Category Archives: Higher education finance

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.

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.

Higher education reform clarifier #4: Will student fees go down as well as up?

Statements from the government that under their reform package higher education fees will go down as well as up have been met with ridicule in social media and even from a Canadian higher education policy research institute.

Certainly it is unlikely that fees for public university students will go down. Cuts to public subsidies for most disciplines mean that universities will need to increase their charges just to maintain current revenue per student.

But undergraduate students in private universities and colleges, and the TAFEs that now offer degrees, will become eligible for public subsidies under the Pyne reform package, as recommended by the report I wrote with David Kemp. Exactly at what level is yet to be determined. But it will be above the zero level most of their students currently receive (under various ad hoc deals with government, a few of the around 130 potentially affected institutions already have some subsidised places).

While I doubt that the full value of the subsidy will be passed on in lower fees, particularly in the more generously subsidised disciplines we should see fees dropping by thousands of dollars for students outside the public university sector. The Budget papers suggest that 80,000 students could benefit from this change.

Higher education reform clarifier #2: Are students facing $100,000 degrees?

There has been a lot of speculation about students facing $100,000 degrees if fees are deregulated. However, my view is that this is very unlikely outside small areas such as medicine, dentistry or veterinary science.

While we are still planning much more work on pricing issues, international student fees provide a a guide to the outer limits of what is likely to be possible – what universities think that the market will pay. Where there are deregulated markets for both internationals and domestics, in the private sector and at postgraduate level, our research is yet to find any cases in which domestic students are charged more, and many cases in which they are charged less.

Our methodology in collecting fees was to look at university websites and compare similar courses across universities. This was done for all the universities in 2013, although not all teach all the covered courses. We then deducted tuition subsidy amounts, as a guide to how these might bring fees down. The Guardian published the results.

The totals vary considerably, but most full courses would end up costing between $35,000 and $60,000 on a simple average of quoted fees. Students would have to decide whether or not the more expensive courses were value for money.

Higher education reform clarifier #1: Will NIDA students pay more?

The higher education reforms announced on Budget night are causing some confusion. Complex reforms are being added to an already complicated system. I am planning on a series of clarifying blog posts to explain what is happening, of which this is the first.

The SMH is running a story on prospective students concerned about fee hikes at the National Institute of Dramatic Art, NIDA.

NIDA is unusual in being subsidised out of the arts budget rather than the education budget. I can’t see anything in the relevant portfolio budget papers about whether NIDA has taken a hit to its funding.

This means that even though NIDA’s students are subsidised, they are classed as full fee by the HELP scheme and borrow under FEE-HELP rather than HECS-HELP. The higher education legislation does not regulate the tuition fees NIDA charges.

For FEE-HELP undergraduates, there is currently a 25% loan fee (eg, a student who borrows $10,000 will have a $12,500 debt recorded). This will be abolished, reducing the initial cost of attending NIDA assuming no further fee changes. However, students will in future be charged an interest rate based on the 10-year bond rate rather than CPI.

NIDA has typically pitched its fee around the level of undergraduate student contributions in comparable courses. If these increase at universities then it is possible that NIDA will see market space to increase its own fees. But there is nothing in the Budget higher education reforms that will require them to lift their charges.

The SMH article quotes 23-year old Oliver Wicks, soon to complete an arts degree, as reconsidering pursuing an education at NIDA due to potential increased cost. However, any increased fees are the least of his worries. As Grattan’s recent HELP doubtful debt report found, a high proportion of performing arts graduates don’t earn enough to start repaying.

Higher education spending in the 1970s compared to now

According to former PM Malcolm Fraser,

Education is the best and most important investment that this country can make. I am not sure that our governments understand this message adequately. Over the last 20 years, governments have actually withdrawn from the funding of education and much of that has been replaced by dependence upon full fee paying students from overseas.

That might have been true for a while in the 1990s and the first half of the least decade. But not in more recent years, as the slide below shows. Some expansion under the previous planned higher education system, and then a surge from the demand driven system, has seen public funding expand very significantly.

subsidies last 10 years

And what happened when Mr Fraser was Prime Minister, from 1975 to 1983? Spending did go up for a while, but was then reduced. It was a period of stagnation in higher education attainment. Fraser faced significant budgetary constraints, as have most of his successors as PM. Read more »

The case for including for-profit higher education providers in the demand driven system

Reaction to the report of the demand driven review, which I co-authored with David Kemp, has been pretty positive overall. But our proposal to extend Commonwealth supported places to non-university higher education providers, especially those operated on a for-profit basis, is attracting some negative comment.

Professor Greg Craven, vice-chancellor of Australian Catholic University, said:

There is a basic psychological difference between a statutory body (university) ploughing money back into the enterprise and a private college whose modus operandi is to make a profit.”

Whether or not that is true, a higher education system needs to be robust to the weaknesses and variability of human motivations. Indeed, the public universities themselves are a case study in the limitations of a ‘just trust us’ model in higher education.

As the report discusses (pages 9-10 especially) the universities were for a long time, and still are to a lesser extent, able to get away with poor practices in teaching. This showed in the abysmal results of the first national student surveys conducted in the mid-1990s. Things have improved since through a combination of public information, government programs and incentives, market competition, and more recently regulation.

The report recommends that all these measures apply to the non-university providers as well. Indeed, they have another layer of scrutiny that the universities lack, which is that their courses need to be individually approved by the Tertiary Education Quality and Standards Agency. It also recommends extending the University Experience Survey to the non-university providers, and publishing the results on a replacement for the MyUniversity website to make it easier for potential students to compare courses. Read more »

New book on the Dawkins higher education revolution

Last night The Dawkins Revolution 25 Years On, which I co-edited with Simon Marginson, Julie Wells and Gwil Croucher, was launched by the Chief Scientist, Ian Chubb, with a right of reply by John Dawkins himself.

In my chapter on the Coalition, I described Dawkins as the most important education minister yet to hold office. Gillard’s combined tenures as education minister and then prime minister might yet see her take that title, but for now it is both the scale and durability of what Dawkins did that puts him in the top position.

These include:

* The mergers of many institutions and the transformations of former colleges of advanced education and institutes of technology into universities (discussed in chapters by Simon Marginson and Ian Marshman and Gavin Moodie).

* The introduction of HECS (discussed in a chapter by Bruce Chapman and Jane Nicholls).

* The introduction of a system of setting funding rates by discipline that is still the basis of today’s rates (discussed in a chapter by Ross Williams).

* A substantial expansion in student numbers (discussed in a chapter by Richard James, Tom Karmel and Emmaline Bexley).

* Increased the role of competitive grants in funding research (discussed in a chapter by Gwil Croucher and Frank Larkins).

* Contributed substantially to the opening up of Australian higher education to international students, including a prior period as trade minister (discussed in a chapter by Margaret Gardner).

* Started deregulation of postgraduate coursework markets.

Most reforms since then have built on the foundations of Dawkins. As I argue in my chapter, the 1999 Kemp reform proposals (which I worked on as his higher education adviser) were the only major attempt to over-turn Dawkins in favour of a more market-driven system.

Those reforms were destroyed after the Cabinet submission was leaked to Labor. Ironically, it was Labor ten years later that introduced a version of the ‘voucher’ system proposed in 1999.

Should the HELP debt be sold?

The government is now hosing down yesterday’s speculation that the accumulated student HELP debt will be sold.

There are good financial reasons for not selling, as Matt Cowgill explained yesterday. Investors would only buy the HELP debt if they could get it for less than they thought it was worth, in which case the government should not sell unless it is desperate for cash. But for now at least financial markets are willing to lend to them at low interest rates.

I believe that there are also good political reasons not to sell now. HELP’s costs are very high, mostly at the moment due to a prediction that 19% of new loans will not be repaid (at p.93 of the portfolio budget papers). Due to the low interest rates government is paying at the moment that is not currently a big expense. But with total debt likely to be over $30 billion now, even small increases in government bond rates can translate into major additional outlays.

These costs need to be brought down. But rule changes to benefit investment banks will not be an easy political sell. It’s hard enough to sell public interest rule changes that help bring total government spending back down towards total government income.

Science demand keeps increasing, despite a higher student contribution

Science has been one of the most popular university courses over the last few years, with strong increases in applications year after year since 2009. The demand shift coincided with a slashing of student contributions by about 40%. This had seemed to be a possible exception to the general empirical rule that changes to student contributions don’t affect demand (some of the history is in Graduate Winners, pp 77-79).

As part of a long series of measures to reduce higher education spending, science student contributions were put back up to pre-2009 levels for 2013, an 80% price increase in one year. If the discount was driving demand, we would expect to see higher student charges reduce demand. New statistics released today show that this has not happened.

In fact, as can be seen in the chart below, numbers continued to grow strongly. They were up another 4%, in a market that was up only 0.5% overall. Only agriculture grew by more in percentage terms, and only health grew by more in absolute numbers. Science offers increased by 3.3%, with overall offers up 0.6%

science apps Read more »