The beginning of the end for no-questions-asked student loans?

The Australian this morning is running stories on the likely increases in doubtful HELP debt* and crackdowns on lending through VET FEE-HELP, which principally lends to students taking vocational education diploma courses.

Industry minister Ian Macfarlane (the Australian must have been sitting on this story, as Chris Pyne become the responsible minister in the pre-Xmas reshuffle) is said to have:

…blasted “criminal’’ training colleges for recruiting elderly students from retirement homes to cash in on taxpayer funding.

Mr Macfarlane said the federal government would take action early next year to stop training companies and brokers offering free iPads to “suck in’’ students who are unlikely to graduate.

Under the proposed measures, some of the government payment to colleges would be withheld until the student found work. This has parallels with the ‘gainful employment’ rules proposed in the United States to deal with similar problems there.

While obviously measures should be taken to reduce rorting, bad provider practices highlight deeper problems with HELP loans. Income-contingent lending has been expanded many times since HECS was introduced in 1989 without anyone going back and thinking carefully about the lending or repayment systems.

In 1989 higher education was still a relatively elite activity and graduates a relatively small proportion of the workforce. Recent graduate un-or-under-employment was only a third of what it is now. To a significant extent, the admission requirements for university could double as a creditworthiness check. The income contingent loan scheme largely acted as a genuine risk manager, rather than handing out mislabelled subsidies to people who were never likely to repay.

Now higher education participation is heading towards 40 per cent of the age cohort, and HELP has been extended to vocational education. Higher education students with lower ATARs are significantly less likely to complete their degrees, leaving them with a HELP debt but without significantly enhanced income-earning potential. People with vocational education qualifications on average earn significantly less than higher education graduates, and more importantly for HELP are much less likely to earn more than the repayment threshold (pp 20-23). Admission to a course is no longer a good proxy for ability to repay.

During 2014 several people have suggested that institutions enrolling students using HELP should share some of the risk of non-repayment (eg Judy Sloan and Core Economics bloggers). The proposal to making some provider payments contingent on student outcomes looks like the first sign of this becoming reality. However, this may not be the best solution.

While vocational and higher education providers could use their own data to develop sophisticated analysis of what types of students are most likely to drop out, they are much less well-placed to assess employment outcomes for those who complete. Former students are under no legal obligation to answer employment surveys. By contrast, the government as the HELP lender has vast amounts of information. Tax file numbers are used for both HELP borrowing and tax collection, what matters for HELP repayment. Linked back to Education Department records, this data could also be used to produce sophisticated analysis of repayment risk.

Arguably, under current arrangements the government is not being a responsible lender. Good lending practices in the financial sector protect both the lender and the borrower from imprudent decisions. Neither protections are currently robust for HELP. Asking some more questions about repayment prospects before lending under HELP could be good for many prospective students, and good for taxpayers who face ever-increasing bad student debt.

* Using Grattan projections based on a mix of official figures and extrapolations from historic data.

Few disciplines escape the graduate employment downturn

As reported yesterday, Australia has recorded its worst ever employment outcomes for recent bachelor-degree graduates. The employment pain is widely spread, with only four of the forty disciplines monitored by Graduate Careers Australia escaping an employment downturn between 2013 and 2014. They are social work, medicine, veterinary science and allied health.

The largest deterioration in employment outcomes was experienced by engineering graduates, showing yet again that this is a boom and bust field of education, with periods of very low unemployment quickly followed by periods of high unemployment.

engineering

There have been many media stories about the declining job market for law graduates, and this is supported by the GCA data. Law graduates managed reasonably well in the early 1990s recession, but now there is a clear negative trend. The upside is that their un-/under-employment is still lower than the average.

law

I have been saying for years that there is nothing in the graduate employment data that justified claims of too few science graduates, and this year’s numbers again support my argument. Un-/under-employment rates for life science graduates now exceeds 50 per cent, second worst only to perpetual employment wooden spoon winners, graduates in the visual and performing arts. The full list of graduate un-under-employment rates is beneath the fold.

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Read more »

Worst ever new graduate employment outcomes

The latest graduate employment statistics bring bad but not unexpected news: the proportion of graduates looking for full time work four months after completion has reached a record 32 per cent. This replaces the previous worst result of 29 per cent in the early 1990s recession – but without a major recession. For graduates aged under 25 years, 35 per cent were still looking for work four months after completion.

Grad unemploy
Source: Graduate Careers Australia, as above and here.

Of those looking for full-time work in early 2014, 20 per cent were working in a part-time or casual job, and 12 per cent were unemployed.

Oddly, there was little sign of this employment misery in the latest ABS Education and Work survey, which was released recently. Overall graduate unemployment remained a little over 3 per cent, the proportion of working graduates with jobs classified as professional or managerial increased, from 73 per cent to 76 per cent. I think these results should be treated sceptically. The survey is reporting increases in postgraduates that seem unlikely, being way in excess of the completions reported by the Department of Education (migration can affect the results, but not on the scale observed). The sample size means that the true result could be a fairly wide range for these sub-categories. I think they have erred on the high side.

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.

Increases in low SES uni participation, 1991-2011

Using the trend data from the chart below, it is often said that we are making little progress in increasing higher education participation for people from low SES backgrounds.

low SES trend

The chart shows domestic low SES students as a percentage of all domestic students. But the denominator is important: it means that low SES enrolment has to increase more quickly than enrolment generally for the percentage to go up.

A more meaningful indicator is low SES enrolment as a percentage of the relevant low SES population. This tells us whether people from low SES backgrounds are becoming more likely to attend university over time.

An interesting paper out from the Group of Eight today (disclosure: drawing on some of my work from a few years back) shows how, for the late teenage children of low SES workers, university attendance has become more likely over time.

For example, in 1991 16 per cent of the children of tradespeople were at university. Twenty years later that number was 26 per cent. The gaps between SES groups remain very wide, but with participation growth in the leading SES group, professionals, slowing down the gaps are not as large as they were in the past.

Census trends occupational partic

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Note: The data is drawn from the census, using 18 and 19 year olds living at home. At home is needed to determine parental occupation. According to the two latest censuses, about 80% of 18 year old university students and 70% of 19 year olds are living with their parents.

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.

Low SES students and the non-university higher education sector

Last week I had a go at the Greens and Labor for supporting low SES students having to pay full fees, if they choose to attend a non-university higher education provider (NUHEP). The Department of Education has recently provided me with data on low SES undergraduate enrolments by NUHEP.

There is wide variation in their low SES enrolment shares, from a low of 4% to a high of 33% (only looking at providers with more than 100 domestic undergraduates). As in the university sector, much of the variation seems regional, reflecting the fact that the low SES measure is based on residential postcodes. Providers with low SES areas in their geographic catchment areas tend to have higher low SES enrolments, such as regional areas and the poorer cities or parts of cities.

Overall, in 2013 15.6% of undergraduate students in NUHEPs had low SES backgrounds, defined as living in postcodes in the lowest 25% of the ABS index of education and occupation. This compares to 17.6% of students in the public universities. The chart below compares some of the sub-groups within the NUHEPs and public universities.

There is a very loose relationship between fees charged and low SES enrolments. The pathway colleges are generally more expensive than the TAFEs, but they have a slightly higher low SES enrolment share. Religious colleges, including theological colleges as well as more general education providers with a religious dimension, have more a higher low SES enrolment share than either of the other two groups. They also tend to have quite low fees.

NUHEP low SESJPG

(Data copyright Commonwealth of Australia, reproduced by permission)