The government’s full-fee student policy

The government’s policy on full-fee university students has received a lot of coverage this week, leading to some confusion on both sides of politics. First Kevin Rudd attracted headlines for showing some hesitation on Labor’s consistent opposition to them, which ended with more clarity than we have had in the decade that this has been their policy – full-fee undergraduate places will be phased out rather than abolished immediately.

On the Coalition side, they have been trying to deal with the possible scenario I outlined on Budget night, of universities handing back Commonwealth-supported places through the new flexibility proposed for their funding agreements with the government and replacing them with full-fee places. The government is backing away from this possibility, including this rather imaginative story in today’s Age suggesting that it threatens the University of Melbourne’s long-term plans.

That the government has gotten itself into this debate shows that despite the symbolic shrewdness of the Higher Education Endowment Fund it remains much better at Budget politics than at higher education politics. Though the 35% cap on full-fee students is arbitrary and silly, it also isn’t much of a practical problem. It affects a handful of courses only, since most people can get HECS places for the courses they want. Politically, it isn’t worth re-opening this issue to gain a minor policy advantage.

Indeed, the government could have abolished the full-fee undergraduate political problem entirely. If it had gone for a voucher system instead of the added bureaucratic flexibilty it chose instead, there would have been no need for the full-fee places. Universities could simply have offered whatever number of places they wanted to in each course, instead of being restrained by their funding agreements.

It’s true that this would have triggered some protest from those universities that use the full-fee places to supplement their income – most (though not all) receive significantly more for a full-fee place than a Commonwealth-supported place. But given the generally positive overall Budget outcome for those universities the criticism would have been muted, and this could have played into any longer-term strategy for abolishing price control on Commonwealth-supported places by encouraging universities to call more loudly for the right to set their own fees.

They would do this because of the need to maintain a certain average level of income per student. To do this universities charge a lot to some students (the full-fee payers, mostly international but also some domestic) and modest amounts to Australian students in Commonwealth-supported places. It would be better if fees clustered more closely around the mean. For Australian students, the current price discrimination is arbitrary – trivial differences in Year 12 scores can translate into massive differences in fees. It also limits the way universities can act in the international student market, since they have to build into their pricing the need to cross-subsidise domestic students.

It’s pretty clear that universities are going to hit price resistance from current full-fee payers before students in Commonwealth-supported places. So the pressure has to be placed on price control for government-subsidised students. But this is the toughest thing to do politically, so the government needs to be confident that it will get strong support if it makes this reform. And one way to get that support is for Vice-Chancellors to see change as necessary.

6 thoughts on “The government’s full-fee student policy

  1. I agree with the idea of a voucher system and deregulated place numbers for each course. But I don’t see how the current regime affects universities’ behaviour in relation to overseas students. Presumably, universities currently do and would continue to charge o/s students what the market will bear (subject to meeting the marginal costs of tuition) and would do this regardless of how much they are getting for domestic students. One impact may be that a voucher system would reduce the value of becoming a PR prior to commencing university.

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  2. Rajat – They could make a profit at anything over marginal cost (if they knew what that was, which I doubt in most cases), but they need to do better than that to get sufficient cross-subsidies.

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  3. What I mean is that with or without the loss on domestic students, universities still have an incentive to find the price-qualtity trade-off for o/s students that maximises their profits from o/s students. Why would they willingly sacrifice rents on o/s students even if they weren’t making a loss on domestic students?

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  4. “Why would they willingly sacrifice rents on o/s students even if they weren’t making a loss on domestic students?”

    Because they are not profit-maximising. This is one reason thinking about the economics of higher education is hard – universities have multiple missions and it is not always obvious which objectives will guide behaviour.

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  5. Any comments about pricing and uptake between utilitarian and productives courses that need costly laboratories (engineers, science teachers) but offer a limited salary at the end, and those popular courses that cost next to nothing to run, but only produce qualifications for tertiary activities (management).
    (sl. off topic) Thanks for your comments on the DeadRoo (my comments playing up – but this lefty felt a rational righty deserves credit.)

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