Category Archives: Higher education finance

Should teacher education places be capped?

NSW education minister Adrian Piccoli has long been a critic of universities over-supplying the teacher education market. In this morning’s Australian, he is calling for caps on student places. If accepted, this would be the second course after medicine to be capped.

It would also be a major precedent, as it would set a low benchmark for justifying capping. According to employment surveys education graduates do slightly better than average in finding full-time work. Among those finding FT work, education graduates do significantly better than graduates in other fields in getting jobs that use their qualifications. That said, full-time employment for education graduates is down 11 percentage points on 2008, the recent peak of graduate employment rates.

The strength of the demand driven system is not that student and universities will always make the right call about where the job market is going, but that it can adapt as new information becomes available. Over the last few years, the message that the teacher market is saturated has been well publicised. Commencing student numbers were already past their peak by 2015, as the chart below shows. The trend would have been further down except for a major move by Swinburne Online, which went from no students in 2014 to 8.5 per cent of the national commencing market for initial teacher education in 2015.

commecning ed students
Source: uCube

There are bigger falls in education more generally – down 10% percent in commencing students between 2014 and 2015 and 13 per cent in full-time equivalents (presumably part-time enrolments at Swinburne Online are affecting that). Under the legislation, capping occurs in full-time equivalent places, not on a head count of students.

The initial 2016 applications and offers data suggests a fall of 2.4 per cent in applications and 4.7 per cent in offers for education, so a further drop in student numbers seems likely.

Cutting student numbers under the pre-demand driven system was a slow, politically painful process. With demand driven funding, it is happening quickly with few people even noticing.

Should we use the OECD’s analysis of the private financial benefits of tertiary education?

I’m quoted this morning in The Australian‘s report on graduate earnings across the OECD, which is in the latest issue of Education at a Glance.

The reported numbers seemed low compared to work Grattan and others have done for higher education, and I have had a bit more time since to work out why.

An issue I noted in the Oz is that the analysis included people with diplomas. In 2012, diploma holders were 28 per cent of everyone with a diploma or higher qualification. Their lower average earnings will bring down the overall average.

Another issue is that the OECD’s data source may be understating graduate income. They used a source I had never heard of for analysing educational returns, the ABS Disablity, Ageing and Carers survey. It was a general population survey so the issue is not that it is a sample of graduates with a disability. However, looking at the way the unit record data is made available to researchers it seems income is only available in ranges, the top one of which is $1,730 a week or more. We hit this problem in the 2011 census as well, with their top range of $2,000 a week or more. 11 per per cent of diploma holders, 21 per cent of bachelor degree holders, and 33 per cent of postgraduate degree holders reported incomes of $2,000 a week or more. As some of these would have incomes well over $2,000 a week, the average is artificially held down by the income category cap.

The OECD numbers are net present value, which means that income expected to be received in the future is counted as of less value than income received now. There is plausible time value of money theory for discounting the future – for example, an 18 year old prospective student would probably rather receive $1,000 now than $1,100 when they finish their 3 year degree, even though there is a favourable implied interest rate on offer.

But in our Graduate Winners report that was not the way we presented the data, which we left undiscounted in the key sections. This was partly because the undiscounted number is easier to understand, and partly because despite the plausibility of time value of money theory in various contexts I was not sure it was so persuasive in this one. In my view, one reason people pursue higher education is so that they will have a good job and a high income in 30 years time. How much theoretical sense does it make to heavily discount the value of achieving a major objective?

Some interesting data on male hourly earnings by years of experience from the latest HILDA report highlights this issue. For the first five or so years, male graduates don’t earn much more per hour than men with vocational education. But after that time a wide earnings gap develops – in the later years that are most discounted by the OECD methodology.

male hourly earnings

The discounting also affects another issue, which is that they assume students don’t work while studying, and the consequent assumed forgone earnings appear with a low discount and are deducted from gross earnings. But in Australia most students work while studying, so the forgone earnings cost is exaggerated, while future income benefits are under-valued.

There is no perfect method of doing educational returns analysis, and every data source in Australia has limitations. But overall I think the OECD numbers are less useful than existing Australian research on the financial benefits of education.

University research expenditure growth finally moderates

In a Grattan report released last year, I argued that research spending was increasing rapidly, with profits on teaching supporting that growth.

The latest ABS statistics on research spending, released every two years, suggest that this trend might be moderating. Although I have not had time to update the complicated analysis we did to estimate the contributing of teaching revenues to research, the long boom in research spending has stalled. After double-digit real growth rates between 2002 and 2012, from 2012 to 2014 there was only 1% real growth, to $10.1 billion (see chart below).

research spending

As overall university expenditure has not stopped growing in this time period, research expenditure as a share of all university expenditure dropped from the record 41% in 2012 to 39% in 2014 (see chart below).

research as a share of university expenditure

Closer examination of the ABS figures by expenditure type shows that one of the reasons for the moderation in research growth is that capital expenditure dropped by $200 million between 2012 and 2014, but 2012 was an unusually high year for capital expenditure. The ABS records capital expenditure in the year in which it occurs, which means that big projects can skew the results for particular years. That $200 million drop accounts for about 0.7% of the drop in the research share of university expenditure.

Still, it does appear that there may be at least a pause in the trend towards research consuming an ever-larger share of university resources. A small decline in research only staff and a small increase in teaching only staff would also support this conclusion. Whether this moderation is just a pause through a period of Commonwealth Budget constraint and a less lucrative international market, or a more lasting slight re-ordering of university priorities, remains to be seen.

University finances in reasonable shape

The annual summary report of university finances has been released. Overall, it shows that university finances continue to be in reasonable shape, especially compared to the period up until 2004 (2008 was the writing down of asset values due to the global financial crisis). The operating surplus in 2014 was $1.9 billion, or about 7 per cent of revenue. It peaked at 9 per cent of revenue in 2010.

uni finances

Of course, aggregate figures like this can hide trouble at particular institutions. In 2014 compared to recent preceding years there was an increase in the number of institutions reporting deficits from one to three, although this is much better than in earlier years.

Unis reporting deficits

The three universities with deficits in 2014 were Victoria University, University of Tasmania and University of Canberra. The latter two had small deficits, but VU lost $16 million. Most of that was due to its TAFE division, suffering from the general turmoil in the vocational education market. Of the three, only VU has been on the deficit list before in the last 5 years.

Things might be a little worse for 2015, with government grant and student contribution indexation rates low and an efficiency dividend being applied to some grants. However, the international student market will be likely be adding to its already significant profits, which will ease the pain.

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.

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.

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.

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.

* 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.