Budget should give universities more flexibility on student contributions

The Australian government is committed to making inroads into its A$36 billion budget deficit in the forthcoming May budget.

Universities and students will not escape unscathed.

While the 2014 fee deregulation plan was shelved late last year, the 20% reduction in tuition subsidies is still baked into the budget forward estimates. The government is not likely to walk away from this and will be under pressure to provide universities with the means to recover at least part of the budget cuts.

The most likely option for the government at this stage is to increase the student contribution limits.

These currently range from $6,256 to $10,440 per year. This represents on average about 40% of the cost per student to the university.

May budget - what to expect

The government may well look to other ways of further shifting the costs of higher education from the taxpayer to the student in the May budget. This could include changes to Higher Education Loan Program (HELP) debt repayment arrangements such as higher interest rates, lower repayment thresholds and recovering debts from deceased estates.

Students and many universities would decry such cost shifting as they always have, but their arguments don’t stack up.

It is true that government funding of tertiary institutions in Australia is ranked low by international standards, yet the quality of our system is much more highly ranked – 10th out of 50 in fact in 2015. So it is not clear that relatively low government funding is holding us back.

‘Even if the student contributions were to double it would still be the best rate of return a young person is ever likely to get on an investment.’ from www.shutterstock.com

Why students should pay more

More importantly, a greater student contribution makes sense on grounds of equity, good resource allocation and quality of education.

A university degree increases lifetime earnings by about A$1 million on average, or 75% more than for non-graduates.

So even if the student contributions were to double it would still be the best rate of return a young person is ever likely to get on an investment.

The current 60% government contribution toward the cost of education is a subsidy from people who have never had the opportunity of a university education.

Next time you go into a shop to buy a pair of shoes, try explaining to the full-time shop assistant why they should pay more taxes for the lucrative investments of students from privileged backgrounds.

Yes, the shop assistant should pay something to account for the positive spillovers that higher education provides to other people in the workplace and community. But why a 60% taxpayer contribution? A cut to, say, 40% or 50% would surely be reasonable.

The current student contribution limits are price caps and, like other price caps, they tend to hurt the people they are intended to help: low socio-economic status (SES) students.

The reason low SES students get hurt is that universities restrict places in some courses by imposing high academic entry scores, and it is the low SES students who disproportionately miss out on places. They are less likely to finish Year 12 and are less likely to have a high ATAR score than high SES students.

Universities have an incentive to shift resources to fee-paying international and post-graduate courses and to restrict Commonwealth-supported places for domestic students in some courses at least.

We see this in courses where universities ration places using academic entry scores that are way above what is necessary to ensure that only academically prepared students get in.

Despite bonus schemes and alternative pathways, low SES students are still disproportionately excluded by high academic entry criteria.

Increasing the price caps (student contribution limits) would therefore increase supply of places in some courses, which would improve access to low SES students.

Would they pay? Yes. A nine-country study has shown that fees have little or no effect on the proportion of low SES students in universities – and not all those countries have the fee-HELP scheme that blunts the demand response to higher fees.

Also, nothing else we’ve done seems to have had much effect on the proportion of low SES students in Australian universities. This has barely shifted over the past 15 years despite the 2008 Bradley Review lifting of enrolment caps and a plethora of retention schemes targeted at low SES students.

Allowing the student contribution to increase would also improve the student experience. Smaller classes, better equipment, better support services and better academic staff can all improve quality but at higher cost. If these investments can be recouped through higher student contributions, they are more likely to go ahead.

We should not presume that all universities will always increase their student contributions to the limit for all courses.

Taxing universities

Fears of price gouging in response to partial fee deregulation are unwarranted.

First, competition will restrict price gouging to some extent and will challenge universities to pick their price point and tailor packages of tuition to that price.

The international student market, for example, is highly competitive and universities compete on price and product differentiation.

And if that doesn’t work, policies are available to restrict price gouging by, for example, shifting some of the cost of unpaid HELP debts back to the universities to encourage them to factor this in when setting their prices.

We could require universities to pay a percentage of total unpaid student debt arising from their courses. This would force universities to carefully consider the affordability of their fees.

The last-resort policy response to price gouging is to tax universities that abuse their monopoly power in the same way as we once, briefly, taxed mining companies on their excess profits.

This would be better than restricting places through price caps. Then at least students from disadvantaged backgrounds would not be turned away from prestige institutions by unnecessarily high academic entry standards.

There is no need for $100,000 university degrees. But some further price flexibility would be good for disadvantaged students and for the quality of the student experience across the board.