Funding incentives for students and universities in the Tehan reforms: some are aligned, others contradict each other

The higher education reforms Dan Tehan announced last month make the idea of ‘national priority’ courses, which are often but not always linked to employment prospects, a central feature.

This is a significant conceptual shift in the funding system. Historically, deliberately steering the system by course has been a marginal aspect of policy. It has occasionally been done by allocating new places to preferred fields, especially in the mid-to-late 2000s. In the same period, some changes to relative student contributions, particularly in the case of science, were designed to boost demand. But universities, influenced by student preferences, largely decided how student places were divided between courses.

In the Tehan proposal, universities will remain the main decision makers. The government will not directly allocate money to national priority fields. Instead, the government will send price signals to students across all fields of education, with low student contributions indicating national priorities, and high student contributions discouraging non-priority fields. Altered student preferences will, if the policy goes to plan, cause universities to shift student places to priority areas.

Student contribution effects

To date, most discussion has centred on what effect the new student contributions will have. My own position on this is mid-debate.

Due to the underlying strength of student interests as drivers of course choices both the more apocalyptic fears of academics in the $14,500 student contribution fields, and any expectations of massive shifts in applications towards priority fields, are probably misplaced.

But for vocationally-oriented students, changes to student contributions might affect choices within their cluster of interests, mainly through publicity effects. These effects, however, are likely to be minor compared to preference movements caused by changes in the actual or perceived career risks and rewards of different courses.

There could also be some current university applicants who withdraw entirely from formal higher education because the price is too high for study that is not linked to future employment, or because they are not Australian citizens and have to pay their student contributions upfront.

University mission effects

Because under the Tehan system universities will not be directly required to deliver places in national priority fields, it relies on universities deciding to respond to student demand. So in predicting the consequences of the Tehan reforms we have to consider university as well as student incentives.

As with students, I don’t think an analytical model that assumes direct relationships between financial incentives and behaviour will produce wholly reliable predictions. Each university wants to achieve its mission, and money is the means by which it pursues that end. The Deloitte analysis of costs reveals numerous loss-making fields of education across the system, which would be unlikely if universities were purely commercial operations. But for each university to achieve its mission, most things they do must breakeven or make a profit.

We can see very clearly in university enthusiasm for international students how motivated they can be by profitable enrolments. But as profits shrink university capacity for supporting loss-making courses and research goes down.

Because universities cannot transfer their costs to the distant future via HELP, as students can, they have much greater short-term sensitivity to financial considerations. That’s why many thousands of university staff will lose their jobs this year.

This post and the next explore in more detail the financial incentives and trade-offs universities will face if the Tehan reforms are implemented, and whether these support achievement of the government’s ‘national priorities’. This post looks at the incentives created by the overall per student funding rate, and the next post looks at Commonwealth and student contributions separately.

Overall funding rate effects

The consequences of the Tehan reform package are hard to predict in part because changes to the prices student pay and universities receive create incentives that often work in opposite directions.

One of the main reasons for this is that, at the same time as moving to a national priority approach to steering course enrolment shares, the government decided to bring overall student funding rates closer to average costs, as determined by the Deloitte analysis.

This cost-pricing decision meant forgoing what might otherwise have been a powerful policy tool, offering universities significant profits on national priority fields. Not only would universities have had strong financial reasons to meet demand in those fields, but they would also have had an incentive to encourage demand through marketing.

Instead, by creating a policy based on national priorities on the demand side and average costs on the supply side, we end up with a semi-random mix of incentives.

Sometimes student and university incentives are in the same direction – lower student contributions and higher university funding rates (positive alignment) or higher education student contributions and lower university funding rates (negative alignment).

But more often student and university incentives are misaligned – there is a higher student price to discourage demand, but an increased university funding rate that encourages supply; or a lower student contribution to encourage demand, but a lower university funding rate that discourages supply.

The chart below shows the mix of interactions. Overall, using 2018 numbers, about one-third of EFTSL are in aligned fields, and two-thirds of EFTSL are in misaligned fields.

The most vulnerable fields are in the second and fourth columns, where the overall funding rate goes down. Due to the aggregation issues in the Deloitte cost data, I can’t analyse profit and loss by university in each affected field, but of those I can 40 were already in loss in 2018, and that would more than triple to 122 on the new funding rates (assuming a 6 per cent increase in costs since 2018).

One of the many reasons why the consequences of the Tehan reforms are hard to predict is that reactions to these losses could be very polarised. Universities with high costs could close their courses and exit the market. With the sector in survival mode due to the international student crisis, this option is more likely than it would otherwise have been. But some institutions may try to tackle their high costs by increasing economies of scale, which would mean more rather than fewer students.

Money should be moved from demand-side to supply-side policies

A central policy problem with the Tehan proposal is that it spends large amounts of money reducing student contributions in the high-priority fields. For courses in the fourth column, more than $750 million would be cut in student contributions (on 2018 EFTSL).

In only one of them, education, is there evidence of demand-side problems. But the problem is not student contributions – it is the legacy of poor employment outcomes a few years ago, entry restrictions and the limited appeal of teaching as a career.

Essentially, $750 million is being transferred to students, most of whose decisions will not be influenced at all (indeed, students who have already chosen these courses and are currently enrolled will benefit, as well as new students).

That money is being lost to universities, whose decisions will be influenced by the funding rates on offer.

Even on its own national priority terms, by focusing on the wrong side of the demand and supply equation, the government’s policy takes huge risks. It could end up with enrolment shifts that are the opposite of what it wants.

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