Category Archives: Higher education finance

Should high university fees be taxed?

If domestic undergraduate fees are deregulated most people, including eminent education economist Bruce Chapman, believe that at least some universities will charge significantly higher fees than now. Chapman has now detailed a proposal to tax excessive fees, to ‘inhibit and limit the extent of price increases’ (number one in this list of Senate inquiry submissions; The Australian‘s version here.)

The basic idea is that the government will establish different bands of fees, which are taxed at different rates – the tax being a reduction in grants that would otherwise be payable to the university. To take an example from Chapman’s paper, fees for humanities up to $6,499 a year (a bit higher than current student contributions) would pay no tax, fees between $6,500 and $11,499 would pay 20% on the margin, fees between $11,500 and $16,499 would pay 60% on the margin, and fees of $16,500 and over would pay 80% on the margin.

The effects of this can be seen in the context of UWA’s plan for a flat $16,000 fee for all undergraduate courses. The tax would be about $1,000 for the $5,000 in the first marginal section, and another $2,700 for the $4,500 up to $16,000. With current subsidies of around $5,500 a year for humanities courses, UWA’s subsidy would be reduced to around $1,800. (For high fees in low subsidy disciplines, the fee tax could mean that the government taxes more than it contributes for that discipline).

Chapman is not endorsing these particular tax rates; they are to illustrate the concept. However, I am not sure that conceptually this is the best way to target the problem of high fees. First, we need to be clear about what the problem is with high fees.

As Chapman says, it is likely that some fees will be well in excess of the costs of teaching. Much of the profit is likely to fund research. There are two public policy problems with this. The first is that students/graduates will incur higher private costs without a commensurate increase in private benefits. The second is that higher fees will generate higher costs for taxpayers, through the interest subsidy on HELP debt and HELP debt that won’t be repaid.

To solve the first problem, the tax policy relies heavily on deterrence. To the extent that universities do charge taxable fees the problem is exacerbated – the money goes to the government, which is even less likely to benefit the student than the university spending money on research. Research spending might at least contribute to the general prestige of the university and the graduate’s qualification.

To solve the second problem, the tax policy is likely to be more effective as it raises revenue that will offset some of HELP’s interest and bad debt costs. However, it means that students who pay upfront are compensating for costs that they won’t generate. Other students who do borrow could over-compensate. Using the tax rates in Chapman’s submission, and a fee of $30,000 for a law student, we estimate a tax of more than $11,000, leading to government savings of $3,000 in excess of the additional HELP costs.

If we are worried about higher private costs without increased private benefits, it might be better to target university spending rather than revenue. In the UK and USA universities report on spending classified according to function (teaching, research etc) that allows us to see the relationship between student-driven funding and spending. If we did that in Australia we could prohibit public universities from moving beyond certain ratios between student funding and spending, and taxing them if they did. That way the student isn’t any worse off than he or she would otherwise have been, since the money wasn’t being spent on them anyway, and it is only the university’s profit being taxed.

For HELP costs, we should tackle HELP’s problems directly rather than focusing on the students paying high fees. Loan fees payable only by those who borrow would assist in dealing with HELP’s costs without hitting the students who pay upfront. Plus there are several other ways of controlling HELP’s costs, as I have pointed out many times before.

Policy considerations aside, this is a complex policy when the government needs a clear, simple and positive case for fee deregulation.

Should government benefits be increased when university fees go up?

Fairfax has a story this morning on the hidden cost of deregulating university fees. Higher education is included in the bundle of goods and services that make up the consumer price index, which in turn is used to index a wide range of government welfare benefits. So if fees increase the CPI will go up, driving up the cost of the social security system. This was an issue in England when their university fees went up.

I am quoted in the story as saying that the government could exclude university fees from the index. I was challenged on Twitter about this.

The CPI is based on a basket of goods and services consumed by households, with the primary input being the ABS Household Expenditure Survey. A well-known criticism of this is that consumption patterns vary significantly between household types. For this reason, the ABS also calculates a range of other indexes for different household types, especially different categories of government beneficiaries. An aged pensioner index has been used, but only when it is more than CPI.

Given that the purpose of indexation is to maintain the real purchasing power of benefits, it is not clear why people should be compensated for an increase in prices in a commodity few of them other than Youth Allowance recipients are likely to consume. This is a general point about the choice of indexation methods, not one just restricted to this particular issue. But there could be special legislation to at least avoid the once-off major spike in prices after the system changes increasing government expenditure on welfare benefits.

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Update: Some of my economist colleagues are more sceptical of the inflationary effects. They argue that the Reserve Bank has an inflation target and they take policy action to keep CPI within it, even though it is common for there to be price spikes in particular services or commodities. So while the cost of higher education would go up, this could be offset by price stability or reductions elsewhere.

Pyne package linking domestic and international charges is about subsidies more than fees

When announcing its higher education reform package, the government said that international student fees would be a cap on domestic fees. This idea has been criticised regularly since, including today by Gavin Moodie who notes that such a rule could easily be gamed.

But the draft guidelines released with the reform bill version 2 last December show that legislation is not mainly about capping total fee levels, but trying to ensure students benefit from tuition subsidies.

The problem here is not that domestic students are likely to be charged more than international students. At Grattan we have collected fee information for both domestic and international students for hundreds of courses where there is no regulation requiring domestic students to be charged less than internationals – for postgraduates in public universities, and in all full-fee courses in non-university higher education providers. There is not a single case where domestic students are charged more than internationals, and only a handful where they are charged the same. Presumably a mix of underlying cost differences, market forces, and mission considerations mean that domestic students are not charged more.

There is no practical need to cap domestic fees with international fees, and that isn’t what the government is trying to do. Rather, it is trying to ensure that its tuition subsidies benefit students instead of providing super-profits to universities. So what the guidelines say is that tuition fees for non-Commonwealth supported students (which includes internationals) must be at least the student contribution plus the Commonwealth contribution, in some disciplines a much bigger number than just the student contribution.* It is phrased as a floor price for international/other full-fee students rather than a maximum fee for domestic students.

Take an engineering degree at a Group of Eight university, where we calculate that the average annual international student fee was $33,000 in 2014. If the rule just said that international student fees were the cap for domestic fees, a university could in theory charge a domestic student $32,900 and then add the $12,000 tuition subsidy, giving them revenue per student of $44,900, way more than they get for an international student. Even if we assume a more moderate domestic fee of say $26,000, with the tuition subsidy added that still leaves the university with revenue of $38,000 per student, $5,000 more than for an international student.

However, under the rule as drafted the university could not get domestic fee revenue of $38,000 ($12,000 subsidy plus $26,000 fee) per student without lifting international student fees to $38,100, which might price them out of that market. A university might be prepared to take that loss in courses where there are few international students. But in courses where there are significant numbers of internationals the rule will ensure that domestic students benefit from the tuition subsidy bringing down the fees they pay, rather than delivering windfall gain revenue to the university.

The proposed rule on fees for full-fee students has weaknesses as a guard against excess fee charging. But I think it is at least interesting in thinking about what subsidies are for in a fee deregulated system. It takes international student fees as a rough guide to the true market worth of a course, and then tries to ensure that the tuition subsidy brings down the price to domestic students.

* The legislation uses the term tuition fee rather than student contribution now, but I will keep the old language to separate the concepts more clearly.

Should there be a GST on higher education?

As public sector financial woes get worse, we are hearing more calls to put a GST on education. I’m not convinced this is a good idea. Some of my concerns are specific to higher education, others apply to education more broadly.

1. Conceptually, it’s not clear that it makes sense for the government to tax and subsidise the same commodity. Subsidies are supposed to make education more affordable, while taxes make it less affordable.

2. Education is a mixed economy sector, with subsidised services existing alongside unsubsidised services for largely historical reasons. Putting a GST on the more privately funded part of the sector further distorts the market in favour of the subsidised sector. Originally, the GST was supposed to reduce microeconomic distortions, but in this case it would increase them. Perhaps in phase two of the GST it is purely about revenue. However, in mixed sectors GST fiscal gains are likely to be reduced by shifting demand to the more heavily subsidised sector. These are bigger issues in school and vocational education than higher education, where the private sector is still small.

3. In higher education, about 40 per cent of student fee/contribution revenue comes from international students. Typically, exports are exempt from GST to increase Australia’s international competitiveness (another of the original justifications). The international student market is very competitive globally, so we could exempt international students, but they are an unusual kind of export – many international students pay their fees in Australia at least partly from income they have earned working in Australia. And if we exempt international students, in full-fee markets we could see the somewhat counter-intuitive outcome of domestic students paying more for a degree from an Australian university that their international student classmates.

4. Most Australian students borrow money under HELP to pay their fees/contributions. This means that any GST would just be added to the already rapidly increasing level of HELP debt. Given HELP’s poor and worsening finances, 20 to 25 per cent of the GST revenue on higher education is likely to have to be written off. And most of the significant cash revenue gains from a GST on higher education would be 15 years away, after people finish paying off what they will owe anyway and start repaying what they borrowed to pay for the GST.

Overall, a GST on higher education would be likely to distort the higher education market while raising little revenue in the short to medium term.

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.