Category Archives: Higher education finance

Would restoring or increasing discounts for up-front student contribution payments improve’s HELP’s finances?

The Australian this morning is giving a lot of attention to this paper by Neil Warren and Richard Highfield on HELP repayment.

It is a good paper, analysing ‘bunching’ of HELP debtor incomes below important repayment thresholds. The significance of this (for both the government and the debtor) is that if the debtor’s income crosses one of the thresholds they have to pay a higher percentage of all their income in repayment.

This has turned out to be a valuable aspect of HELP’s repayment system compared to those of other countries, where students pay at the margins (eg 9% of income above the threshold). In Australia, anyone who consistently earns above the initial threshold (about $53K this year) is likely to eventually repay all their debt, as they will pay back $2,000+ each year. But in other countries, earnings slightly above the threshold result in only very small repayments. This is one reason that, bad as Australia’s student doubtful debt figures are, they are not as bad as England’s.

However, because crossing a threshold has a high cash cost there are temptations to keep income below it. I have to admit that long ago I considered turning down a pay increase because I thought it would reduce my take-home pay more than I can afford, as someone who at the time had a very tight financial situation. In the end, what was to my boss a generous increase boosted my take-home pay by some token amount (and of course sped up my HECS repayment). What Highfield and Warren present is evidence that some people are using deductions for education, work and charity to bring their taxable income below thresholds.

Their policy suggestion is to change the definition of HELP repayment income so that some or all of these deductions are not included. This is a strategy the government has adopted before to tackle negative gearing and fringe benefits. I need to think more about the education and work deductions, but support removing charitable deductions (the taxpayer would still get the deduction for income tax purposes).

Another suggestion is to revisit the issue of discounts for paying student contributions upfront. The discount was cut from 25 per cent to 20 per cent in 2005, and then to 10 per cent in 2012, with a bill to eliminate it entirely stalled in the Senate. Many never lent will never cause repayment problems, so this has an obvious attraction – if the savings from the reduced lending outweigh the discount’s cost.

However, I am not convinced that the discount is having a big enough effect in encouraging up-front payment to warrant keeping it. The proportion of students paying upfront is in long-term decline, as seen in the chart below. The halving of the discount in 2012 did cause the biggest year-to-year decline in upfront payment in this time series, but it really only sped the trend up, rather than marking an obvious major turning point. We are talking perhaps about 1 to 2 extra percentage points of students paying upfront if they had a stronger financial incentive.

HECS-HELP discount

Cutting the discount has been based in part on the assumption that many of the people paying upfront are not principally motivated by a financial calculation. They are parents paying for their kids, employers paying for their staff, or individuals who don’t want to hold debt even on very low interest rates. Overall, the government is probably better off trying to collect the full student contribution amount via HELP than giving windfall gains to people who will pay upfront anyway.

While it has always made sense to borrow under HECS or HELP, due to the very favourable lending conditions, I am not entirely sure why we are seeing such a strong trend. An increasing share of low SES students might explain some of it, but I suspect there is more going on.

Years to repay student debt as a way of setting student contributions

In The Australian this morning, Melbourne University VC (and my former boss) Glyn Davis has an op-ed saying:

As the 2011 Lomax-Smith report made clear, there is no consistent principle guiding public and private contribution to university study. A law or economics student pays about 83 per cent of the cost of their education while students in other disciplines enjoy a much larger public subsidy. This is not fair.

I have no dispute that the current system of setting overall funding rates and student contributions is untidy. It is the accumulated result of ad hoc decisions going back 25 years. There has been no careful empirical work to ensure that either funding rates or student payments reflect clear funding principles.

That said, I do not believe that the current principles for setting student contributions are inherently ‘unfair’. When different student contributions for different courses replaced previously flat HECS rates in 1997, the stated rationale was the new fees would reflect a mix of private benefit and course costs.* The higher the private benefit, the higher the student charge, with some but not primary acknowledgement of course cost. If course cost is not the major factor in setting the fee, it is not clear that calculations based on course cost denominators tell us much. The implied denominator for a private benefits approach is future earnings or some other measure of private advantage.

The reason law and economics student pay most of their course costs is their high private benefits/low course costs combination. But the idea behind differential HECS was to get a more even outcome on a student costs/graduate private benefits calculation.

I think one interesting way to look at this is to calculate how many years it takes graduates in different disciplines to repay their HELP debt. Based on 2011 census data, we think it would take a median male graduate about 10 years to repay their HELP debt. The chart below shows that even though law students pay high fees, they are estimated to take less time than average to repay, because their salaries are higher than average. Business graduates are estimated to take 11 years, a little above average.

median years reapy

From an egalitarian perspective, something like this system means that graduates across the disciplines put in more similar work effort to repay their debts than a system in which their subsidies are a more consistent percentage of course costs. For example, if we had a 50:50 public/private funding system law graduates would get higher subsidies and take less time to repay, despite already being on the shorter side of the median. Science students would get lower subsidies and take more time to repay, despite already having an above-median repayment period. It was counter-intuitive outcomes like these that sunk the Lomax-Smith recommendation of a 60:40 public/private split.

From a public benefit subsidy perspective, the current system also has some merit. In this analysis, students make some calculation of private benefits (financial and non-financial) from a course and compare these with the costs (also financial and non-financial). If we want to encourage more people to take education generally or particular courses via subsidies we can alter private financial benefits to make them more attractive. But if private benefits are already high, we don’t need subsidies at all or to the same extent. This means that we can charge students in high private financial benefits courses more, regardless of cost.

To reiterate, this is not a defence of the detail of the current system. But there are good reasons not to be too worried about what numbers we get from a student contribution/total course costs calculation, and to look at other rationales for setting student charges.

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* I am using ‘course costs’ a bit loosely here; the calculations are actually student contribution/Commonwealth-supported student funding rate. The funding rate is typically around the actual costs, but this varies between disciplines and institutions.

Should New Zealanders be entitled to Australian student loans?

Although tough measures against refugee boat arrivals sometimes give the opposite impression, Australian migration rules overall are about as liberal as they have been since federation. We have multiple uncapped long-term although often temporary visa categories including New Zealanders, 457 work visa holders, international students, and working holiday visas. At the end of 2014, there were nearly 1.4 million people in the country on these visas. Only a small number of people seem to be really thinking through the implications of such a large number, although ad hoc issues come up regularly.

One of these is the status of long-term New Zealand residents of Australia in Australian higher education institutions, a subject mentioned in today’s Australian. Contrary to what the article says, New Zealanders are entitled to subsidised places in Australian public universities, as Australians are in New Zealand universities. However, New Zealanders are not entitled to the HELP student loan schemes, and therefore must pay their student contributions or fees up-front. Australians can borrow in New Zealand if they have lived there for at least three years.

The available statistics don’t tell us exactly the scale of the issue, but in 2013 there were 16,400 New Zealand-born people enrolled as ‘domestic’ students and 16,400 full-time equivalent students paying undergraduate student contributions up-front because they were not entitled to HECS-HELP. There is a bit of coincidence in the numbers as the latter figure includes permanent residents from other countries, while the former number includes postgraduates. But many New Zealanders who have been in Australia for much of their lives, went to Australian schools, talk with Australian accents, and consider themselves Australian for most purposes will nevertheless be paying upfront.

The policy intent behind this rule is reasonable enough. It’s one of several measures designed to ensure that people unlikely to be paying taxes in Australia, and therefore unlikely to repay HELP loans, don’t get to borrow (although it raises the question of if they are not going to stay, why give them any support at all?). But it is out of alignment with the social reality of many of the people it affects.

This has been recognised by the government, and they have an amendment that would allow New Zealanders who have been here ten years or more to be eligible for HELP loans. Unfortunately it is embedded in the ill-fated Pyne higher education reform package bill, and so unlikely to pass the Senate. It’s another reason why we need a three bills strategy to get higher education policy moving again, with this amendment going in a Budget measures bill.

It’s also worth noting that this would have been much less of an issue in the first place if we had measures to collect HELP debt from people living overseas. There are already signs that Australia and New Zealand are moving to assist each other in getting student debt repaid. If international repayment mechanisms were in place, we could have a more integrated Australia-New Zealand higher education market with short waiting times on student eligibility.

OECD comparisons are a poor guide to higher education funding policy

Rodney Tiffen’s Inside Story article on university funding reflects conventional wisdom: that there should be more public funding of higher education. But as is common in these pieces, it only really alludes to possible arguments, rather than spelling them out and exploring their implications.

We start with the familiar claim that Australian spending on higher education is relatively low, as a share of GDP, compared to other OECD countries. There are problems with the data used as it does not include the significant subsidies via the HELP loan scheme, but the basic point is right: on a per place basis Australian students pay more than is common in the European countries that make up most of the nations in the analysis.

Tiffen describes Australia’s low position as a low rank, when in reality the information on public spending is just a list. A rank only makes sense if higher numbers are inherently good and low numbers are inherently bad. But even relying purely on OECD numbers the available evidence counts against this conclusion. Consider higher education attainment rates compared to fees. As the chart below shows, low attainment is mostly found in low fee countries.

I have described this before as the paradox of public funding: that high subsidies can lead to low attainment. A low fee policy is usually aimed at demand-side considerations. But in higher education the problem is usually the supply of student places rather than demand for them. When public funding is limited, it is better to give smaller amounts to a larger number of people (eg Australia) than larger amounts to a smaller number of people (eg many European countries).

fees and attainment 2
Note: 2003-04 fees data used to approximate fees likely to be have been paid by the cohort in the attainment data.

This is a paradox, not a political science law. As the Scandinavian countries show, it is possible to have no fees and high attainment. But this typically occurs as part of a much broader political and economic system. High taxing countries have high public spending on social services, low taxing countries have high private spending on social services. Again OECD data can show the pattern as it applies to higher education.

fees and tax

For graduates, the difference between paying high taxes generally and paying extra ‘tax’ via HELP repayments is likely to be subtle. It is possible that the free-on-delivery mode of education shifts education expenses to a later period in life, when high annual tax bills are more manageable. That could be a benefit of the Scandinavian system, but I have not seen any research that demonstrates the point. But there are mostly likely to be significant issues when there are high taxes and high fees, as seems to be the case in England.

OECD comparisons are heuristics rather than arguments. If Australia differs markedly from other countries it is worth asking if this matters. In Australia’s case, I’d say the answer is no. Fees that are high compared to other countries, but modest compared to private benefits, have helped us deliver higher education to the masses on a tax take that is less than many other OECD countries.

A three bills strategy could break the higher education impasse

The government’s higher education reform package faces its second defeat in the Senate this week. Over the last week controversy has focused on the government’s threat to not renew $150 million in funding to the National Collaborative Research Infrastructure Strategy (NCRIS). This is being denounced today as reckless and bullying.

While threatening not to fund NCRIS looks like a tactic to pressure the Senate to pass fee deregulation, it also reflects the narrowing of options to achieve another important goal of the Pyne package, which is to control total spending on higher education. This has increased rapidly in recent times, with the main teaching subsidy program up 40 per cent in just five years. The previous government tried to introduce cuts, the current government is trying, and the next government will try. With big Budget deficits forecast, higher education cannot escape attention.

In my view the issue is not whether higher education will be cut, but how to do it in ways that cause least harm to public policy objectives in teaching and research. The situation we are in now is that programs are going to be cut according to whether or not the measures need parliamentary approval, not whether the affected programs are low priority or could be funded in other ways.

NCRIS is vulnerable because unlike most other university programs it is funded via the annual Budget appropriations bill. All the government has to do is not include its funding in the bill and the money is saved. The Parliament will not get to consider a bill on NCRIS. I think the demand driven system is also vulnerable in the medium term. From 2017 funding agreements between the government and universities could be used to freeze funding (which is all the government is trying to do; the 20 per cent cut proposed to per student funding is what is needed to control spending while student numbers grow). The Parliament has no power over funding agreements, so they are an obvious way to save money.

The minister doesn’t want to pursue either of these options. He has made much of securing conditional support for NCRIS, which Labor had left out of the forward estimates. He likes the demand driven system so much that he wants to extend it. But with internal government requirements to deliver savings, these programs are among the few feasible options if the Parliament won’t co-operate.

The multi-purpose bill higher education bill currently before the Parliament – with Budget measures, the demand driven reforms and fee deregulation – is complicating efforts to get a good outcome. If Senators are opposed to any of it, they will vote against all of it. Fee deregulation faces the strongest opposition, so leaving it in the bill is an obstacle to achieving the bill’s other two objectives.

In a couple of Senate inquiry submissions I have explained the different sources of the Pyne package and suggested proceeding with them separately.

I think we need three bills: Budget measures, demand driven reform, and student funding rates. One of my submissions suggests reforms to HELP that are not in the current bill but which would save money, lessening the need for big cuts to per student subsidies. While it would still be difficult to get a higher education savings bill through the Senate, it would have a better chance than one that includes fee deregulation. It would also give the government a better political position on NCRIS – indeed, it could include a special appropriation for NCRIS so that it is clear that this is just a Budget issue, and not a tactic around fee deregulation.

So far as I know, none of the cross-bench Senators opposes the demand driven reforms. If there were offsetting savings in the Budget legislation, the government could bring a separate demand driven bill forward and expect it to pass the Senate.

Fee deregulation as it stands will almost certainly fail to pass the Senate. As there is no consensus on alternatives, we need more time to work through the issues. The universities want the extra revenue deregulation would bring, but I don’t think this is urgent for 2016. While the government has invested a lot of political capital in fee deregulation as the big idea of the reform package, a sequenced legislative strategy would maximise their chances of achieving something in higher education in this parliamentary term.

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.