private schools to maximise their child’s ATAR, which in turn increases their chance of getting into their desired university course. However, this may become more complicated in future.

With fee deregulation there will be a shift from competition on ATAR only to competition on ATAR and tuition fees. This could well have a ripple effect on the fees charges by private schools.

It is certainly possible that some high ATAR students would decide not to pay the fees Group of Eight universities charge, and go for better value for money options at other universities. However, this does not necessarily mean that ATAR cut-offs at Group of Eight universities would go down.

The reason that ATARs may not change, or even go up, is that under fee deregulation Group of Eight universities could change their business strategies. To generate profits under the current system they operate high-volume/low-margin businesses for Commonwealth-supported students. But with fee deregulation, they could go for lower-volume/higher-margin business to generate the same or more profit on fewer students. Smaller intakes can allow higher cut-offs, even if some high ATAR students go elsewhere.

The Group of Eight are still likely to have plenty of academically strong applicants. For students interested in research or researchers, the Group of Eight will still be dominant. For students interested in prestige, the Group of Eight will still be dominant. They will still have well-located campuses. And for high-ATAR students interested in meeting other high-ATAR students, it is hard to imagine how the Group of Eight won’t still have the highest concentration, even if they don’t have quite the same total number as now.

So it will still be difficult to get into Group of Eight universities, and there will still be powerful incentives to maximise ATAR scores.

There are other assumptions in Buly’s article that give us further reason to doubt that private schools would suffer financially from fee deregulation.

His agument assumes that large numbers of families make financial trade-offs between school and higher education. Although some parents do pay their children’s higher education student contributions, most don’t. Upfront payments have been steadily declining, down to 16.4% in 2012, compared to 22.5% in 2005. Generally, parents pay for school and children pay for higher education through the HELP loan scheme.

We should also be cautious about the idea that ATAR factors are dominant in the decision to use private schools. Research into parental choice of schools has found that it is values, discipline and especially religious factors that are typically most important. The cost of higher education won’t change any of these factors.

If parents used private schools for university admission more generally, the demand driven system might have led to reduced need for private school ATAR-boosting. It’s still hard to get into Group of Eight universities, but it has never been easier to get in somewhere. But so far this is not showing in school enrolment data.

My best guess is that higher education policy will have little effect on private schools.

Update: This idea is popular with University of Melbourne academics: here and here.

What proportion of uni graduates leave Australia permanently?

In our Grattan report on HELP doubtful debt, we struggled to get long-term data on graduates leaving Australia. We were interested in this issue because currently there are no provisions for recovering HELP debts from graduates living overseas.

The latest HILDA Statistical Report doesn’t report on HELP debtors, but it does include information on people with a bachelor degree or above. Perhaps unsurprisingly, they are more likely than people with other qualifications to leave Australia permanently, as seen in the figure below.

emigration by level

Based on general emigration data, our report assumed that graduates with personal or family links to another country would be more likely to emigrate. HILDA confirms that this is the case, with people with both parents born in a non-English speaking country having three times the emigration rate as people with both parents born in Australia. However, 87% of people with NESB parents remained.

emigration by parent birthplace

Reflecting the general Australian population and the education focus of many migrant groups, nearly half of Australia’s domestic students in 2011 had at least one parent born overseas. While HELP debtors going overseas is a much smaller issue than the deceased estate write-off, these numbers suggest that it would be worthwhile to do more to recover HELP from overseas debtors. The Grattan doubtful debt report discusses some of the practical issues in doing so. Since the report was released, the government has said that it has had discussions with the English about mutual efforts to help collect student debt.

Parent birthplace 2011 students

Higher education reform clarifier #6: How realistic is the Greens’ university cost website?

The Greens’ What will my degree cost? website is aimed at politics rather than real education choices, but the idea of an education finance website is a good one. As I argued in The Conversation this morning, we also need to start helping people choose between vocational and higher education. But of course the information in a political website needs to treated with scepticism – even if I am the source of some of it.

For their website the Greens are using data I provided to various newspapers a few weeks ago, but without the caveats I attached to it. To reality check some of the wilder speculation at the time about $100,000 degrees, I used international student fees.

While international student fees are market rates, I believe that they are the upper limit of what is plausible for domestic students. This is because where we have deregulated markets for both international and Australian students, in postgraduate courses and in higher education providers outside the public system, in the vast majority of cases domestic students are charged less.

Some of the possible reasons for charging domestic students less are genuine cost differences, university missions aimed at serving domestic students, and a more competitive domestic market. But whatever the precise reason, the fee numbers in the Greens’ website are almost certainly higher than the average student will be paying in the future, and definitely much higher than the best-priced courses that will be available.

The campaigns being run by the Greens, the NTEU and NUS are likely to leave many people believing that higher education will be much more expensive than it really is. This is a problem for universities under the demand driven system. Under the previous system the supply of university places was set by government well below demand, so reduced applications had no effect on final enrolments. Now with supply and demand quite evenly balanced fewer applications could easily translate into fewer students for some universities.

A number of universities have recognised the problem, and announced price freezes for students starting during the rest of 2014. I think universities are going to have to a lot work on this for the 2015 intake to correct inaccurate beliefs about costs that some of their prospective students will now have .

Higher education reform clarifier #5: Would arts degrees need to cost twice as much?

Stories in the Fairfax papers this morning are talking about the doubling of fees for some arts degrees, to compensate for reduced government subsidies. That is only true of journalism courses, but the reason why these numbers are being arrived at are worth further examination.

The current system is based on funding a ‘unit of study’ (ie a subject) according to its field of education. Each field of education is allocated to one of eight ‘funding clusters’ that determine its ‘Commonwealth contribution’ (ie subsidy) and ‘student contribution’ (often called ‘HECS’). Universities set their own student contributions up to a maximum set by legislation, but in practice all charge the maximum amount.

As is common in the higher education system, various quirks of history rather than clear principles or policies explain these rates. As the figure below shows, this leads to very different overall funding rates for the subjects that someone enrolled in arts might take (I have adjusted 2014 rates up to $2016 for the comparison to come). In my view, only the foreign languages difference could obviously be justified by an inherent need for different teaching methods.

arts now

What the new Commonwealth contribution rates would do is bring the humanities and social science type subjects, except economics and languages, to a consistent level, as seen in the figure below. This means that humanities like history get a small increase in funding, while the others get a substantial cut.

arts changes

From a first principles basis, the new rates look more consistent and rational than the rates they would replace.

If they go ahead (the government has signalled willingness to look at the detail of these cuts) do student contributions need to increase to take total funding per place back to current levels? Arguably, some of these disciplines have long been over-funded and there is scope to not simply maintain the funding status quo by passing on all reductions in Commonwealth contributions to students.

Overall, however, the ‘revenue theory of costs’ is likely to explain university operations more than any strict relationship between what it should reasonably cost to deliver a course and what it actually does cost. It’s Bowen’s law: universities raise all the money they can, and spend all the money they raise. No matter how much money they have, they always feel ‘under-funded’ because they let their costs increase to absorb any previous funding boost. This is why even absurdly rich universities like Harvard feel the need to do major fundraising campaigns.

So while some disciplines look over-funded relative to similar disciplines, it is likely that much of this extra funding has been built into expenditure over time (even if profits in some disciplines have been redistributed to other university activities). While they might not pass on all the Commonwealth contribution reduction to students, the internal trauma involved in reducing costs means that there are likely to be substantial student contribution increases.

One reason I am keen on opening the higher education system up to competition is that I want to bring in new players without these legacy cost structures, who I hope will be able to provide the same or better services than the universities while charging students lower fees.

Higher education reform clarifier #4: Will student fees go down as well as up?

Statements from the government that under their reform package higher education fees will go down as well as up have been met with ridicule in social media and even from a Canadian higher education policy research institute.

Certainly it is unlikely that fees for public university students will go down. Cuts to public subsidies for most disciplines mean that universities will need to increase their charges just to maintain current revenue per student.

But undergraduate students in private universities and colleges, and the TAFEs that now offer degrees, will become eligible for public subsidies under the Pyne reform package, as recommended by the report I wrote with David Kemp. Exactly at what level is yet to be determined. But it will be above the zero level most of their students currently receive (under various ad hoc deals with government, a few of the around 130 potentially affected institutions already have some subsidised places).

While I doubt that the full value of the subsidy will be passed on in lower fees, particularly in the more generously subsidised disciplines we should see fees dropping by thousands of dollars for students outside the public university sector. The Budget papers suggest that 80,000 students could benefit from this change.

Higher education reform clarifier #3: Would compound interest on HELP debt be new?

At a conference I attended yesterday there seemed to be some confusion about the government’s plan to index HELP debt at the 10 year bond rate, capped at 6 per cent, rather than at CPI. There was a lot of concern about introducing ‘compound interest’.

In the context of HELP, compound interest is the paying of interest on previously accrued interest added to a student’s debt. This has been a feature of Australia’s income contingent loans, HECS and then HELP, from the start. What’s changing is not the fact of compounding, but the rate of interest. Based on recent history, this is likely to be 1 to 2.5 per cent higher than now.

The main alternative to these variable real interest rates is a loan fee. Undergraduates borrowing under FEE-HELP pay a 25 per cent loan fee. This provides an incentive to pay up-front, avoiding the taxpayer subsidising interest payments on loans from people who have the cash to pay for their education, and contributing to the cost of interest. Upfront payment allows the government to avoid the risk of doubtful debt. However, once the loan fee is incurred it does not provide much incentive to repay early.

The government is removing the FEE-HELP loan fee. It was certainly unfair that full-fee undergraduates had to pay it, but not full-fee postgraduates. HECS-HELP borrowers also make no contribution to the cost of their loan other than the CPI interest.* But I am not sure that the idea of a loan fee should be dismissed. It makes the total cost of higher education more predictable for borrowers, and manages the risks of periods of earning less than the threshold for repayment. At the same time, a loan fee could substantially reduce the cost of HELP to other taxpayers.
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Higher education reform clarifier #2: Are students facing $100,000 degrees?

There has been a lot of speculation about students facing $100,000 degrees if fees are deregulated. However, my view is that this is very unlikely outside small areas such as medicine, dentistry or veterinary science.

While we are still planning much more work on pricing issues, international student fees provide a a guide to the outer limits of what is likely to be possible – what universities think that the market will pay. Where there are deregulated markets for both internationals and domestics, in the private sector and at postgraduate level, our research is yet to find any cases in which domestic students are charged more, and many cases in which they are charged less.

Our methodology in collecting fees was to look at university websites and compare similar courses across universities. This was done for all the universities in 2013, although not all teach all the covered courses. We then deducted tuition subsidy amounts, as a guide to how these might bring fees down. The Guardian published the results.

The totals vary considerably, but most full courses would end up costing between $35,000 and $60,000 on a simple average of quoted fees. Students would have to decide whether or not the more expensive courses were value for money.

Higher education reform clarifier #1: Will NIDA students pay more?

The higher education reforms announced on Budget night are causing some confusion. Complex reforms are being added to an already complicated system. I am planning on a series of clarifying blog posts to explain what is happening, of which this is the first.

The SMH is running a story on prospective students concerned about fee hikes at the National Institute of Dramatic Art, NIDA.

NIDA is unusual in being subsidised out of the arts budget rather than the education budget. I can’t see anything in the relevant portfolio budget papers about whether NIDA has taken a hit to its funding.

This means that even though NIDA’s students are subsidised, they are classed as full fee by the HELP scheme and borrow under FEE-HELP rather than HECS-HELP. The higher education legislation does not regulate the tuition fees NIDA charges.

For FEE-HELP undergraduates, there is currently a 25% loan fee (eg, a student who borrows $10,000 will have a $12,500 debt recorded). This will be abolished, reducing the initial cost of attending NIDA assuming no further fee changes. However, students will in future be charged an interest rate based on the 10-year bond rate rather than CPI.

NIDA has typically pitched its fee around the level of undergraduate student contributions in comparable courses. If these increase at universities then it is possible that NIDA will see market space to increase its own fees. But there is nothing in the Budget higher education reforms that will require them to lift their charges.

The SMH article quotes 23-year old Oliver Wicks, soon to complete an arts degree, as reconsidering pursuing an education at NIDA due to potential increased cost. However, any increased fees are the least of his worries. As Grattan’s recent HELP doubtful debt report found, a high proportion of performing arts graduates don’t earn enough to start repaying.

Higher education spending in the 1970s compared to now

According to former PM Malcolm Fraser,

Education is the best and most important investment that this country can make. I am not sure that our governments understand this message adequately. Over the last 20 years, governments have actually withdrawn from the funding of education and much of that has been replaced by dependence upon full fee paying students from overseas.

That might have been true for a while in the 1990s and the first half of the least decade. But not in more recent years, as the slide below shows. Some expansion under the previous planned higher education system, and then a surge from the demand driven system, has seen public funding expand very significantly.

subsidies last 10 years

And what happened when Mr Fraser was Prime Minister, from 1975 to 1983? Spending did go up for a while, but was then reduced. It was a period of stagnation in higher education attainment. Fraser faced significant budgetary constraints, as have most of his successors as PM. Read more »