How should student contributions be set? Part 2: Letting universities set their own prices

In the first post in this series on the conceptual and philosophical thinking behind student contributions, I argued that successive governments have primarily used them to limit system-level public expenditure.

Once the public spending constraint is achieved, this approach leaves room for other methods of setting student contributions. This post looks at giving universities a role in deciding what level of student contribution to charge.

Liberal plans for fee deregulation

The idea that universities should set their own fees on top of a government subsidy has a long Liberal lineage. Plans to lift controls on fees were in the 1991 Fightback! package, David Kemp’s 1999 leaked Cabinet submission, and in Christopher Pyne’s unsuccessful 2014 higher education reform proposal.

For fiscally-constrained governments, part of fee deregulation’s attraction is its scope to further reduce public expenditure. Universities can compensate for public spending cuts with increased student charges. But fee deregulation also has a more positive agenda.

Arguments for additional student-funded resources include creating a more diverse higher education system, promoting more competition between universities, letting students invest more in their own education, strengthening university finances, and giving universities greater financial autonomy.

Although many of these arguments are institution-focused, deregulated fees are a version of the private benefit argument for student contributions I will discuss in a later post. Students will accept fees up to their level of perceived private benefit.

Problems with fee deregulation

All these Liberal proposals included tuition subsidies, but conceptually it is not fully clear why. With the HELP loan scheme, the system could probably run without them. In England, only fields with high teaching costs have tuition subsidies.

Tuition subsidies could keep fees down, but this is not certain. There is evidence of both mission-based near-cost and commercial pricing in currently deregulated markets for domestic students. Universities could set their fees at whatever level the market will tolerate, taking the subsidy on top of that. Like some top private schools, universities might put the extra funds towards extravagant facilities rather than lower fees.

But at least students directly benefit from extravagant facilities. In another fee deregulation scenario, neither high fees nor the government’s tuition subsidies lead to much change in the student experience. Our combined teaching-research university system means nominally not-for-profit institutions chase teaching profits to meet their insatiable desire for ever-more research. The main benefit to students for paying a fee premium is the prestige attached to their degree, with prestige driven by expensive research.

In the international student market high fees cost Australian taxpayers nothing. But in the domestic market, high fees lead to taxpayer costs via the HELP loan scheme, as not all debt is repaid. This contradicts the fiscal goal of fee deregulation.

There can be good reasons for letting universities charge their students more, but in the public university system also grounds for keeping both student and total costs down.

Brendan Nelson’s partial deregulation

Brendan Nelson, the education minister from 2001 to 2006, found a way of reconciling the competing policy objectives. Unlike his more radical predecessors and successors, he got a version of these Liberal ideas through the Senate in 2003 and established the current funding system.

Admittedly Nelson had a luxury few Liberal education ministers have – with an overall budget surplus, he could combine his plans for change with public spending increases rather than decreases.

But crucially Nelson did not over-reach by going for complete fee deregulation. Instead, he proposed allowing universities to set fees up to 30 per cent more than the then differential HECS rates, except in nursing and teaching which remained at the same price. The 30 per cent was knocked back to 25 per cent in Senate negotiations.

Although the fee increase was modest, this was still a major structural change. HECS in its original form was a government charge that went to the government. But Brendan Nelson created a student contribution that was set by and went to the university, although most of the cash flow still came from government via HECS-HELP.

Effects of Nelson reforms

The Nelson reforms did not make much observable difference to public university diversity or competition (partly because Nelson tightened restrictions on student numbers at each university; this was not a full market agenda). Despite being able to charge different student contributions, most universities soon set them at the maximum legal level.

But his parallel creation of FEE-HELP led to significant growth in the non-university sector, which is quite different to the public universities in many respects.

Nelson’s policies delivered the only sustained real increase in per student funding in decades. I have my doubts, for the sceptical reasons mentioned above, about whether much of this money was invested in teaching. But satisfaction with teaching continued increasing in this period, and the long research boom started.

Nelson’s creation of a separate student contribution, rather than the government HECS charges, has significantly paid off for universities.

During the recent Commonwealth Grant Scheme funding freeze, student contributions were indexed to inflation as usual, while the average Commonwealth contribution paid fell in real terms due to enrolments above the funding cap. Under the pre-Nelson block grants, all funding would have fallen in real terms.

Universities continue to be paid the full student contribution charged for every enrolment. Before Nelson ‘over-enrolments’ were funded at a much lower rates. Whether the Tehan reforms pass or not, the separate student contribution will be critical to the system’s capacity to meet domestic undergraduate demand in the coming years.

Brendan Nelson’s creation of separate student contributions, with prices set by universities, made the higher education system more resilient and adaptable than it would otherwise have been. His policies achieved some of the goals of fee deregulation advocates, without the political, fiscal or social costs of the more radical proposals.

The Tehan bureaucratic alternative

In their implications for students, the Tehan plans for maximum $14,500 student contributions in humanities, law and business courses have parallels with previous Liberal higher education reform proposals. Universities get to set a maximum fee that is much higher than current levels.

Conceptually, however, I think the Tehan plan abandons important previous Liberal ideas about university funding.

Rather than giving universities more flexibility over their per student funding rate, a market-leaning idea, the Tehan reforms are based on a bureaucratic idea that the total funding rate should equate to average teaching and scholarship costs, with little or no room to depart from this to deliver something different, or for the university to earn a profit.

And rather than trying to give universities more autonomy, universities will be starved for funds, forcing them to participate in bureaucratic schemes that require them to deliver on the government’s idea of performance in teaching and graduate outcomes, on equity group enrolments, and on industry engagement.

And the student contributions themselves, rather than serving a general university financing role, or letting students invest more in their own education, will be specifically aimed at changing student behaviour in the direction of government goals.

The next post examines this change in the conceptual foundations of the student finance system in more detail.

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