Category Archives: Higher education finance

Should uni students pay a fixed share of total course costs?

In a Conversation article today, Louise Watson revives an idea from the 2011 base funding review (on which she served): that the government and students should each pay a fixed share of the total funding rate for the course the students take. She says:

The wide variation in subsidy levels from 16% to 71% of total course costs is the product of incremental political decisions made by previous governments. Pyne’s proposal to cut government subsidies by 20% across the board does not address these anomalies. It would be fairer if all government subsidies met the same percentage of course costs, regardless of discipline, even though this would cause an increase in some students’ HECS liability.

In the base funding review a 40 per cent student/60 per cent government ratio was suggested; in today’s article Watson refers to a National Commission of Audit suggestion of 45/55.

My Graduate Winners report was a detailed critique of this idea from the perspective of using higher education subsidies to produce public benefits.

But I don’t think the fixed ratio idea is much better from Watson’s perspective of fairness to students. Under the current system, student contributions are mostly based on presumed private benefit from a degree, with a nod to cost differentials in delivering courses. This is how we get apparent anomalies – law has high private benefits but low delivery costs, and therefore the student contribution is a high percentage of the total funding rate.

While the private benefit categorisations are old and were always rather back-of-the-envelope, their practical effect is to even out the number of years it takes to repay a loan. The chart below shows, using 2011 census data, how long it would take male graduates to repay their HELP debt, if they were earning the median income for someone with a bachelor degree in their discipline.

HELP repay

Under the current student contribution system, most repayment times are clustered around the overall average of 10 years.

Under the base funding review flat rate subsidy recommendations, science and agriculture would become much more expensive, even though they already have relatively long repayment times. Law and IT would become cheaper, even though their graduates are already relatively quick to repay. It’s not obvious to me how this improves on fairness.

These issues arise because although we spend more than $6 billion a year on the main tuition subsidy program, nobody knows exactly why. But I think the main practical effect of this spending is that it shortens student debt repayment times, and keeps them clearer of the cash-constrained child-rearing years. This is one of the main things I take from this year’s debate on fee deregulation – while the arguments were often under-developed, people were expressing concern about women carrying debt while they were out of the workforce with kids, and about delays in the capital accumulation needed to enter the property market.

The current student contribution system helps with income smoothing, with graduates eventually paying via high marginal tax rates later in their careers. By causing already long repayment times to extend further, and already short repayment times to reduce still more, the Watson proposal would work against this policy objective.

HELP and vows of poverty

On Twitter I was challenged on the religious colleges point, that there was a difference between being eligible for FEE-HELP loans and directly receiving tuition subsidies. Having just checked the census income numbers, looking at ministers of religion and graduates of ‘religious studies’, it seems that in this case there may not be so much difference between the two.

In 2011, the year of the last census, the threshold for repayment of HELP was an annual income of about $47,000. Unfortunately that does not neatly fit with the census income categories, falling into one with the range of $800-$999 a week.

The slide below shows incomes for ministers of religion, with 47 per cent definitely earning below the threshold (the bars show the cumulative percent of ministers), with another 16 per cent in the income range including the threshold.

ministers of religion

The results for people with degrees in ‘religious studies’ are even worse. For this group, 56 per cent earn less than threshold and another 12 per cent have an income in the the threshold’s income range.

religious studies

By contrast, for graduates generally 34 per cent are clearly below the threshold and another 12 per cent have an income in the threshold range.

There are many people who are below the threshold in a given year who will still repay eventually, as they are temporarily out of the workforce or working part-time. But religious vocations are often characterised by the religiously-motivated forgoing of material luxury, and also payment-in-kind by the church, such as free or heavily subsidised accommodation. These factors are likely to put some ministers of religion below the threshold for their careers, despite working full-time.

This means that the effective costs of extending tuition subsidies to religious colleges is likely to be less than what I estimated yesterday, as some of the tuition subsidies will just replace debt that will never be repaid anyway.

How big are religious colleges?

As noted last week, Labor and the Greens have added religious colleges to their list of objections to the Pyne higher education reforms. But how big are these colleges?

By my count, there are 21 colleges with a religious dimension currently in the funding system, through their eligibility for FEE-HELP loans. There are another three approved to offer higher education qualifications that are not in the funding system. Of the Christian colleges, all but two have a course leading to the ministry, although several that do have these courses have more students enrolled in other fields other than theology, especially teaching and, in the case of Avondale, nursing.

Under the Pyne reforms, all higher education providers offering undergraduate places would be eligible to join the demand driven funding system, making them entitled to tuition subsidies for their undergraduate students. Theology subjects are in the humanities funding group, meaning that they would receive a tuition subsidy of about $4,200 a year (non-university providers are being offered 70 per cent of the university funding rate). If every college joined the demand driven system they would entitled to about $10 million a year for these students (assuming that students enrolled in ‘philosophy and religious students’ are primarily taking theology subjects). There are about 2,400 full-time equivalent domestic undergraduate students in this discipline group in these colleges.

In total, they have about 4,000 full-time equivalent domestic undergraduates. Four of the colleges are already receiving public funding for non-theological courses. They would get cuts if the Pyne bill passes, due to reduced overall funding rates in most disciplines and a further 30 per cent reduction for not being university providers. After taking this into account, I estimate that the total subsidy for colleges with a religious angle would increase from about $13 million now to about $21 million if the Pyne reforms passed as introduced.

Of course this assumes no change in student numbers post-reform, but I doubt that there is large unmet demand for courses in religious colleges.

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Enrolment numbers are from the Department of Education, copyright to the Commonwealth of Australia, and reproduced with permission.

The public funding of religious colleges

The Age ran a page one story this morning on the potential eligibility of religious colleges for public funding, if the revised Pyne higher education reform bill passes. Labor and the Greens oppose the policy on the grounds that it breaches the separation of church and state, although Labor higher education spokesman Kim Carr draws a distinction between religious studies and training for the priesthood.

Australia doesn’t have a US-style separation of church and state. The Constitution ensures that the government will not prevent the free exercise of religion and limits the ways in which sectarian disputes can damage the government, but does not require the state to have no involvement with religious organisations. It is common for Australian governments to fund religious organisations, typically for school education and the delivery of social services.

In my view this is consistent with the original liberal thinking that led to the idea of a church-state separation. This was not based on hostility to religion. It is because religious belief is important to many (and historically most) people that liberals want to protect it. At the same time, attempts to use the state to impose religious belief and practices have often had very negative consequences.

From this perspective, a policy that funds theology studies and training for the ministry is unproblematic provided it is neutral between religions. The Pyne policy meets that criterion. All but two of the current religious colleges are Christian, but there is no legal obstacle in the way of other religions. A third non-Christian religion, Islam, does have a course in the public university sector.

Of course, it would not be hard to make an argument that such funding is unnecessary: religions have been training their own clerics for many centuries. But the same argument could be made against most higher education subsidies. My view on this is that while public subsidy of higher education could safely be reduced, while it exists it should be available to all students on a consistent basis.

Did per student higher education funding increase under Labor?

Labor higher education spokesman Kim Carr isn’t happy with Universities Australia. He is taking aim at their claim that ‘per-student funding has decreased in real terms over a number of years.’ Carr says that per student funding increased under Labor.

I think he is right, but these things are surprisingly hard to sort out. We need to distinguish between government policy on funding rates and the average per student funding rate. The two are not necessarily the same.

Per student funding rates have fluctuated over the years in part because universities, by accident or design, have ‘over-enrolled’ – that is, they have taken more students than was specified in their funding agreement with the government. Policies on this have varied over the years, but usually it has meant that universities get a lower funding rate for the over-enrolled students. As a result the average per student funding rate is lower than the official funding rate. Arguably, if universities do this they cannot then reasonably complain about the per student funding consequences.

An important change by Labor was that it largely ended the distinction between students within and outside funding agreement targets. In the final Howard-era iteration of the over-enrolment policy universities received Commonwealth and student funding up to 5% more than the original funding agreement target, and student contributions only for students above that. Labor increased the 5% to 10% for 2010 and 2011, and then introduced the demand driven system in 2012. This meant that many students for which universities would otherwise have received the student contribution only received the Commonwealth contribution as well, pushing up the average funding rate. On the other hand, the enrolment frenzy of some universities in the lead up to 2012 diluted average funding (again, a decline entirely driven by university behaviour).

Labor also finally replaced a Keating-era indexation system that had delivered below-inflation per student funding increases for many years. They stole their own glory by trying to snatch it back via an ‘efficiency dividend’, but the relevant legislation having failed to pass the universities look like they will continue to benefit from this change on a per student basis (except that flat wage growth means that the new system is for this year delivering an increase that looks more like the old system).

With the demand driven system, average per student funding is also benefiting from compositional shifts in enrolment – that is, growth has been strong in courses such as science, engineering and health that have relatively high per student funding rates.

Another issue with per student funding is whether we should count performance driven funding related to teaching. It’s certainly relevant to total government funding, but as it tends to be a bit of a lottery (with constantly shifting criteria and being first on the list for cuts) I’m inclined not to count it.

That said, Labor like all other governments in the preceding quarter century essentially retained underlying funding rates that have an historical and political basis, rather than adopting a pricing system aligned with costs, standards, or market preferences. Most of the huge increases in spending on higher education have been on more students, rather than on more money for each student. Failure to reform per student prices, and the Budget-panic driven efficiency dividend announced in April 2013, in my view shattered the vice-chancellors’ confidence in the current system, and explains why most of them now support fee deregulation.

Extension of the demand driven system should not be delayed

The government is distancing itself from a claimed list of higher education reform concessions reported this morning. I’m glad to hear that because one of the claimed concessions, a three year delay on extending the demand driven system, would be a mistake.

I would say it, but I think expanding the demand driven system is the most urgent of the reforms.

As the demand driven review report argued, the current system is not fit-for-purpose as we move into the next stage of mass higher education. Funding policy provides a strong financial incentive to start in a public university bachelor degree, when lower-ATAR and other under-prepared students would be better off starting in a diploma course. Diplomas are currently outside the demand driven system, and most of the pathway courses are in the private higher education sector.

The government could just allow public universities to offer more sub-bachelor courses. But only a few universities have much existing capacity or expertise in this area, so this would be a slower way of improving this market than bringing the existing players in.

In some markets public universities could scale up their sub-bachelor offerings (for example, dual sectors that already have experience in vocational diplomas, and the universities with their own pathway colleges already). However, this could undermine the long-term structural goal of a more diverse higher education system. It would let public universities compete in the non-university higher education provider sub-bachelor markets (about 20% of NUHEP students) while not letting the NUHEPs compete in the public university bachelor market. Some NUHEPs may not survive increased competition that is based solely on unjustified differences in public subsidy, not on educational quality.

The biggest danger with fee deregulation is excessive fee charging by public universities, at the expense of students and of taxpayers via HELP. While I don’t think that private universities and NUHEPs can have a large short-term effect on this (given their scale and historic focus on product differentiation rather than price competition) they can influence the behaviour of some public universities. The chart below comparing average NUHEP fees with the total Commonwealth supported place revenue received by public universities suggests that, in most fields, NUHEPs have competitive cost structures. We should be encouraging them to compete on price against universities, not giving universities another three years of protection.

NUHEP fee

Delaying extending the demand driven system would also undermine one of the government’s strongest lines against Labor and the Greens: that is now parties of the left that support full-fee undergraduate places, not the Liberals.

What is Whitlam’s higher education legacy?

Gough Whitlam, who died today, is one of the big four of Australian higher education policy: Menzies, Dawkins and Gillard are the other three.

Whitlam is most famous for abolishing tuition fees in Australia’s universities and state-funded colleges from 1974 (here is the original legislation for universities.)

I’ve argued before that free education was a major symbolic success, but in practice not as significant as many people in hindsight believe. Through scholarships, state subsidies and federal subsidies higher education was already free or cheap for most people. A chart I included on university funding sources in the latest edition of Mapping Australian higher education (p. 53) shows that students were only a minor source of university income in the early 1970s.

Nor was Whitlam very successful in lifting higher education attainment rates. While the number of higher education places did grow, the baby boom generation was so large that there was little growth in attainment for them. On this measure, Menzies, Dawkins and Gillard were all much more significant.

What Whitlam did succeed in doing was take over funding responsiblity for higher education from the states, making conditional grants the basis of Commonwealth power over higher education. Technically, the Commonwealth’s power was quite limited. Universities could have refused Commonwealth grants and returned to fee charging if they wanted to. But never stand between a vice-chancellor and money. If there was anything the universities would not do for the Commonwealth’s cash we never found out what that was. As John Dawkins discovered, they were even willing to merge with colleges of advanced education, which were well down the system hierarchy.

Two particular Whitlam-era policies are still in place, although substantially modified. He created a general student income support system, TEAS, to replace various scholarship schemes. This survives through Youth Allowance, Austudy and Abstudy. A needs-based income support system is a more efficient way of funding higher education students than merit-based scholarships, which often go to people from affluent families.

Although completely free higher education lasted less than 15 years, Whitlam’s price control on undergraduate higher education has lasted the full 40 years since 1974. Universities were given back their power to set charges in 2005, but only up to limits determined by the federal government. Christopher Pyne is now trying to abolish these controls, supported for the first time in the post-Whitlam era by a majority of vice-chancellors.

The fact that until recently most vice-chancellors supported undergraduate price control shows Whitlam’s on-going influence. Despite being dissatisfied with their funding rates for all but a handful of those 40 years, many vice-chancellors still maintained the faith that government would give them what they believed they needed. Public funding was the norm when most of them went to university and started their academic careers. Even now, vice-chancellors generally see private funding as a regrettable but necessary departure from this ideal state. Staff and student groups ofen condemn university leaders for this concession. Creating such a powerful default belief about how the world should be shows that Whitlam’s cultural legacy will survive the man’s passing.

How can higher education spending be controlled without Senate approval?

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

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

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

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

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

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

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

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

Changes to Commonwealth contribution rates

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

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

Increasing or abolishing the student contribution cap

This requires amendment of section 93-10 of HESA.

The government has said that international student fees will be the new cap. While not expressed exactly in those terms, this is already legislated through section 36-55 of HESA. What that section says is that student contribution amounts (legally defined as being for students in Commonwealth supported places) can’t be more than tuition fees (legally defined as being for full fee students). As section 36-30 effectively bans domestic full fee undergraduate students in public universities except in very limited circumstances, the tuition fee reference is almost invariably going to be to international students.
There is no requirement to offer courses to international students, and universities can increase their international student fees, so this is not a very strong capping mechanism.

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

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

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

Higher education reform clarifier #5: Would arts degrees need to cost twice as much?

Stories in the Fairfax papers this morning are talking about the doubling of fees for some arts degrees, to compensate for reduced government subsidies. That is only true of journalism courses, but the reason why these numbers are being arrived at are worth further examination.

The current system is based on funding a ‘unit of study’ (ie a subject) according to its field of education. Each field of education is allocated to one of eight ‘funding clusters’ that determine its ‘Commonwealth contribution’ (ie subsidy) and ‘student contribution’ (often called ‘HECS’). Universities set their own student contributions up to a maximum set by legislation, but in practice all charge the maximum amount.

As is common in the higher education system, various quirks of history rather than clear principles or policies explain these rates. As the figure below shows, this leads to very different overall funding rates for the subjects that someone enrolled in arts might take (I have adjusted 2014 rates up to $2016 for the comparison to come). In my view, only the foreign languages difference could obviously be justified by an inherent need for different teaching methods.

arts now

What the new Commonwealth contribution rates would do is bring the humanities and social science type subjects, except economics and languages, to a consistent level, as seen in the figure below. This means that humanities like history get a small increase in funding, while the others get a substantial cut.

arts changes

From a first principles basis, the new rates look more consistent and rational than the rates they would replace.

If they go ahead (the government has signalled willingness to look at the detail of these cuts) do student contributions need to increase to take total funding per place back to current levels? Arguably, some of these disciplines have long been over-funded and there is scope to not simply maintain the funding status quo by passing on all reductions in Commonwealth contributions to students.

Overall, however, the ‘revenue theory of costs’ is likely to explain university operations more than any strict relationship between what it should reasonably cost to deliver a course and what it actually does cost. It’s Bowen’s law: universities raise all the money they can, and spend all the money they raise. No matter how much money they have, they always feel ‘under-funded’ because they let their costs increase to absorb any previous funding boost. This is why even absurdly rich universities like Harvard feel the need to do major fundraising campaigns.

So while some disciplines look over-funded relative to similar disciplines, it is likely that much of this extra funding has been built into expenditure over time (even if profits in some disciplines have been redistributed to other university activities). While they might not pass on all the Commonwealth contribution reduction to students, the internal trauma involved in reducing costs means that there are likely to be substantial student contribution increases.

One reason I am keen on opening the higher education system up to competition is that I want to bring in new players without these legacy cost structures, who I hope will be able to provide the same or better services than the universities while charging students lower fees.