Category Archives: Higher education

Increasing public returns to higher education by cutting public funding

The Fairfax papers are running a story this morning saying that:

“Australia bucks the international trend as one of only five OECD countries where the public profits at a higher rate than the individual. It ranks second out of 29 countries – behind only Britain – for the biggest benefit to the public, while in 24 countries the private rate of return outweighs or equals the public rate.

Economist David Richardson from The Australia Institute says the OECD study “demolishes the claim” that higher education benefits individuals more than the public.”

But these OECD figures don’t show what Fairfax or Richardson think they do. This is because the financial benefits of education are largely independent of public investment in education. For students, they are earnings gap between one education qualification and some counter-factual. For the government, they are the additional tax revenues (and possibly welfare spending savings) on the same counter-factual.

What the Graduate Winners report argued was that government subsidies are a largely redundant addition to the already large private benefits of higher education. Therefore they don’t have a major effect on incentives, provided there is a good loan scheme like HELP. The government can reduce them without having effects on behaviour – which is what has happened in Australia.

Since 1989, Australia has reduced public investment per student in nominal terms twice and reduced it in real terms in many other years. After all these cuts, higher education participation rates are at record levels.

But because the private financial returns to education have grown over much of the time, and the public benefits are essentially taxes on those private earnings, the government is getting the same or greater financial benefit on a lower initial investment. Consequently, their returns on dollar investment have being going up. Further cuts to public spending would further increase public rates of return. Read more »

Julia Gillard’s inside story on the demand driven system

In a strange kind of way, I have reason to be grateful to Julia Gillard. As education minister she did what I had argued for from the late 1990s, and largely ended the quota system of distributing student places between universities.

Debate about the ‘demand driven system’ she introduced has been good for my career, particularly via the demand driven review. I haven’t completely given up hope that the reforms recommended by the review might become policy.

So I was interested in what Gillard had to say about higher education in her book, My Story.

It seems that red tape annoyance may have had something to do with the demand driven system. She complains that she had to “sign off on a brief so that 20 or 30 [student] places could be moved from a university that wanted to surrender them to a university that wanted to take them up.”

I always said that this was absurd, although I was more worried about the consequences for universities and students than ministers. Gillard even uses the same language I did about unchaining universities.

Unsurprisingly, much of the argument within the government about the demand driven system was about money. It nearly didn’t get through the Expenditure Review Committee, saved by a “ministers-only discussion in Kevin’s office” (back in the day when it was Kevin’s office; see the rest of the book…).

Later on, when the demand driven system was costing even more than the sums that had nearly seen it rejected by the ERC in the first place, there was “internal pressure” to “revert to a more traditional, predictable capped approach to funding”. She says that if she had not been PM the system “probably would have been trimmed”.

She defends the alternative to capping, which was an “efficiency dividend” (revealingly copyedited to read “limited-efficiency dividend”). She wasn’t a fan of the National Tertiary Education Union’s response to this, which she dismisses as “hysterical and immature”.

Many tens of thousands of students are in universities today who would not have been if Gillard hadn’t been education minister and then PM. Many others have benefited from universities being more responsive to students. The demand driven system is a real policy achievement.

How can higher education spending be controlled without Senate approval?

A story in today’s Age raises the possibility of different higher education spending cuts from those announced in May. Instead of cutting subsidies to per student tuition funding and the HELP loan scheme, the government could target research funding.

The article suggests that the government might use this as a bargaining chip in Senate negotiations around the Pyne reform package, knowing that it would trigger the vice-chancellor panic (“doomsday scenario”) reported today. But we should also keep in mind that that there are really three separate components to the package. The first was to contain total higher education funding at around current levels, despite forecast considerable increases in student numbers. That was coming out of the broader Budget strategy, and would have happened regardless of whether there were any structural reforms. The second is the implementation of key recommendations of the demand driven review I did with David Kemp. The third is fee deregulation. Dropping these structural reforms would save money, but the government is likely to still want some savings.

The key to reducing research funding is that about $1.8 billion of it is driven through the ‘other grants’ provision of the Higher Education Support Act 2003 (HESA). The legislation sets out a maximum amount that can be spent. But there is no minimum amount and no specific legislated entitlement, as there is for student funding. The actual spending is determined by the minister through the Other Grants Guidelines. I think this could be used to cut spending (contrary to what the Age article says, only a small amount of research funding is affected by the appropriations bills – most of it comes from HESA).

From 2017, there will be opportunities to control spending through the funding agreements the Commonwealth signs with universities. These could be used to reduce the number of centrally distributed Commonwealth supported places (sub-bachelor, postgraduate, and medicine, though sub-bachelor may be deregulated) and control total spending on places within the demand driven system by institution. Universities can’t be offered less money than they received the year before, but with on-going growth in student numbers expected that could still deliver significant savings (the legal details are in chapter 7 of my Keep the caps off report).

Funding agreements have to be published, but they don’t need Senate approval and so are a viable way of curbing spending growth.

Both these ways of reducing spending are sub-optimal. But if this article is based on real backgrounding from the government, that is the point. It is designed to pressure the Senate into making more sensible changes.

What legal changes are needed for the Pyne higher ed reform package?

A few people have asked me about what legal changes are required to implement the Pyne higher education reform package. This post summarises what I think the legal situation will be. The relevant legislation is the Higher Education Support Act 2003 (HESA).

Changes to Commonwealth contribution rates

The government plans to introduce new, generally lower, Commonwealth contribution rates. This requires amending section 33-10 of HESA. I’ve heard it said that this will be part of the appropriation bills which by convention are passed by the Senate, but this isn’t right. Those appropriation bills cover only a smallish percentage of government funding, not including the Commonwealth Grant Scheme.

The government has also indicated that it wants to further reduce funding rates for diploma courses and non-university higher education providers. That would require more substantial redrafting, especially if the government intends to expressly fund research through the Commonwealth Grant Scheme. Section 33-10 alludes to the ‘benefits to students’ power in the Constitution. On the basis of the Williams No. 2 case (the school chaplains case), the High Court may well take a dim view of using this provision to fund research. (Update: There are other potential Constitutional foundations that possibly could be used here, such as the corporations power that was used for the TEQSA Act, universities being legal corporations.)

Increasing or abolishing the student contribution cap

This requires amendment of section 93-10 of HESA.

The government has said that international student fees will be the new cap. While not expressed exactly in those terms, this is already legislated through section 36-55 of HESA. What that section says is that student contribution amounts (legally defined as being for students in Commonwealth supported places) can’t be more than tuition fees (legally defined as being for full fee students). As section 36-30 effectively bans domestic full fee undergraduate students in public universities except in very limited circumstances, the tuition fee reference is almost invariably going to be to international students.

There is no requirement to offer courses to international students, and universities can increase their international student fees, so this is not a very strong capping mechanism.

Requiring universities to put 20 per cent of additional student revenue into a Commonwealth scholarship fund

One complexity here is that division 46 of HESA already has Commonwealth scholarships, in this case actually funded by the Commonwealth rather than other students. Apart from that there could be a backdoor way of doing this, via section 30-25(2), which enables the Commonwealth to put almost any requirement on universities not expressly contradicted by the Act as a condition of receiving funding. Given that the Commonwealth once got away with using 30-25(2) to force the University of Melbourne to subsidise the then legally separate Victorian College of the Arts, requiring universities to subsidise their own students would look reasonable in comparison.

That said, legislation or delegated legislation would give the policy a stronger legal basis, so I expect the government will pursue one of those options. Read more »

Language background should be dropped as a higher ed equity category

At The Conversation, Tim Pitman has anlaysed enrolment changes under the demand driven system of the official equity groups.

He mentions in passing one equity group that survives on the list despite it not predicting educational disadvantage: coming from a non-English speaking background and arriving in Australia in the last decade.

Census data suggests that it is people from English speaking backgrounds who lag in university attendance. Limiting the analysis to 18 to 20 year olds who are citizens (to avoid international students skewing the analysis), only people who speak Australian Indigenous languages at home have lower rates of university attendance.

NESB attend

Narrowing the analysis to people arriving in Australia between 2001 and 2011 does not change the broad picture, with people speaking an African language at home having about the same rate of university attendance as people who speak English at home, with the other groups having higher, and often significantly higher, rates of attendance.

NESB recent arrival

Speaking English at home is not, of course, in itself a disadvantage when it comes to going to university. Class, cultural and locational factors explain these differences. These factors are already covered by other equity categories, making language background redundant.

Update: Tim Pitman in comments below is questioning whether restricting the analysis to 18-20 year olds is enough to sustain the argument. I give reasons below why I think it is. However, to test this I have analysed 30-34 year olds. I don’t think these numbers are as good as the 18-20 year olds, as they are more affected by adult migration by people who already have degrees. Also there will be some double counting of people who have a degree and are studying. But they are a guide. Here we do get one language group, Southwest and Central Asian (without double-checking the numbers, I am guessing mainly Arabs, Afghans and Turks) which has lower rates of educational attainment and participation. However, the differences aren’t large and overall it is still very difficult to argue that speaking a language other than English at home is in itself associated with educational disadvantage.

30-34 year olds

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 #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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