Category Archives: Higher education

No need to spend more than $2 billion promoting STEM subjects

Unfortunately Labor’s promise to write-off the HELP debt of 100,000 science, technology, engineering and maths graduates suggests that they have learned little from their previous mistakes in this area. Following a 2007 election promise, to boost science and maths they cut student contributions and introduced a HECS-HELP benefit, under which around $1,700 a year of HELP debt is written off if graduates work in specified occupations related to their degree.

The cut in student contributions was strongly promoted, and there has been on-going advocacy for STEM disciplines from the Chief Scientist, Professor Ian Chubb. There has been a big increase in science demand and domestic undergraduate enrolments – up 35 per cent between 2008 and 2013, or more than 21,000 full-time equivalent places. By far the largest increase has been in the biological sciences, which made up nearly 40 per cent of the total. Engineering, which did not have a cut in student contributions, increased by 32 per cent over the same period, with more than 8,000 additional full-time equivalent places. Science demand kept growing in 2013 and 2014, despite student contributions being put back up again.

As I have long argued, there has never been any evidence that we need a significant boost in bachelor-level science graduates. The latest employment data confirms that the surge of completions in science is only leading to serious un- and under-employment among science graduates, who have been hit especially hard in the general graduate employment downturn. So it is hard to argue that there is any general problem to solve in the first place.

sci take 3

Possibly there are still some niche employment issues in say secondary maths and science teachers – although they have fallen off the skills shortage list. But a promise to write off a few tens of thousands of dollars in student debt is unlikely to change how many people see a teaching career. Even for financially motivated students, the cost of university is not high relative to career earnings for full-time professionals. Perhaps the main thing that will drive graduates to teaching is that they may have few other options, thanks to the over-supply of graduates.

Course and career choices are primarily about interests and aptitudes, with long-term earnings a factor. These can be influenced – people have multiple interests and are not necessarily aware of all the suitable course and career opportunities. But this influence can be achieved without writing off more than $2 billion in student debt (we get similar numbers to the government). A few million dollars in marketing expenditure would probably have the same effect, if this was a desirable outcome – which it is not. Labor’s latest policy is, unfortunately, only likely to to encourage people to make choices that put them at high employment risk.

The Budget significantly understates likely student-driven higher education spending

Compared to last year, for higher education the 2015-16 Budget is uneventful. But the problem with the Budget papers is that they assume that several things that are unlikely to occur will happen. In particular, they assume that Commonwealth contributions will be cut, domestic undergraduate student fees will be deregulated, and that students at private universities and non-university higher education providers will enter the publicly-funded system. While I think only fee deregulation is completely impossible with the current Senate, on the government’s current legislative strategy it is not clear how any of these proposals will become law.

The government’s reform package not passing the Senate will have both positive and negative effects on the Budget forward estimates. The reform package had two significant costs: added subsidies from more students becoming eligible for Commonwealth-supported places, and added doubtful HELP debt from fee deregulation. From this perspective, the Budget is over-stating likely higher education spending.

However, the Budget is also assuming that per student subsidies will be lower than in fact they will be, as the government is still pursuing per student funding cuts averaging 20 per cent. It is also, I think, assuming an efficiency dividend (I can’t see it mentioned but I have not seen an announcement that it is no longer being pursued), and a change to the grant indexation system (although this change would not deliver any significant short term savings). From this perspective, the Budget is under-stating likely higher education spending.

Calculating the net effects of these changes is difficult on the information presented in the Budget. We have used varying scenarios about public university-only student numbers, indexation and the efficiency dividend. Based on these scenarios, the forward estimates understate likely government spending on the Commonwealth Grant Scheme by between $2.5 billion and $3.7 billion. In other words, universities will receive between $2.5 billion and $3.7 billion more than the Budget papers suggest.

On currently available information, we cannot provide a sensible revision to projected HELP costs. Compared to information on HELP published late last year, HELP’s costs have been revised down. The 2015-16 Budget papers suggest that VET FEE-HELP borrowers will shrink from 225,500 to 128,000 between 2014-15 and 2015-16. If so, that is a remarkable response to current efforts to clean up the vocational education industry. They are also predicting fewer HECS-HELP and FEE-HELP borrowers.

The ‘performance indicator’ for the proportion of new HELP loans that are expected not to be repaid has been reduced by two percentage points across the comparable forward estimates years, so that by 2017-18 it is anticipated to be 21 per cent instead of 23 per cent. While an improvement would flow from fewer VET FEE-HELP borrowers, these proportions still look to be on the optimistic side.

Corrected post: Most HELP debtors still owe less than $20,000, but big debts are increasing

The ATO personal income statistics provide information on how much debt students and former students are holding. Although debt levels are increasing, the vast majority of HELP debtors (71 per cent in 2012-13) still owe $20,000 or less.

The modal amount of debt is below $10,000, with more than 40 per cent in this category in all years. However, this is a poor guide to what the typical student will end up borrowing, as it includes people who are early in the borrowing phase and towards the end of their repayment phase (plus probably quite a few people who did not borrow much in the times when HECS was much cheaper, but have not repaid).

HELP debt levels

The share of HELP debtors owing more than $40,000 has increased from 3.5 per cent to 5.6 per cent between 2010-11 and 2012-13, or just over 100,000 people in 2012-13.

Fewer people are repaying their HELP debt

A few months ago I argued that flat graduate incomes and an initial threshold that was indexed to average weekly earnings was going to mean fewer graduates making a repayment. The 2012-13 taxation statistics that came out today shows that this is already a problem. The total number of people who made a HELP repayment that year dropped by over 2,000 compared to 2011-12, while the total number of debtors increased by more than 142,000.

Help debtors and repayments

The surge in enrolments since 2009 means that it is inevitable that a lower percentage of debtors will make a repayment, since it takes time for people to finish their courses and enter the workforce. But this is only the second time since HECS/HELP started in 1989 that the absolute number of people making a repayment went down, other than due to a deliberate policy shift (increasing the threshold for 2004-05). Total repayments did go up by $24 million, or about 1.6%.

The falling number of debtors making a repayment highlights again the need for a lower threshold and measures to reduce the manipulation of HELP repayment income.

Would restoring or increasing discounts for up-front student contribution payments improve’s HELP’s finances?

The Australian this morning is giving a lot of attention to this paper by Neil Warren and Richard Highfield on HELP repayment.

It is a good paper, analysing ‘bunching’ of HELP debtor incomes below important repayment thresholds. The significance of this (for both the government and the debtor) is that if the debtor’s income crosses one of the thresholds they have to pay a higher percentage of all their income in repayment.

This has turned out to be a valuable aspect of HELP’s repayment system compared to those of other countries, where students pay at the margins (eg 9% of income above the threshold). In Australia, anyone who consistently earns above the initial threshold (about $53K this year) is likely to eventually repay all their debt, as they will pay back $2,000+ each year. But in other countries, earnings slightly above the threshold result in only very small repayments. This is one reason that, bad as Australia’s student doubtful debt figures are, they are not as bad as England’s.

However, because crossing a threshold has a high cash cost there are temptations to keep income below it. I have to admit that long ago I considered turning down a pay increase because I thought it would reduce my take-home pay more than I can afford, as someone who at the time had a very tight financial situation. In the end, what was to my boss a generous increase boosted my take-home pay by some token amount (and of course sped up my HECS repayment). What Highfield and Warren present is evidence that some people are using deductions for education, work and charity to bring their taxable income below thresholds.

Their policy suggestion is to change the definition of HELP repayment income so that some or all of these deductions are not included. This is a strategy the government has adopted before to tackle negative gearing and fringe benefits. I need to think more about the education and work deductions, but support removing charitable deductions (the taxpayer would still get the deduction for income tax purposes).

Another suggestion is to revisit the issue of discounts for paying student contributions upfront. The discount was cut from 25 per cent to 20 per cent in 2005, and then to 10 per cent in 2012, with a bill to eliminate it entirely stalled in the Senate. Money never lent will never cause repayment problems, so this has an obvious attraction – if the savings from the reduced lending outweigh the discount’s cost.

However, I am not convinced that the discount is having a big enough effect in encouraging up-front payment to warrant keeping it. The proportion of students paying upfront is in long-term decline, as seen in the chart below. The halving of the discount in 2012 did cause the biggest year-to-year decline in upfront payment in this time series, but it really only sped the trend up, rather than marking an obvious major turning point. We are talking perhaps about 1 to 2 extra percentage points of students paying upfront if they had a stronger financial incentive.

HECS-HELP discount

Cutting the discount has been based in part on the assumption that many of the people paying upfront are not principally motivated by a financial calculation. They are parents paying for their kids, employers paying for their staff, or individuals who don’t want to hold debt even on very low interest rates. Overall, the government is probably better off trying to collect the full student contribution amount via HELP than giving windfall gains to people who will pay upfront anyway.

While it has always made sense to borrow under HECS or HELP, due to the very favourable lending conditions, I am not entirely sure why we are seeing such a strong trend. An increasing share of low SES students might explain some of it, but I suspect there is more going on.

Public opinion on special admission standards for Indigenous university applicants

In the United States, racial preference in university admissions is a highly controversial issue. But in Australia universities have long had special admissions programs for Indigenous applicants, with little obvious controversy. So far as I am aware the latest ANU Poll, on Indigenous affairs, is the first to ask the general public what they think.

As the chart below shows, a small majority of respondents, 54%, favoured special programs and admission standards for Aboriginal people. This was lower than support for governments helping Aboriginal people find employment (69%) or who think the private sector should do more to employ Aboriginal people (66%).

It’s hard to explore the reasons for these results from within this survey. However there are common ideas around minimum entry standards (as seen in the annual January low ATAR debate), and using ranked prior academic performance to allocate scarce places, that would influence views on university admission more than staff hiring practices.

Indigenous

Years to repay student debt as a way of setting student contributions

In The Australian this morning, Melbourne University VC (and my former boss) Glyn Davis has an op-ed saying:

As the 2011 Lomax-Smith report made clear, there is no consistent principle guiding public and private contribution to university study. A law or economics student pays about 83 per cent of the cost of their education while students in other disciplines enjoy a much larger public subsidy. This is not fair.

I have no dispute that the current system of setting overall funding rates and student contributions is untidy. It is the accumulated result of ad hoc decisions going back 25 years. There has been no careful empirical work to ensure that either funding rates or student payments reflect clear funding principles.

That said, I do not believe that the current principles for setting student contributions are inherently ‘unfair’. When different student contributions for different courses replaced previously flat HECS rates in 1997, the stated rationale was the new fees would reflect a mix of private benefit and course costs.* The higher the private benefit, the higher the student charge, with some but not primary acknowledgement of course cost. If course cost is not the major factor in setting the fee, it is not clear that calculations based on course cost denominators tell us much. The implied denominator for a private benefits approach is future earnings or some other measure of private advantage.

The reason law and economics student pay most of their course costs is their high private benefits/low course costs combination. But the idea behind differential HECS was to get a more even outcome on a student costs/graduate private benefits calculation.

I think one interesting way to look at this is to calculate how many years it takes graduates in different disciplines to repay their HELP debt. Based on 2011 census data, we think it would take a median male graduate about 10 years to repay their HELP debt. The chart below shows that even though law students pay high fees, they are estimated to take less time than average to repay, because their salaries are higher than average. Business graduates are estimated to take 11 years, a little above average.

median years reapy

From an egalitarian perspective, something like this system means that graduates across the disciplines put in more similar work effort to repay their debts than a system in which their subsidies are a more consistent percentage of course costs. For example, if we had a 50:50 public/private funding system law graduates would get higher subsidies and take less time to repay, despite already being on the shorter side of the median. Science students would get lower subsidies and take more time to repay, despite already having an above-median repayment period. It was counter-intuitive outcomes like these that sunk the Lomax-Smith recommendation of a 60:40 public/private split.

From a public benefit subsidy perspective, the current system also has some merit. In this analysis, students make some calculation of private benefits (financial and non-financial) from a course and compare these with the costs (also financial and non-financial). If we want to encourage more people to take education generally or particular courses via subsidies we can alter private financial benefits to make them more attractive. But if private benefits are already high, we don’t need subsidies at all or to the same extent. This means that we can charge students in high private financial benefits courses more, regardless of cost.

To reiterate, this is not a defence of the detail of the current system. But there are good reasons not to be too worried about what numbers we get from a student contribution/total course costs calculation, and to look at other rationales for setting student charges.

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* I am using ‘course costs’ a bit loosely here; the calculations are actually student contribution/Commonwealth-supported student funding rate. The funding rate is typically around the actual costs, but this varies between disciplines and institutions.

Should New Zealanders be entitled to Australian student loans?

Although tough measures against refugee boat arrivals sometimes give the opposite impression, Australian migration rules overall are about as liberal as they have been since federation. We have multiple uncapped long-term although often temporary visa categories including New Zealanders, 457 work visa holders, international students, and working holiday visas. At the end of 2014, there were nearly 1.4 million people in the country on these visas. Only a small number of people seem to be really thinking through the implications of such a large number, although ad hoc issues come up regularly.

One of these is the status of long-term New Zealand residents of Australia in Australian higher education institutions, a subject mentioned in today’s Australian. Contrary to what the article says, New Zealanders are entitled to subsidised places in Australian public universities, as Australians are in New Zealand universities. However, New Zealanders are not entitled to the HELP student loan schemes, and therefore must pay their student contributions or fees up-front. Australians can borrow in New Zealand if they have lived there for at least three years.

The available statistics don’t tell us exactly the scale of the issue, but in 2013 there were 16,400 New Zealand-born people enrolled as ‘domestic’ students and 16,400 full-time equivalent students paying undergraduate student contributions up-front because they were not entitled to HECS-HELP. There is a bit of coincidence in the numbers as the latter figure includes permanent residents from other countries, while the former number includes postgraduates. But many New Zealanders who have been in Australia for much of their lives, went to Australian schools, talk with Australian accents, and consider themselves Australian for most purposes will nevertheless be paying upfront.

The policy intent behind this rule is reasonable enough. It’s one of several measures designed to ensure that people unlikely to be paying taxes in Australia, and therefore unlikely to repay HELP loans, don’t get to borrow (although it raises the question of if they are not going to stay, why give them any support at all?). But it is out of alignment with the social reality of many of the people it affects.

This has been recognised by the government, and they have an amendment that would allow New Zealanders who have been here ten years or more to be eligible for HELP loans. Unfortunately it is embedded in the ill-fated Pyne higher education reform package bill, and so unlikely to pass the Senate. It’s another reason why we need a three bills strategy to get higher education policy moving again, with this amendment going in a Budget measures bill.

It’s also worth noting that this would have been much less of an issue in the first place if we had measures to collect HELP debt from people living overseas. There are already signs that Australia and New Zealand are moving to assist each other in getting student debt repaid. If international repayment mechanisms were in place, we could have a more integrated Australia-New Zealand higher education market with short waiting times on student eligibility.

OECD comparisons are a poor guide to higher education funding policy

Rodney Tiffen’s Inside Story article on university funding reflects conventional wisdom: that there should be more public funding of higher education. But as is common in these pieces, it only really alludes to possible arguments, rather than spelling them out and exploring their implications.

We start with the familiar claim that Australian spending on higher education is relatively low, as a share of GDP, compared to other OECD countries. There are problems with the data used as it does not include the significant subsidies via the HELP loan scheme, but the basic point is right: on a per place basis Australian students pay more than is common in the European countries that make up most of the nations in the analysis.

Tiffen describes Australia’s low position as a low rank, when in reality the information on public spending is just a list. A rank only makes sense if higher numbers are inherently good and low numbers are inherently bad. But even relying purely on OECD numbers the available evidence counts against this conclusion. Consider higher education attainment rates compared to fees. As the chart below shows, low attainment is mostly found in low fee countries.

I have described this before as the paradox of public funding: that high subsidies can lead to low attainment. A low fee policy is usually aimed at demand-side considerations. But in higher education the problem is usually the supply of student places rather than demand for them. When public funding is limited, it is better to give smaller amounts to a larger number of people (eg Australia) than larger amounts to a smaller number of people (eg many European countries).

fees and attainment 2
Note: 2003-04 fees data used to approximate fees likely to be have been paid by the cohort in the attainment data.

This is a paradox, not a political science law. As the Scandinavian countries show, it is possible to have no fees and high attainment. But this typically occurs as part of a much broader political and economic system. High taxing countries have high public spending on social services, low taxing countries have high private spending on social services. Again OECD data can show the pattern as it applies to higher education.

fees and tax

For graduates, the difference between paying high taxes generally and paying extra ‘tax’ via HELP repayments is likely to be subtle. It is possible that the free-on-delivery mode of education shifts education expenses to a later period in life, when high annual tax bills are more manageable. That could be a benefit of the Scandinavian system, but I have not seen any research that demonstrates the point. But there are mostly likely to be significant issues when there are high taxes and high fees, as seems to be the case in England.

OECD comparisons are heuristics rather than arguments. If Australia differs markedly from other countries it is worth asking if this matters. In Australia’s case, I’d say the answer is no. Fees that are high compared to other countries, but modest compared to private benefits, have helped us deliver higher education to the masses on a tax take that is less than many other OECD countries.

IT, engineering and economics students least satisfied with teaching quality

Yesterday I reported data from the 2014 University Experience Survey suggested that students at non-university higher education providers were, on most indicators, more satisfied with their education than students at universities.

There are also significant differences between disciplines on satisfaction with teaching quality, as seen in the chart below. I have taken out disciplines with fewer than 1,000 respondents in the UES, as well as most ‘other’ disciplinary categories as too vague. This took out both the discipline with the highest satisfaction (language and literature, 89%) and with the lowest (mechanical engineering, 72%).

satisfaction by discipline

Most of the relatively low-satisfaction disciplines are popular with males and international students, who report lower overall satisfaction than females and domestic students. But I can’t tell on the available data which way the causation might be running – whether students in engineering, IT and commerce faculties are less satisfied at least partly because they tend to be male and/or from overseas, or because males and international students are less satisfied because they are enrolled in engineering, IT and commerce faculties.