In a new paper published by the U of M’s Centre for the Study of Higher Education I chronicle the history of student contribution rationales – the reasons the government gave for HECS rates and then student contributions.

I argue that five rationales have been used: private benefits, course costs, increasing resources per student place, incentivising course choices and public benefits.

A key turning point is the 1996 Budget, when the government abandoned a flat HECS charge across all disciplines and introduced differential HECS. This required a more complex set of justifications than previously. The government’s arguments had to explain not just why students should pay compared to the previous free higher education system, but also why they should pay more for some courses than others.

The Wran report

The HECS system was recommended in a 1988 review chaired by former NSW Premier Neville Wran. It introduced four concepts that were subsequently influential in thinking about how to charge for higher education: private benefits, public benefits, a balance between private and public benefits, and course costs.

In the Wran report the private financial benefits graduates received were a high-level justification for introducing course charges. However they did not recommended private benefits-based charging because they thought they needed to know the mix of public and private benefits, an empirical task they saw as too hard. In later policy discussions this converts into the idea that a ‘balance’ between public and private benefits should drive the distribution of costs between the government and students. As I will discuss in another post, this idea has recurred repeatedly but always – and rightly – been rejected by policymakers.

With private benefits out, the Wran report recommended course charges based on course costs, with students to pay roughly 20 per cent of the estimated cost in eight categories. The underlying idea seemed to be that students should share in the costs their course choices create.

However the Hawke government decided to implement a flat average rate per subject across all disciplines.

Differential HECS – specific course costs and private financial benefits

In 1996 the Howard government, with Amanda Vanstone as education minister, decided to reduce public higher education expenditure and increase HECS. Instead of a percentage increase on the existing rates they went back to the Wran idea of basing HECS on course costs. A Department of Finance document in a released Cabinet submission has a five band HECS rate system based on assumed costs. This highlighted a political problem with cost-based pricing – nursing students would pay more than law or business students.

Like course costs, private benefits was a rationale for introducing HECS. Taking it to a specific course level extended the logic. On my reading of the documents, however, linking HECS bands to relative private benefits between courses was primarily a political modification of the course cost rationale, to justify charging law students more than nursing students.

In my report, I map the differential HECS bands against data from the time on relative private financial benefits and costs. Although based on the documents course cost was the main rationale, on the data relative private financial benefits better explains the allocation of disciplines to HECS bands. This is partly because several disciplines would go into the same band whether a course costs or private benefits rationale was used. On my numbers, course cost justifies placing borderline private benefits courses into higher or lower HECS bands.

The Nelson reforms – increase university resources and incentivise student choices

Brendan Nelson as education minister used the Vanstone differential HECS rates as the basis for his reforms, announced in 2003 and implemented in 2005. Nelson introduced several major changes. HECS had been set by the government and went to the government, but under Nelson student contributions were set by the universities up to a legislated maximum and went to the universities.

Nelson introduced two new student contribution rationales. For most courses the legislated maximum student contributions were set at 25 per cent higher than the previous differential HECS rates. Nelson claimed, optimistically, that ‘every last dollar will be spent on improving the quality of the education that will be received by the current and the next generation of Australian students’. This rationale is increasing university resources to improve educational quality.

Two courses were exempted from the 25 per cent increase, nursing and teaching, and maintained at their old differential HECS rate. Nelson explained that this ‘new national priorities student contribution band will be used to attract students to courses that are a national priority for the Government’. This was the rationale of using incentives to steer course choices.

The Nelson reforms marked a larger change in justifications than just adding rationales. In the first two iterations of HECS/student contributions the arguments were mainly normative, to justify reducing the Commonwealth share of total funding, albeit to finance more student places in 1989. The HECS rates were not intended to influence universities, as their funding was determined separately. And although pre-2003 documents recognised the possibility that HECS levels might influence student choices, this was seen as a negative side-effect rather than a goal.

With Nelson the policy potential implicit in differential pricing was turned into a positive, with the aim of changing student and university behaviour.

Job-ready Graduates – public benefits and incentivise student choices

The idea that public benefits might be relevant to student charges was in the Wran report and the public-private balance idea, but before Dan Tehan’s Job-ready Graduates policy it had never influenced price setting. It was a high-level justification for why the Commonwealth funded higher education, but not an operational concept for determining funding levels. The public element of per student funding was always a residual item, the nominal funding rate roughly based on teaching costs minus the student contribution, set using the various reasons described above.

Job-ready Graduates by contrast increased the share of costs covered by the government in courses that ‘produce higher public returns or which contribute to identified national priorities’. With fixed total funding rates, a higher Commonwealth contribution translates into a lower student contribution, which is one practical mechanism by which increased public subsidy could convert into ‘higher public returns’ – the theory being that lower prices lead to higher demand which in turn leads to more supply in the target courses.

Incentivising course choices was not a novel rationale – it had been tried before and abandoned for nursing, teaching, science and maths (the last two in the Rudd-Gillard governments). But it was new in being applied across a large number of courses and in giving the argument a twist.

In its earlier iterations, this rationale was framed positively, promoting the target courses without specifying the alternatives that students were impliedly being encouraged not to take. Under Job-ready Graduates, however, the bad alternatives were highlighted with a $14,500 student contribution, $3,000 more than the previous highest rate and more than double the previous student contributions for most arts disciplines. The Job-ready Graduates discussion paper suggested that current funding incentives ‘could encourage sub-optimal choices for students and institutions, leading to poorer labour market outcomes and returns on investment in higher education’. This was a deterrence use of student contributions.

Summary of rationales

The chart below from my paper summarises the four main phases of student contribution policy and the rationales used.

Empirical tests

While any rationale can be evaluated for its practical consequences these are particularly relevant for those with specific policy goals. We lack the regular teaching expenditure data needed to know whether the 2005 student contribution increases made a difference in the classroom. This is during the early years of the 21st century boom in research expenditure so I have my doubts. Whether incentivising course choices with student contribution discounts and penalties works is the issue for Job-ready Graduates. So far there is little evidence of policy success, a conclusion shared by a Productivity Commission report also out today.