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 #3: Would compound interest on HELP debt be new?

At a conference I attended yesterday there seemed to be some confusion about the government’s plan to index HELP debt at the 10 year bond rate, capped at 6 per cent, rather than at CPI. There was a lot of concern about introducing ‘compound interest’.

In the context of HELP, compound interest is the paying of interest on previously accrued interest added to a student’s debt. This has been a feature of Australia’s income contingent loans, HECS and then HELP, from the start. What’s changing is not the fact of compounding, but the rate of interest. Based on recent history, this is likely to be 1 to 2.5 per cent higher than now.

The main alternative to these variable real interest rates is a loan fee. Undergraduates borrowing under FEE-HELP pay a 25 per cent loan fee. This provides an incentive to pay up-front, avoiding the taxpayer subsidising interest payments on loans from people who have the cash to pay for their education, and contributing to the cost of interest. Upfront payment allows the government to avoid the risk of doubtful debt. However, once the loan fee is incurred it does not provide much incentive to repay early.

The government is removing the FEE-HELP loan fee. It was certainly unfair that full-fee undergraduates had to pay it, but not full-fee postgraduates. HECS-HELP borrowers also make no contribution to the cost of their loan other than the CPI interest.* But I am not sure that the idea of a loan fee should be dismissed. It makes the total cost of higher education more predictable for borrowers, and manages the risks of periods of earning less than the threshold for repayment. At the same time, a loan fee could substantially reduce the cost of HELP to other taxpayers.
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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 »

Did free university education increase higher education attainment?

This year marks the 40th anniversary of Gough Whitlam’s free higher education policy. It continues to be the subject of considerable nostalgia. But did the policy increase higher education attainment? The answer to this question is quite complex.

The figure below is from the 2011 census. It shows lifetime higher education attainment rates by the year in which each one year age cohort turned 18. Contrary to some expectations, from 1974 a period of growth comes to an end and attainment plateaus for a decade, before growth resumes again in the mid-1980s.

attainment census
Note: Citizens only

The 2010-11 ABS Learning and Work survey shows the same pattern. With this survey I can restrict the analysis to Australian qualifications only, which helps explain why attainment levels for the free education generation are a little lower than in the census.

attainment L&W

The reason for this is not that the number of higher education places went down. There was an increase during the Whitlam years. But higher education attainment is affected by both the number of places and the overall population. In the 1970s the 1950s baby boom was reaching higher education age (slide below), which meant that many more people were trying to get into higher education.

age cohort

In this context, free education may have been counter-productive. It is focused on demand for higher education, but the supply of higher education has nearly always been a much more significant policy problem than demand. This can lead to the paradox of public funding: attempts to increase demand for higher education through cutting its cost can lead to lower higher education attainment. With finite public resources, the more governments spend per student the fewer the students they can support overall.

This was a key insight behind the creation of the HECS system in 1989, and as the first two slides above show spreading government support over more students contributed to a long period of growing higher education attainment.

The year of education-related third-party expenditure

The annual third-party political expenditure disclosures were put on the Australian Electoral Commission website today. I’ve updated my spreadsheet tracking spending by broad source, below.

pol exend 06-13

After three years of business outspending unions, the unions are just back in front. However both categories hide that 2012-13 was the year of education campaigns. The biggest single spend was $6.2 million by the Australian Education Union. The second-biggest spend was $4.8 million by Universities Australia. Adding in some other smaller campaigns, 47% of third-party political expenditure for 2012-13 was on education-related issues.

As the previous government raided the higher education budget to fund schools, it looks like the AEU had the better return on investment, if you believe that these campaigns make a difference.

Will the new Student Start-up Loan save money?

Today the Liberals introduced legislation for Labor’s conversion of the Student Start-up Scholarship into a new income-contingent loan, the Student Start-up Loan.

Overall, its design is closely linked to the Higher Education Loan Program (HELP). However, people who take out SSLs will not have to start repaying until after they have repaid their HELP debt. Potentially, that is not for a very long time.

Experience with the former Student Financial Supplement Scheme, under which students could trade in $1 of income support for a $2 loan, suggest that there is significant adverse selection with income support loans.

From figures given during discussion of closing the SFSS down in 2003, I estimate that about $2.7 billion was lent between 1993 and 2003. The Department’s annual report for 2012-13 says that $1.8 billion is still owed, of which they class 63% as doubtful debt. Doubtful debt for HELP is estimated at 23%.

Presumably this is from a mix of people taking out loans they never expected to repay and income support entitlement being a proxy for other characteristics that put people at above-average risk of being bad debtors.

In this case, the Commonwealth can’t be financially worse off. This is a loan replacing a grant, so long as repayments exceed administration costs they will come out ahead.
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