Whether the Tehan reforms pass the Senate or not, in 2021 universities face a recession-induced spike in demand. This post looks at the system’s capacity to respond under each policy scenario.

Commonwealth Grant Scheme

Based on last year’s portfolio budget statement, which requires some averaging of years, under status quo policies the Commonwealth Grant scheme will increase by about the rate of inflation. As Commonwealth contributions are indexed to inflation, and universities are already delivering more student places than needed to get their maximum grant, the 2021 CGS funding increment would not require any additional student places.

Under the Tehan reform scenario, starting in 2021 the government will add ‘growth places’ that are partially linked to population increases in the 15-29 age cohort. But these places will not increase Commonwealth Grant Scheme funding compared to 2020. Rather, the maximum CGS payment is first reduced and then slightly increased by the growth places. The lost funding would be recycled in a proposed industry linkage fund, but this puts new constraints on university spending rather the freeing up funds for new student places.

Lower average Commonwealth contributions

Although under the Tehan reform scenario there will be less CGS funding in total, the implications for students places would differ from the status quo.

As described in a previous post, by reducing the average Commonwealth contribution the Tehan reforms require universities to deliver more student places per each $1 million in Commonwealth Grant Scheme funding.

These proposed lower average Commonwealth contributions come from cuts to science, engineering, law, business, social science, communications, and humanities other than languages students. However, except for science and engineering, existing students in these fields would be grandfathered at the old, higher Commonwealth contribution rate. This is so current students are not hit with the new maximum $14,500 student contribution. The new Commonwealth and student contribution rates would apply to commencing students only.

Based on 2018 EFTSL, the grandfathered students would use approximately 27 per cent of all Commonwealth-supported EFTSL. At the old funding rates, they would generate $840 million more CGS revenue than under their proposed new $1,100 per EFTSL Commonwealth contribution. Only as grandfathered students complete their courses, and are replaced by new commencing students on lower rates, will lower average Commonwealth contributions have their full effect.

Although science and engineering have lower Commonwealth contributions, many non-grandfathered ‘national priority’ fields would have higher Commonwealth contributions than under status quo policies. Education, nursing, IT, architecture and languages EFTSL would move straight onto the new funding rates. The net effect, based on 2018 enrolments, would be that these continuing students would cost the CGS about $170 million more than the current funding rates.

This combination of decisions for continuing students means that the CGS would, under the Tehan reform scenario, incur added expenses for fields with increased Commonwealth contributions before getting the full financial benefit of fields with decreased Commonwealth contributions.

The cost of continuing students, along with the cut to total CGS funding, means that if the Tehan reforms pass universities need only deliver the same number of EFTSL by discipline as in 2018 to get their full 2021 CGS entitlement. No new student places are required.

Over time lower average Commonwealth contributions would put upward pressure on the number of student places, but in 2021 the CGS effects of status quo and Tehan reforms policies are the same: each require zero new places.

A squeeze on commencing places

The squeeze on CGS funding for commencing students is, unfortunately, worse than it looks in the slide above. I used the 2018 division between commencing and continuing students. But that is probably not an accurate guide to 2021, when Australia will be in a severe recession.

During a previous economic downturn, the global financial crisis, retention from first to second year increased by two percentage points. It is unlikely that almost all universities suddenly found innovative new ways of reducing attrition. It is more likely that students who would have dropped out to work did not because jobs were harder to find.

If a retention increase is repeated in the COVID-19 recession, continuing students will consume more EFTSL, and more of the limited CGS funds, that my slide suggests. In turn, under either the status quo or Tehan reform scenarios, that will squeeze the CGS funding available for commencing students.

An added continuing students issue is that more students are starting courses during 2020 than anticipated. Some ‘undergraduate certificate’ students will want to convert their qualification into something with more academic and labour market credibility. And there are big percentage mid-year offer increases reported in Queensland, although keep in mind that fewer offers are made mid-year than for first semester. I expect that similar increases will occur around the country.

If we rely on the CGS alone, in 2021 an increased number of applicants will fight over fewer commencing student places than in previous years.

Student contribution only enrolments will be critical

The prospects of the 2021 commencing cohort depend, therefore, on the willingness of universities to ‘over-enrol’, to take students on student contribution funding only.

I estimate that over-enrolment stands at about 26,000 places in 2020. It can be accidental – universities never know exactly what proportion of offers will be accepted, or how many students will drop out, or the mix of full and part-time study. But in some cases over-enrolment is so large that it must be deliberate.

Intentional over-enrolment is currently most financially attractive in business and law courses, where universities get nearly 84 per cent of the funding rate from the student contribution alone.

In some fields the new student contributions proposed in the Tehan reforms would make deliberate over-enrolment more attractive, as the chart below shows, taking the student share of funding to 93 per cent. Many fields taught in arts faculties would join business and law in this position.

While there are cost-side issues in some fields, if the Tehan reforms pass we have a partial de facto demand driven system. In several courses universities could forgo the Commonwealth contribution and still get most of the funding rate.

In other fields, however, the student contribution currently provides a smaller proportion of the total funding rate than in business or law, and this would shrink further if the Tehan reforms pass. Although accidental over-enrolment would still happen in these fields, deliberate over-enrolment makes much less financial sense. This would constrain growth in student places.

Conclusion

For would-be 2021 commencing students, the case for the Tehan reforms rests on the greater attractiveness of deliberate over-enrolment. Students applying for law, business or arts could all benefit from over-enrolment – albeit at the high annual price of a $14,500 student contribution.

For students wanting to take courses in other fields, 2021 could be a tough year for university entry. Under either the status quo or Tehan reform scenarios, continuing students will consume CGS funding that would otherwise have been available for commencing students.