Category Archives: Higher education

Should high university fees be taxed?

If domestic undergraduate fees are deregulated most people, including eminent education economist Bruce Chapman, believe that at least some universities will charge significantly higher fees than now. Chapman has now detailed a proposal to tax excessive fees, to ‘inhibit and limit the extent of price increases’ (number one in this list of Senate inquiry submissions; The Australian‘s version here.)

The basic idea is that the government will establish different bands of fees, which are taxed at different rates – the tax being a reduction in grants that would otherwise be payable to the university. To take an example from Chapman’s paper, fees for humanities up to $6,499 a year (a bit higher than current student contributions) would pay no tax, fees between $6,500 and $11,499 would pay 20% on the margin, fees between $11,500 and $16,499 would pay 60% on the margin, and fees of $16,500 and over would pay 80% on the margin.

The effects of this can be seen in the context of UWA’s plan for a flat $16,000 fee for all undergraduate courses. The tax would be about $1,000 for the $5,000 in the first marginal section, and another $2,700 for the $4,500 up to $16,000. With current subsidies of around $5,500 a year for humanities courses, UWA’s subsidy would be reduced to around $1,800. (For high fees in low subsidy disciplines, the fee tax could mean that the government taxes more than it contributes for that discipline).

Chapman is not endorsing these particular tax rates; they are to illustrate the concept. However, I am not sure that conceptually this is the best way to target the problem of high fees. First, we need to be clear about what the problem is with high fees.

As Chapman says, it is likely that some fees will be well in excess of the costs of teaching. Much of the profit is likely to fund research. There are two public policy problems with this. The first is that students/graduates will incur higher private costs without a commensurate increase in private benefits. The second is that higher fees will generate higher costs for taxpayers, through the interest subsidy on HELP debt and HELP debt that won’t be repaid.

To solve the first problem, the tax policy relies heavily on deterrence. To the extent that universities do charge taxable fees the problem is exacerbated – the money goes to the government, which is even less likely to benefit the student than the university spending money on research. Research spending might at least contribute to the general prestige of the university and the graduate’s qualification.

To solve the second problem, the tax policy is likely to be more effective as it raises revenue that will offset some of HELP’s interest and bad debt costs. However, it means that students who pay upfront are compensating for costs that they won’t generate. Other students who do borrow could over-compensate. Using the tax rates in Chapman’s submission, and a fee of $30,000 for a law student, we estimate a tax of more than $11,000, leading to government savings of $3,000 in excess of the additional HELP costs.

If we are worried about higher private costs without increased private benefits, it might be better to target university spending rather than revenue. In the UK and USA universities report on spending classified according to function (teaching, research etc) that allows us to see the relationship between student-driven funding and spending. If we did that in Australia we could prohibit public universities from moving beyond certain ratios between student funding and spending, and taxing them if they did. That way the student isn’t any worse off than he or she would otherwise have been, since the money wasn’t being spent on them anyway, and it is only the university’s profit being taxed.

For HELP costs, we should tackle HELP’s problems directly rather than focusing on the students paying high fees. Loan fees payable only by those who borrow would assist in dealing with HELP’s costs without hitting the students who pay upfront. Plus there are several other ways of controlling HELP’s costs, as I have pointed out many times before.

Policy considerations aside, this is a complex policy when the government needs a clear, simple and positive case for fee deregulation.

Should government benefits be increased when university fees go up?

Fairfax has a story this morning on the hidden cost of deregulating university fees. Higher education is included in the bundle of goods and services that make up the consumer price index, which in turn is used to index a wide range of government welfare benefits. So if fees increase the CPI will go up, driving up the cost of the social security system. This was an issue in England when their university fees went up.

I am quoted in the story as saying that the government could exclude university fees from the index. I was challenged on Twitter about this.

The CPI is based on a basket of goods and services consumed by households, with the primary input being the ABS Household Expenditure Survey. A well-known criticism of this is that consumption patterns vary significantly between household types. For this reason, the ABS also calculates a range of other indexes for different household types, especially different categories of government beneficiaries. An aged pensioner index has been used, but only when it is more than CPI.

Given that the purpose of indexation is to maintain the real purchasing power of benefits, it is not clear why people should be compensated for an increase in prices in a commodity few of them other than Youth Allowance recipients are likely to consume. This is a general point about the choice of indexation methods, not one just restricted to this particular issue. But there could be special legislation to at least avoid the once-off major spike in prices after the system changes increasing government expenditure on welfare benefits.

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Update: Some of my economist colleagues are more sceptical of the inflationary effects. They argue that the Reserve Bank has an inflation target and they take policy action to keep CPI within it, even though it is common for there to be price spikes in particular services or commodities. So while the cost of higher education would go up, this could be offset by price stability or reductions elsewhere.

Pyne package linking domestic and international charges is about subsidies more than fees

When announcing its higher education reform package, the government said that international student fees would be a cap on domestic fees. This idea has been criticised regularly since, including today by Gavin Moodie who notes that such a rule could easily be gamed.

But the draft guidelines released with the reform bill version 2 last December show that legislation is not mainly about capping total fee levels, but trying to ensure students benefit from tuition subsidies.

The problem here is not that domestic students are likely to be charged more than international students. At Grattan we have collected fee information for both domestic and international students for hundreds of courses where there is no regulation requiring domestic students to be charged less than internationals – for postgraduates in public universities, and in all full-fee courses in non-university higher education providers. There is not a single case where domestic students are charged more than internationals, and only a handful where they are charged the same. Presumably a mix of underlying cost differences, market forces, and mission considerations mean that domestic students are not charged more.

There is no practical need to cap domestic fees with international fees, and that isn’t what the government is trying to do. Rather, it is trying to ensure that its tuition subsidies benefit students instead of providing super-profits to universities. So what the guidelines say is that tuition fees for non-Commonwealth supported students (which includes internationals) must be at least the student contribution plus the Commonwealth contribution, in some disciplines a much bigger number than just the student contribution.* It is phrased as a floor price for international/other full-fee students rather than a maximum fee for domestic students.

Take an engineering degree at a Group of Eight university, where we calculate that the average annual international student fee was $33,000 in 2014. If the rule just said that international student fees were the cap for domestic fees, a university could in theory charge a domestic student $32,900 and then add the $12,000 tuition subsidy, giving them revenue per student of $44,900, way more than they get for an international student. Even if we assume a more moderate domestic fee of say $26,000, with the tuition subsidy added that still leaves the university with revenue of $38,000 per student, $5,000 more than for an international student.

However, under the rule as drafted the university could not get domestic fee revenue of $38,000 ($12,000 subsidy plus $26,000 fee) per student without lifting international student fees to $38,100, which might price them out of that market. A university might be prepared to take that loss in courses where there are few international students. But in courses where there are significant numbers of internationals the rule will ensure that domestic students benefit from the tuition subsidy bringing down the fees they pay, rather than delivering windfall gain revenue to the university.

The proposed rule on fees for full-fee students has weaknesses as a guard against excess fee charging. But I think it is at least interesting in thinking about what subsidies are for in a fee deregulated system. It takes international student fees as a rough guide to the true market worth of a course, and then tries to ensure that the tuition subsidy brings down the price to domestic students.

* The legislation uses the term tuition fee rather than student contribution now, but I will keep the old language to separate the concepts more clearly.

The asbolute number of lower-ATAR students is still small

In The Conversation today, I have some suggestions about how to handle the increasing willingness of universities to make offers to lower-ATAR applicants. One point I should have made (other than just noting that many lower-ATAR students reject their offers) is that the absolute number of lower-ATAR offer acceptances is not that high, despite a high growth rate since 2010 – about 3,500 in 2014, out of 86,500 acceptances by school leavers admitted with an ATAR (or about 4 per cent). The trend in lower-ATAR absolute numbers can be seen in the slide below.

Comparing acceptance data and enrolment data during the demand driven review last summer there were significant discrepancies between lower-ATAR acceptances and enrolments, indicating drop outs before the HELP census date. If the past is a guide, nearly a quarter of those who made it to the census date won’t return in second year, and just over half will complete. So the absolute number of lower-ATAR students in the system is lower than these acceptance numbers might suggest.

lower ATAR offers
Source: Department of Education applications reports

The other interesting thing about this chart is the sharp increase in applications. As cut-off ATARs began to fall with the enrolment boom it is likely that school leavers who had previously dismissed higher education as unrealistic began to think it was possible, and put in an application. Of course universities also alerted them to this possibility. An example from Victoria University is below.

lower ATAR

Is the prospect of higher fees deterring university applications?

The number of applications to university for courses commencing in 2015 has attracted more interest than usual, due to the controversy over higher education fees. Some data has already been released by individual tertiary admission centres, but it is now available in consolidated form. The figures are preliminary, reflecting applications made as of October 2014. Based on recent history, there will be tens of thousands more applications lodged after this date. I am still seeing plenty of university advertising aimed at that goal.

There is a particular complication this year in Western Australia. A change to the school starting age in 2003 has flowed through the school system, leading to a Year 12 cohort that was only about 60 per its normal size. This makes the WA figures hard to interpret, and the report presents trend data with and without WA.

Without WA, school leaver applications are up 2.2 per cent. Possibly this could be interpreted as saying that the fear of fees has had little or no impact on demand. That’s probably right, although the apparent upward trend may be due to people who would have taken a gap year starting in 2015, so that they get at least one year on the fixed student contribution rates. We also don’t know exactly how many students completed Year 12, so we cannot calculate an application rate.

Non Year-12 applications are down 6.5 per cent. However, this may not mean anything at all. For non-Year 12 applicants, there is a longer-term structural shift away from using tertiary admission centres and towards applying directly to universities. Since 2010, the number of TAC non-Year 12 applications has declined every year, while the number of direct applications has increased.

The report also raises the possibility that the demand driven system might have reduced a backlog of unmet demand for higher education. It is plausible that as people who had unsuccessfully applied to higher education in the past get admitted the pool of higher education hopefuls will diminish. And as more people get into university straight from school, there is a smaller potential market for mature-age higher education.

While these theories may be right, it is still possible that there will be no decline in overall non-Year 12 applications when we get the direct applications data later in the year.

If the demand driven system survives it will be our best yet test of theories in this area. Under the old system, the supply of places was always well below demand. Unless there was a huge decline in demand any price sensitivity would not show in enrolment numbers. We therefore had to use applications data to assess underlying demand. But applications are an imperfect proxy for a serious intention to pursue higher education. Large numbers of people reject the offers they receive, raising questions about whether some apparent demand for higher education is really just keeping options open, or contingent on an offer for a very specific course. Actual enrolments in a system without supply constraints will be a better guide to the true level of demand for higher education.

Should there be a GST on higher education?

As public sector financial woes get worse, we are hearing more calls to put a GST on education. I’m not convinced this is a good idea. Some of my concerns are specific to higher education, others apply to education more broadly.

1. Conceptually, it’s not clear that it makes sense for the government to tax and subsidise the same commodity. Subsidies are supposed to make education more affordable, while taxes make it less affordable.

2. Education is a mixed economy sector, with subsidised services existing alongside unsubsidised services for largely historical reasons. Putting a GST on the more privately funded part of the sector further distorts the market in favour of the subsidised sector. Originally, the GST was supposed to reduce microeconomic distortions, but in this case it would increase them. Perhaps in phase two of the GST it is purely about revenue. However, in mixed sectors GST fiscal gains are likely to be reduced by shifting demand to the more heavily subsidised sector. These are bigger issues in school and vocational education than higher education, where the private sector is still small.

3. In higher education, about 40 per cent of student fee/contribution revenue comes from international students. Typically, exports are exempt from GST to increase Australia’s international competitiveness (another of the original justifications). The international student market is very competitive globally, so we could exempt international students, but they are an unusual kind of export – many international students pay their fees in Australia at least partly from income they have earned working in Australia. And if we exempt international students, in full-fee markets we could see the somewhat counter-intuitive outcome of domestic students paying more for a degree from an Australian university that their international student classmates.

4. Most Australian students borrow money under HELP to pay their fees/contributions. This means that any GST would just be added to the already rapidly increasing level of HELP debt. Given HELP’s poor and worsening finances, 20 to 25 per cent of the GST revenue on higher education is likely to have to be written off. And most of the significant cash revenue gains from a GST on higher education would be 15 years away, after people finish paying off what they will owe anyway and start repaying what they borrowed to pay for the GST.

Overall, a GST on higher education would be likely to distort the higher education market while raising little revenue in the short to medium term.

Fewer new graduates will start repaying their HELP debt

In the mid-year Budget update, the government predicts that repayments of HELP debt will slow down. Unsurprisingly given recent posts on graduate employment, I think that’s right. Fewer graduates have any significant source of income.

What I have not written about so far is what graduates are paid if they have a full-time job. What the latest graduate employment outcomes data shows is that median starting salaries were essentially the same in 2014 as in 2013, at $52,500 a year (for graduates aged less than 25 in their first full-time job). That means that graduate salaries are going backwards in real terms. The HELP thresholds, however, keep being indexed according to average weekly earnings, which are still going up.

Unless there is a surprising surge in salaries paid to new graduates, this means that the median graduate who completed at the end of 2014 will not make a HELP repayment even if he or she has a full-time job. The slide below has the trends in starting salaries and initial HELP repayment thresholds.

starting salary and threshol

An implication of this is that, at least for younger graduates (older graduates are more likely to already have jobs, or employment histories that get them better-paying jobs*), is that few of them will begin HELP repayments in the months after graduation. Overall, only 42 per cent of the graduating cohort from 2013 have a full-time job, down from 56 per cent in 2007 and 2008. If the median starting salary slips below the initial HELP repayment threshold, fewer than half of that group will make a repayment. This suggests that around one in five new graduates will earn enough to start repaying their HELP debt.

Presumably these trends informed the 2014 Budget decision to lower the initial HELP repayment threshold to $50,638, which would require many more new graduates to start repaying, at the rate of 2 per cent of their income. But it is not clear why the Budget went for a once-off cut to the initial threshold, rather than changing the indexation system from average weekly earnings to the consumer price index. The government proposed this change for much more politically sensitive welfare payments.

Originally, the HECS thresholds were indexed to CPI, but were changed to AWE in 1994. Which it is has major implications for repayment levels. In our doubtful debt report, we showed that if the initial threshold had been indexed to the CPI rather than AWE it would have been $44,836 in 2013-14, rather than its actual figure of $51,309. Although we did not model the other thresholds, using CPI rather than AWE could significantly speed up repayments by bringing people into higher repayment categories earlier in their careers.

* In 2013, graduates aged above 25 or above with previous full-time employment experience had a median salary of $58,000.

What’s going on in the new graduate labour market?

Late last year the mainstream media picked up on the graduate un/under-employment story. At Grattan we have been doing a bit more work to see what is going on.

One of the things we wanted to look at whether the poor employment outcomes were driven by more graduates, as the 2009 and onwards enrolment boom students finish their courses, or a declining labour market, or both.

We have published completions data, but there is no published time series of the number of recent graduates with jobs. What we’ve done is taken the proportion of recent graduates with full-time jobs in the Graduate Destination Survey as a share of the completions number. To the extent that the GDS is an imperfect sample our numbers are likely to be a little wrong, but I doubt this will affect the trend.

As can be seen in the slide below, both supply and demand factors are affecting outcomes. The graduate labour market peaked in 2007, when nearly 61,000 new bachelor graduates found (or already had) full-time jobs. In 2013 and 2014, just over 52,000 new bachelor graduates had full time jobs about four months after completing their degrees.

recent grad employ and complete

There seem to be two shocks to the employment market. The first was the onset of the global financial crisis, with was felt most strongly for the 2008 completing students, with a decline of 7 per cent in the number of graduate jobs on the previous year. Perhaps surprisingly, there was a slightly bigger shock in 2013, with a 7.6 per cent decline on the number of jobs in 2012. One reason it was worse in 2013 is that big health fields which had been little affected by the 2009 downturn declined significantly. This is consistent with fewer health occupations appearing on the skills shortage list (p. 68).

While graduate employment opportunities have trended down, the number of domestic bachelor degree completions has trended up, by 17 per cent between 2008 and 2014. Given there are still some big student cohorts enrolled in our universities, the number of completions will only increase in the next few years. Unfortunately, we cannot have the same confidence about full-time jobs for recent graduates.

Release of the 1988 HECS Cabinet documents

The 1 January release of old Cabinet papers has put on the public record the original submission that led to the creation of HECS.

As Julie Hare reports in The Australian, some of its issues are still current today. The Department of Finance wanted a real interest rate on HECS debt, and the Pyne reform package’s original proposal that this be implemented suggests that they have been consistent over the last 25 years on this point (it was in the leaked 1999 reform submission as well).

The issue of doubtful student debt is not so prominent, but it is alluded to in a related Expenditure Review Committee document. The ATO, concerned about the bureaucratic implications of maintaining records for decades, wanted to close HECS accounts that had recorded no changes for extended periods (10 years was suggested). This was opposed by both the departments of Education and Finance, with the latter saying that the issue was evidence of the need for faster repayment requirements and the real interest rate to provide an incentive to repay. They did later get faster repayments, with the initial rates of 1%, 2% & 3% of income (depending on earnings) soon replaced with higher rates, and progressively increased over the years to the current range of 4% to 8%.

There are a few ideas in the documents that were not pursued. Waiving indexation of HECS debt of people out of the workforce for long periods due to unemployment or invalidity was to be investigated. I suspect that this was rejected on feasibility grounds – there is a lot in these documents about the complexities of implementation, down to such detail as the need to upgrade the ATO’s air conditioning before the necessary IT equipment could be installed. If a variable is not in the existing ATO systems, it is very hard to have policy based on it.

A proposal to not charge HECS in the first year of university to students who had been on AUSTUDY or ABSTUDY in their last year of school was also dropped. The Department of Prime Minister and Cabinet suggested that this could undermine the argument that the loan scheme alone could deal with equity concerns, and lead to lobbying from other groups for exemptions. They thought we should wait and see if there was a problem with demand from this group. They made the right call on this, as subsequent research has not shown socioeconomic background in itself be a significant factor in price sensitivity.

At the Conversation, Gwil Croucher discusses some of the other considerations revealed by this release.

As Christopher Pyne is finding, higher education reform is hard. These Cabinet documents provide some insight into the background of a big reform that was implemented and, in modified form, survives.

The beginning of the end for no-questions-asked student loans?

The Australian this morning is running stories on the likely increases in doubtful HELP debt* and crackdowns on lending through VET FEE-HELP, which principally lends to students taking vocational education diploma courses.

Industry minister Ian Macfarlane (the Australian must have been sitting on this story, as Chris Pyne become the responsible minister in the pre-Xmas reshuffle) is said to have:

…blasted “criminal’’ training colleges for recruiting elderly students from retirement homes to cash in on taxpayer funding.

Mr Macfarlane said the federal government would take action early next year to stop training companies and brokers offering free iPads to “suck in’’ students who are unlikely to graduate.

Under the proposed measures, some of the government payment to colleges would be withheld until the student found work. This has parallels with the ‘gainful employment’ rules proposed in the United States to deal with similar problems there.

While obviously measures should be taken to reduce rorting, bad provider practices highlight deeper problems with HELP loans. Income-contingent lending has been expanded many times since HECS was introduced in 1989 without anyone going back and thinking carefully about the lending or repayment systems.

In 1989 higher education was still a relatively elite activity and graduates a relatively small proportion of the workforce. Recent graduate un-or-under-employment was only a third of what it is now. To a significant extent, the admission requirements for university could double as a creditworthiness check. The income contingent loan scheme largely acted as a genuine risk manager, rather than handing out mislabelled subsidies to people who were never likely to repay.

Now higher education participation is heading towards 40 per cent of the age cohort, and HELP has been extended to vocational education. Higher education students with lower ATARs are significantly less likely to complete their degrees, leaving them with a HELP debt but without significantly enhanced income-earning potential. People with vocational education qualifications on average earn significantly less than higher education graduates, and more importantly for HELP are much less likely to earn more than the repayment threshold (pp 20-23). Admission to a course is no longer a good proxy for ability to repay.

During 2014 several people have suggested that institutions enrolling students using HELP should share some of the risk of non-repayment (eg Judy Sloan and Core Economics bloggers). The proposal to making some provider payments contingent on student outcomes looks like the first sign of this becoming reality. However, this may not be the best solution.

While vocational and higher education providers could use their own data to develop sophisticated analysis of what types of students are most likely to drop out, they are much less well-placed to assess employment outcomes for those who complete. Former students are under no legal obligation to answer employment surveys. By contrast, the government as the HELP lender has vast amounts of information. Tax file numbers are used for both HELP borrowing and tax collection, what matters for HELP repayment. Linked back to Education Department records, this data could also be used to produce sophisticated analysis of repayment risk.

Arguably, under current arrangements the government is not being a responsible lender. Good lending practices in the financial sector protect both the lender and the borrower from imprudent decisions. Neither protections are currently robust for HELP. Asking some more questions about repayment prospects before lending under HELP could be good for many prospective students, and good for taxpayers who face ever-increasing bad student debt.

* Using Grattan projections based on a mix of official figures and extrapolations from historic data.