2021 will be a competitive year for university applicants

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.

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How will the number of student places increase under the Tehan reforms?

Although I don’t support the Tehan plan to steer student demand to ‘national priority’ fields, from day one I have supported increasing the number of student places.

According to the Department’s discussion paper on the reforms, they will ‘support an additional 39,000 university places by 2023 and almost 100,000 places by 2030’. These additional places are needed to meet previously unexpected demand due to the COVID-19 recession and, from the mid-2020s, the ‘Costello baby boom’ cohort (although the former Treasurer perhaps should not get too much credit for them).

This post examines how student places for undergraduates might increase under the Tehan reforms. For general readers, the first section on major sources of additional places includes the key policy changes. Read on after that part if you need to know the detail of higher education policy.

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Commonwealth and student contribution reforms create a harder cap on ‘priority’ than ‘non-priority’ courses

My previous post examined how, for many disciplines, price signals to students and universities contradict each other under the Tehan reforms. Without demand and supply incentives lined up, enrolment patterns by discipline may not match the government’s ‘national priorities’.

The overall price signal for the university, the total per student funding rate for each full-time equivalent enrolment, is made up of two components. These are a Commonwealth contribution, paid out of the Commonwealth Grant Scheme, and a student contribution, a university charge paid by students up to a legislated maximum amount. Most students use HECS-HELP loans to pay their student contributions.

This post looks at what separate effects the Commonwealth and student contributions might have on university behaviour, independently of how they combine to form a total funding rate.

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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.

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Regional universities are especially disadvantaged by funding based on average costs

Dan Tehan is the most regionally-focused education minister I can remember, and quite probably ever. Multiple new or expanded programs for regional campuses and students are part of his higher education plan.

But a sector-wide central feature of his policy, the closer alignment of discipline-level funding rates with average costs, poses particular problems for regional universities.

As the Deloitte Access Economics analysis of teaching and scholarship costs found, regional universities have higher average costs than city universities. It says that:

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Can a block grant system work on lower per student funding rates?

In recent posts I examined how various average teaching costs compared to the proposed new student funding rates. Average costs provide a rough guide to the decisions facing universities. Fortunately, the cost data has average costs for each field in each university in the sample. This detail offers a more nuanced understanding of how the new funding rates will affect universities.

The published cost data is from 32 universities and covers 20 fields of education. Not every university offers courses in all fields. In total, 551 fields are examined for profits and losses.

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Correction post – true average costs, whether average costs are true, and that chart

In a post last week, I suggested that a chart on average teaching costs compared to funding rates in the Tehan reform discussion paper, which was causing concern and confusion, and was later amended by the Department of Education, might make things look worse than was the case.

This turned on what kind of ‘average’ we were looking at. There are multiple versions of average 2018 estimated costs by field of education floating around – an average of averages (all institution average costs by field added up/number of institutions), a median of averages (institutional average cost in the middle of the range for each field), and a true average (total costs for field/EFTSL in field). I thought the chart might use an average of averages, which would over-weight low-EFTSL, high-average cost institutions.

But, having realised that I had the true average numbers when I thought I did not (in a file with a name that did not reveal this aspect of its contents), I now think the Department’s chart is based on true average figures.

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Financial influences on job-seeking university applicants

In an earlier post, I argued that student interests drive course choices, but also that more than 80 per cent of first-year students hope for improved employment outcomes.

It follows from this that, within their cluster of interests, prospective students would plausibly choose courses with the best apparent employment and income outcomes.

This theory helps explain trends seen in applications data. While supply-side and timing problems mean we do not always have enough ‘job-ready graduates’, rarely do we lack ‘job-ready applicants’.

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Could the proposed student contributions influence permanent residents and NZ citizens?

In saying that I expect price sensitivity to be low in response to changed student contributions, I have given the HELP loan scheme as one of my reasons. Study now, repay later, perhaps never.

But I should caveat that, because not all Commonwealth supported students are entitled to a HELP loan. HELP is a rare social support scheme that is linked to citizenship; it could be the only one (happy to hear of others, if anyone knows of them). The only general exception is permanent humanitarian visa holders.

Entitlement to a Commonwealth supported place is more conventional. Permanent residents can have one. Indeed, for people with PR their tuition subsidy entitlements are more liberal than for other programs. Unless someone was an international student when starting their course, their eligibility for a CSP begins immediately on attaining permanent residence, while there is a waiting period for many social security benefits.

The benefit for a CSP for someone with PR is limited to the Commonwealth contribution and the price cap on student contributions.

But this means that any student contributions have to be paid upfront. In 2018 about 38,000 domestic students were permanent residents, or 3.5 per cent of the total.

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The Tehan discipline funding rates are probably better than they look

Update 3/7/2020: I now believe that, contrary to what this post suggests below, that at least the amended chart is based on ‘true average’ figures.

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On Twitter the new funding rates in the Tehan higher education reform package are being criticised for not covering costs in most fields. That’s a completely understandable concern, given that the government’s own discussion paper suggests that this will the case, by publishing the chart below.

Fortunately for universities, if this package makes it through the Senate, I think there is a mistake in the chart’s figures. I noticed this because I initially made the same mistake myself when analysing the underlying cost figures for this blog post last month. (Update 24/6: The latest version of the discussion paper has a lower overall average cost than the chart above.)

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