Category Archives: Higher education

Pursuing the demand driven reforms without fee deregulation

According to media reports, new education minister Simon Birmingham is considering proceeding separately with extending the demand driven system to sub-bachelor courses and to higher education providers outside the public university system. Fee deregulation would be dumped.

This is the strategy I have been advocating for months. While it is not a certainty in the Senate, it at least has a realistic chance.

For the reasons outlined in the demand driven review, I believe that it makes policy sense. Politically, it offers a way for the Coalition to limit Labor’s higher education political advantage.

Labor has been going hard on higher education affordability. Yet Labor’s opposition to extending the demand driven system creates a contradiction in their policy. While campaigning strongly against a 20% cut to per student subsidies for students in public universities, they are happy for students in other higher education providers to get no subsidies at all. While campaigning strongly against deregulated fees in public universities, they are ensuring that students in other higher education providers stay in price deregulated courses. Under a revised Coalition package, accepting fee regulation would be the price higher education providers pay for entering the Commonwealth supported system.

From the Coalition’s perspective, the main internal obstacle to this strategy is paying for it. Under the revised package, extending the system would be less costly than as it was announced in May 2014. If higher education providers have to be able to manage within overall Commonwealth supported rates, fewer of them will enter the system. Work we did at Grattan last year (summarised in this Senate submission) estimated that about 60% of courses in non-university providers had total fees at or below Commonwealth supported rates, suggesting that entering the demand driven system would be viable. I don’t know how many students those courses have, but there would be fewer providers entering the system without fee deregulation.

Abandoning fee deregulation for public universities would also provide savings compared to the current forward estimates. There is a common misconception that fee deregulation saves the government money, but in reality it is expensive via HELP interest subsidies and bad debt. The government only saves money if it reduces public funding and replaces it with private funding within a capped system.

I am not opposed to reducing per student Commonwealth contributions to distribute the total pool of Commonwealth funding more fairly across higher education students. But the first priority for controlling higher education expenditure should be dealing with HELP’s costs. Senator Birmingham has made a good start with this through his VET FEE-HELP reforms.

Rather than abandoning loan fees, as proposed under the Pyne package, they should be levied on all students who borrow. There is a sort-of loan fee already for Commonwealth supported students. The discount for paying up-front is another way of saying there is a fee for not paying up-front. But this discount does not generate any extra revenue for the Commonwealth, and it needs to be converted to one that does. There are also a range of other desirable reforms to the initial threshold for repayment (in the original Pyne package), indexation of thresholds, and recovery from deceased estates.

Getting savings measures through the Senate is always more difficult than getting spending measures approved. But there now does seem to be a chance that the Coalition can make a positive higher education reform in this parliamentary term, while still getting higher education to play its part in controlling the deficit.

Some first thoughts on Labor’s higher education policy

Labor has released its higher education policy today. Some first thoughts:

The sensible

* They want to build on the new QILT website (itself a big improvement on MyUniversity) to provide better information to students and parents in making informed choices. It’s not in Labor’s policy, but I would suggest that there are two big information gaps for prospective students at the moment. For QILT, the units of analysis are the course and the university. However, as the attrition rates reported elsewhere in Labor’s policy imply the more important unit of analysis may be the prospective student – ie, student attributes matter more than university or course attributes in predicting completion. The other issue is that while prospective students are getting improved information about choices within higher education and vocational education (see the MySkills website), there is not much on the choice between higher education and vocational education. But that’s the choice people with weaker academic backgrounds need to be considering.

* They would keep the demand driven system. Previous talk of using compacts as a backdoor way of steering the supply side of the demand driven system is absent from this document, and if it has been dropped I think that is a good thing.

* There would be better processes: a green and white paper to sort out the detail of their policy once in government. They are also proposing a Higher Education Productivity and Performance Commission. The main discussion about the Commission is on labour market forecasting, but there is much else it could do to meet the goals implied by its title.

The neutral

* They are promising a ‘Student Funding Guarantee’, which they say will boost per student funding by $2,500 ‘compared with the Liberals’ plan’. Perhaps compared to the 2014 Budget policy, but not so far as I can see compared to the status quo, which is the most likely outcome under the Liberals as well, even if they would rather spend less. Just indexing the current average per student funding rate by 2.5% a year I get quite similar projections to Labor. Incidentally, 2.5% is less than universities would like, but in recent times weak wage growth means that the indexation system Labor introduced last time they were in office is not producing the increases in grants that universities thought it would.

Incidentally, the wording in the document is not always as careful as it could be, blurring the distinctions between per student funding and per student government funding. Universities won’t be 40 per cent better off per student each year under Labor; without spending cuts or fee deregulation it is just that more of their money will come from government. The accountability pressures may differ slightly depending on whether the government or students pay, but a dollar is a dollar regardless of where it comes from. Apart from ideological considerations around public-private funding shares, so far as I can see universities will be financially indifferent between Labor in 2018 and the status quo (which is just Labor policy as of 2012).

The not so good

* Labor’s plan to write off the HELP debt of 100,000 STEM graduates was controversial when it was announced in May. As I said at the time, it is at best wasteful and at worst will encourage prospective students to take high employment risk courses. The Higher Education Productivity and Performance Commission will be able to identify the problems.

* They will not implement the Kemp-Norton report recommendation to extend the demand driven system to non-university providers or sub-bachelor degrees. However, they will announce further policies regarding the TAFE system and pathway programs prior to the election.

Getting overseas student debtors to repay

The promised legislation to recover HELP debt from people overseas was introduced today. In principle this is a good idea, with the main issue being how to implement it. As outlined in our Grattan doubtful debt report last year, both the UK and New Zealand experience significant difficulties in recovering student debt overseas.

We are starting well behind those two countries, because there is a basic problem in alerting people to the fact that they are obliged to repay. Because overseas repayment is a long-standing feature of the NZ and UK schemes, student debtors would have been alerted to their obligations when taking out a loan. Here it is widely (and correctly) believed that no repayment is needed while overseas, and it will take many years to correct that misconception, presuming that this bill gets through the Senate.

Existing overseas HELP debtors have until 1 July 2017 to notify the ATO of their situation. People leaving the country from 1 January 2016, with the intention of staying away for 6 months or more, will need to notify the ATO within 7 days of leaving. There is going to have to be a new departure card to warn people of this. I’m not sure how they will deal with people whose plans change while they are overseas. A change of mind will not be a valid excuse, as not supplying information to the ATO is an absolute liability offence, with a fine of up to $3,600.

Notification will be an issue with any requirement for overseas HELP debtors to repay. The other main issue is determining how much to pay. The UK has a complex scheme that tries to match the initial repayment threshold to living standards in other countries. After that, debtors pay 9% of their earnings above the threshold. NZ has flat repayments based on how much the debtor owes.

The proposed Australian scheme will rely on conversions of overseas income back to $A. Presumably there will have to be some $A value fixed in regulation to provide some certainty in advance as to thresholds. Debtors need to know roughly how much they will need to set aside for their repayment. However, given fluctuations in the $A there will still be some uncertainty about how much it will cost them in their local currency when the time comes to transfer the money. Debtors will be hoping that the $A stays low; bad luck if you are a HELP debtor during the next commodity price boom.

The minister’s media release indicates potential reciprocal arrangements with the UK and NZ on student loans, which may simplify things for debtors and increase compliance. However, in our Grattan report we reported on the locations of overseas graduates three years after completion. At that point, only about 30% were in the UK or NZ.

In the end, more draconian measures might be needed. NZ has the power to stop student debtors at the airport, although I don’t know if it has ever been used. The UK has the power to use legal action to recover all the debt at once, which would make legal action in overseas countries more feasible – it is not worth suing over a few thousand dollars in annual repayments, but could be to get tens of thousands. As most overseas HELP debtors are likely to return permanently, high penalty interest on the total debt might help. It would create an incentive to follow the rules while doing that stint in London, New York, Hong Kong or the many other cities that attract Australian graduates.

Does attending a prestige research university reduce earnings?

The latest HILDA statistical report has a finding that the AFR says:

threatens to undermine the prevailing view that it’s worthwhile for students sweat out a high ATAR score in year 12 so they make it into one of the elite Group of Eight universities.

What the report says is that Group of Eight graduates in their sample earn less than graduates who went to universities in the Australian Technology Network or Innovative Research Universities groups.

In my view the finding is not so much wrong as misleading. We did similar research at Grattan last year, using the same HILDA data source. We found a salary premium for the Group of Eight and Australian Technology Network universities of about 6 per cent, after controlling for various personal attributes and, most importantly, discipline.

I believe that the main reason the HILDA report is getting its result is that Group of Eight universities have enrolment skews towards relatively low paid disciplines such as arts and to a lesser extent science. As can be seen in the chart below, these tend to have lifetime earnings in the lower half of the income distribution.

Source: Grattan analysis of ABS Census 2011 data. It shows the median lifetime private financial benefit of holding a bachelor degree in the stated discipline, compared to the median person of the same gender who finished their education at Year 12.

Just taking 2013 completions, 31 per cent of Group of Eight completions were in the ‘society and culture’ field that includes humanities compared to 23 per cent of IRU graduates and 14.5% of ATN graduates. For science, this field includes 16 per cent of Group of Eight graduates but only 8 per cent of IRU and 6 per cent of ATN graduates.

All this said, past research that does control for discipline has consistently found that the financial advantage of attending a Group of Eight university is less than we might expect, given their relatively high prestige. Despite some anecdotal evidence to the contrary, employers of new graduates don’t seem to pay a Group of Eight salary premium. And Grattan’s work using HILDA data found only a fairly small advantage in the long run. As we did not control for prior ability, even that small advantage might be over-stated due to partly reflecting the higher prior academic ability, as measured by school results, of the students who attend Group of Eight universities.

If a prospective student wants to maximise their income, the key advice is that what they study matters more than where they study it.

But for Group of Eight universities to come out worse in the long run on a discipline basis they would have to be doing significantly worse in adding human capital during their courses, bad enough to cancel out the positive effects of higher prior ability and whatever proxy value their brands have in the labour market. That seems pretty unlikely. I think if the analysis was done again including discipline we’d see a finding more consistent with theory and past research: a small Group of Eight advantage.

The science bubble finally shows signs of deflating

Since 2009, demand for science courses has been growing strongly. This is leading to a serious labour market over-supply, and so I believe there needs to be a correction. Unfortunately the information flows to prospective students for science contain a lot of misleading signals from STEM boosters, who persist in high-profile, but in my view incorrect, claims that this area of education needs encouragement.

The February 2015 applications statistics show some tentative signs that the market is adjusting to science realities. Through the tertiary admissions centres, there has been a 3 per cent decline in science applications. In reality, it is probably a larger drop than this, as I understand that a course reclassification that led to a big drop in environmental studies applications should have boosted science. Against this trend, however, there has been a 5 per cent increase in direct applications for science courses (for non-Year 12 applicants, there is a trend towards applying directly rather than through tertiary admission centres).

Feb demand

The biggest drop in demand if we don’t consider the environmental studies reclassification has been for education courses, down 9 per cent through tertiary admissions centres. This is probably because with a clear occupational outcome in teaching negative labour market information is transmitted much more effectively. Although this is a sensible adjustment, Kim Carr will still be on the warpath about nearly 900 education course offers to applicants with ATARs below 50.

Total applicants (as opposed to applications) are up 1 per on 2014, indicating a market that is essentially stable.

Pure research at universites increasing absolutely, but declining relatively

I have an article in The Conversation this morning arguing that policy over the last quarter century has made public universities more public than they would otherwise have been. Without external pressures, academics and universities would focus on a narrower range of objectives than governments and public opinion would prefer.

In response, Gavin Moodie observes

I am concerned at the diminution in the importance of pure basic research in Australian universities, which is now very much a minority activity. This is particularly worrying since while there are many other bodies established to conduct applied research, there is no other institution to conduct pure basic research.

While the share of all research that is ‘pure’ (definitions here) has gone down (see yesterday’s post), looking at the absolute spending gives a somewhat different picture. Spending on pure research doubled in real terms between 1992 and 2012, but this is a much lower growth rate than for the more applied types of research.

pure research
Source: ABS

Although I don’t think the trend is as negative as Gavin perhaps does, I have some sympathy for his broader point. While public universities can and should do more than academics are inclined to, their comparative advantage compared to other institutions is likely to be at the more pure end of research. If the government wants more applied research, it should probably steer much of that funding to more specialised organisations with clear commercialisation/practical problem solving goals.

Research commercialisation policy déjà vu

Australian is known as a nation that conducts high-quality basic research, and the Government wishes to maintain this reputation. … The Government considers, however, that a greater proportion of such research should be in fields that have the potential to improve the nation’s competitive position. …. We have a poor record in translating the results of basic research into effective application.

- John Dawkins, Higher Education: a policy discussion paper, December 1987

Overall, the Australian research sector is highly productive, internationally connected, and recognised globally for high quality research. … Despite this strong performance in producing excellent research, our ability to translate publicly funded research into commercial outcomes lags behind comparable countries.

- Christopher Pyne and Ian Macfarlane, announcement of a new research commercialisation strategy, May 2015

There are various perpetual critiques of Australian higher education, and the idea that we don’t do very well in commercialising research is one of them. As the ABS figures reported in the chart below show, there has been a significant shift in research towards the applied end of the spectrum. But it remains the case that Australian businesses infrequently report universities as a major direct source of innovation.

Research type

Perhaps some good will come of the latest round of policy initiatives, but I doubt it will be enough to stop similar analyses being offered 25 years from now. Universities just aren’t particularly well suited to producing commercially-oriented research. They attract people whose main interest is curiosity-driven research, not people who want to make money. Academics are much more likely to apply for grants that don’t involve collaboration with industry than those that do, even though industry grants are easier to get. The university status system is oriented around publications in theoretically-inclined high-prestige international journals, not solving the practical problems of Australian industry. While incentives for particular types of research activity matter at the margins, they are unlikely to change university culture.

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.