Category Archives: Higher education finance

The VETification of higher education is a precedent that should not be set

In The Australian this morning an article points out that publicly-funded language diplomas may be not be available to new students from next year. In my view, that is a correct implication of both general policy statements on funding diplomas and associate degrees made by the government, and the specific consultation paper on sub-bachelor courses.

Unfortunately, this is a case in which the government, in attempting to fix one problem, would create several new problems.

The original problem here is that diplomas and associate degrees were, at the last minute in 2011, excluded from the demand driven system. That means that the total number of government-funded sub-bachelor places remains set by the government, the allocation of places between universities reflects largely historical decisions, and new places (when available) are distributed according to regularly changing criteria. The distribution of places does not strongly align with the preferences of students, the strategies of universities, or the needs of employers. In the review of the demand driven system I did with David Kemp, we recommended putting sub-bachelor places into the demand driven system.

On the surface, the government’s proposal looks like it is responding positively to this recommendation. Constraints on the number of funded sub-bachelor places will be lifted in two ways. First, sub-bachelor courses approved by the minister will enter the demand driven system. Second, sub-bachelor courses not approved by the minister will be given an exception on the general ban on undergraduate full-fee places at public universities.

Language courses are in trouble because they typically fail to meet both the announced criteria for sub-bachelor demand driven funding – that they articulate into a related bachelor degree program, and that they have been developed with a focus on industry needs. Read more »

Should permanent residents lose their higher education tuition subsidies?

Under current law, access to the HELP loan scheme is a rare government financial benefit linked to citizenship rather than permanent residence. It may be the only benefit in this category.

Under the government’s proposed higher education reforms, permanent residents would become entitled to HELP.* But access to tuition subsidies under the Commonwealth Grant Scheme would instead be restricted to citizens, and permanent residents put in full-fee places. For undergraduates especially, this could cost them tens of thousands of dollars.

No universally applied rules govern who is entitled to what in Australia. But there are patterns of eligibility that suggest some broad principles. Generally speaking, longer and stronger connections to Australia lead to wider eligibility for government-financed benefits. Underlying this is the idea of a reciprocal welfare state; paying tax and receiving benefits are linked over a lifetime. People who aren’t committed to Australia, and who probably won’t finance as well as receive government benefits, have restricted entitlements.

The clearest example of this idea in practice is the distinction between temporary and permanent migrants. Temporaries are eligible for few benefits, while permanents get almost all. It would be unreasonable to require people to make long-term taxation contributions to Australia without making them eligible for the benefits those taxes finance. But people present in Australia for only short periods should not receive benefits they haven’t financed. The temporary/permanent distinction is not as robust as it once was because of the rise of long-term but legally temporary migrants. But that is a problem with the visa categories more than the underlying principle.

The Australian welfare state also makes sharp distinctions between residents and non-residents. Regardless of citizenship status, Australians living overseas generally aren’t entitled to social security benefits (or any higher education benefits; Australian citizens studying at the overseas campuses of Australian universities generally don’t get subsidies or loans). The main exception is the aged pension, but that is linked to past residence. Again, full legal membership of the Australian community through citizenship isn’t counting for much; being within reach of the Australian taxation system matters more.

Why are citizenship and higher education benefits linked in an unusual way? Read more »

Is a public-private ‘balance’ a useful higher education funding idea?

For several decades, Australian higher education policymakers have been interested in the idea that there is a desirable ‘balance’ between public and private contributions to the cost of higher education, and that a distribution of public and private benefits should inform this.

In an earlier post, I argued that a Deloitte Access Economics report released this week had come closer than any previous work to calculating a distribution of public and private benefits of higher education. What I am not convinced of is that such a calculation is useful for policymakers.

Sometimes an analysis of personal benefits and public benefits, as distinct from some ‘balance’ between them, will be helpful. In the Deloitte report (p.10) they argue that:

The economic policy rationale for governments to support higher education is the existence of a ‘market failure’ – specifically, the existence of the public benefits described above and the fact that, in the absence of government funding, the decisions by providers and students will not drive the system toward its socially optimal operation.

Economic theory suggests that students will choose to acquire knowledge where their expected private benefit is at least equal to their cost of education. If at least some public benefit exists, then this decision-making process will result in a suboptimal level of knowledge transfer activities.

In order to increase levels of knowledge and maximise the total net social benefit of higher education, governments need to be able to identify the public benefits being created, such that appropriate subsidies can be derived and applied. Identifying the relative split between public and private benefits may then inform the relative subsidy payments based on these dimensions.

Apart from the sentences in bold, I agree. I have made similar arguments myself.

The problem with the first bolded sentence is that the presence of public benefits does not of itself lead to sub-optimal levels of education. This will only happen if the total net private benefits are too low to justify enrolment. In those cases, tuition subsidies reduce costs and make it easier to get to positive net private benefits. This may encourage prospective students to enrol when otherwise they would not.

The main argument of my 2012 Graduate Winners report is that even though market failures are possible, with income contingent loans there are only limited empirical circumstances in which they actually exist.

In most cases the private benefits of higher education are already so large – Deloitte, like previous research, identifies hundreds of thousands of dollars or more extra in lifetime income (p.34) – that the tuition subsidies are unlikely to sway the decisions of someone acting in their rational economic self-interest. Subsidies at the levels historically seen in Australia usually add relatively small amounts to net private financial benefits that are already large enough to attract students to higher education. And this is before we take into account other factors influencing people to attend higher education, such as interest in their field of study, access to particular careers, the lifestyle experience of campus, status, and keeping parents happy. Read more »

The quest for a public-private higher education funding ‘balance’

Despite some contrary-sounding quotes from me in yesterday’s Australian, I think a new Deloitte Access Economics report on the public and private benefits of higher education is both a valuable overview of the literature and a significant contribution in its own right to the Australian analysis of this topic.

My criticisms relate primarily to the conceptual framework given in the original brief from the Department of Education, which I will turn to in another post. This brief in turn was based on an idea with a long history in Australian higher education politics, that there should be a ‘balance’ between public and private contributions to higher education costs, which should be related to public and private benefits.

The 1988 Wran report, which led to the introduction of HECS, argued that students should contribute to the cost of their education because they typically derived a private financial benefit from a degree. It noted that there were public as well as private benefits from higher education, but it was hard to apportion them (p. 53). This was a reason for not using analysis of either to set student contribution rates – instead, they went for a percentage of costs rather than benefits. In the version of HECS announced by the government there was a flat student contribution rate equivalent to about 20 per cent of average per student costs.

Empirically, the Wran committee could not find a way to make a distribution of public and private benefits work as a pricing mechanism. Conceptually, however, there was a certain logic to it. If students should pay for the private benefits they receive, shouldn’t the public also pay for the benefits it receives?

In 1996, announcing big cuts to per student public spending on higher education, the government echoed the Wran report, saying that although the ideal balance between public and private contributions could not be precisely established, the private benefits were substantially greater than those implied by the current HECS rates. Private benefits ended up doing almost all the policy work – the new ‘differential HECS’ rates were mainly linked to assumed future income. The higher the potential income, the higher the HECS rate. Read more »

England and Australia: two higher education income contingent loan systems with very different consequences

The recent debate about student debt in England was triggered by this very interesting paper from the Institute for Fiscal Studies. I have used some of their analysis to think about how their situation differs from Australia’s, despite both having income contingent loans.

1) Total tuition costs. As I noted in my post last week, tuition charges are higher in England than in Australia, with most courses a flat £9,000 per year, or about $15,000 on current exchange rates. Australian annual student contributions this year range from $6,349 (arts, education, nursing) to $10,596 (law, medicine, commerce). The British pound has a low exchange rate at the moment; if we use $US purchasing power parity English courses are between 1.7 and 2.9 times more expensive than in Australia.

The high English tuition fees are partly because there are no tuition subsidies offsetting them in many courses, while all undergraduates at public universities in Australia receive tuition subsidies. But it is also because of their flat fee system, which means that students in low-cost fields are charged more than the total cost of their course.

While undergraduate courses are cheaper in Australia than England whichever way we compare them, in Australia we don’t have a good understanding of how HECS-HELP debt for undergraduate courses is interacting with FEE-HELP debt for postgraduate courses. But further study in full-fee courses is likely to be one reason why we are seeing strong growth in total HELP debts above $50,000. Read more »

Are English university students right to be upset about high fees?

Since the British Labour Party did unexpectedly well in last month’s UK elections, on the back of strong support from young people in particular, university fees have turned into a big issue there. The Australian‘s High Wired column hints that this ‘international narrative’ might arrive on our shores.

Both free and high-fee higher education systems can perform reasonably well on measures such as levels of educational attainment. The chart below has lagged fee data to capture the time 25-34 year olds went to university, but the broad patterns are evident. People living in high fee countries tend to have relatively high rates of holding university qualifications. Low attainment countries have low or zero fees, but there is also a cluster of low or zero fee countries with high attainment.

There are many country-level complexities in this analysis (for example, German low attainment may not be a problem given the structure of their economy and strong vocational system). But generally the cost of high attainment has to be met with high taxes or high fees. Read more »

Have universities enjoyed ‘rivers of gold’?

The Australian‘s High Wired column is bemused at the apparent contradictions between UQ VC Peter Hoj’s narrative of funding cuts and Simon Birmingham’s claim that universities have benefited from ‘rivers of gold’ in public funding in recent years.

It’s true that there have been some cuts to research funding, although it remains high by historical standards (some trends at page 51 of this pdf). Some increases in equity funding from the Gillard era were trimmed, and performance funding abolished. But these funds were not supporting long-term programs.

It’s much harder to claim that there have been cuts to core teaching grants, coming via the Commonwealth Grant Scheme and HELP (which as I keep pointing out, is heavily subsidised). The chart below shows the trend – up 50 per cent in real terms since 2008. From the Commonwealth’s perspective, this certainly looks like a river of gold.


Read more »

Rival fairness arguments in the university fees debate

This week I am on a panel discussing a fair price for students to pay for their university education. Both those who want students to pay more and those who want students to pay the same or less draw on fairness arguments.

Fairness arguments for higher student charges

Fairness to other taxpayers: Critics of free or cheap higher education have long thought subsidising students was unfair to other taxpayers. Way back in 1972 Malcolm Fraser criticised Labor’s free tertiary education policy on the grounds that it would lead to a ‘wharf labourer paying taxes to subsidise a lawyer’s education’. The 1988 Wran report, which recommended the introduction of HECS, justified it partly on the basis that ‘taxpayers carry most of the burden of higher education [but]…most taxpayers are not privileged members of society and neither use nor directly benefit from higher education.’

Fairness to other taxpayers is perhaps the lead trigger idea in reducing public spending and increasing student charges. Two of the three proposed nominal cuts in per student public spending of the last 30 years (1989 was the exception) occurred when there was a Budget deficit, creating an active choice between increasing taxes or charging students more.

A fair price: Underlying the fairness to other taxpayers notion is also an argument that it is fair to ask people to pay for what they receive. This has led to a recurring idea that there should be a ‘balance’ between private and public contributions to the cost of higher education. It appears in the Wran report, the arguments for the 1996 funding cuts and HECS increases, the Lomax-Smith review of funding (never acted on), and again in the Pyne and Birmingham policy documents. Students should pay for the benefits they receive, and the public should pay for the benefits it receives.

The public-private balance idea has had little influence on policy detail. Public benefit calculations have never been used to set public funding rates, and private benefits have been used to set private funding rates only once, in a back of the envelope way, in introducing differential HECS for 1997. This created the idea that student contributions should be linked to likely future earnings. Differential HECS connects to a market idea of a ‘fair’ price – pay more, get more. But it also links to progressive notions that the relatively rich should pay more, or get less in taxpayer-funded benefits. This is a common idea in the Australian welfare system. Despite the weak association with policy detail, repeated use of the balance metaphor suggests it reflects intuitions about how higher education should be funded.
Read more »

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.