Testing the waters on uni fees

Basic economics tells us that students won’t just pay any price for a university degree. If market prices become too high, a case can be made, in theory at least, for public policy action to lower the cost to students, to ensure that the labour market has sufficient graduates or to target particular groups of people.

But how do we tell when we have reached such a point? Professor Simon Marginson seems to think that the theory above is sufficient for us to know. An article in this morning’s Age reports that the proportion of university students from a low socioeconomic background hasn’t changed in 15 years, despite two significant price hikes, but Marginson says:

there is a problem with extrapolating the results — if you keep lifting costs, there is likely to be a lag factor before you see evidence that parts of the community are being excluded. “It’s a pretty clumsy way to test the waters.”

In my view, theory can only take us so far in answering what is essentially an empirical question: at what prices will student (or prospective student) behaviour start changing in ways that are, from a public policy perspective, undesirable? We can be confident that we are not there yet. Total applications have dropped since their most recent peak in 2003, but demand still exceeds supply, and by very large margins in some courses at some universities. Demand would not exceed supply if prices were too high.

We are also observing strong enrolment growth in the full-fee sector, where costs to students are usually significantly higher than in the publicly-subsidised, price-controlled places that most Australian undergraduates occupy. International students, most of whom come from countries with per capita income well below Australia’s, appear to believe that their fees are value for money. Are we to believe that Australian students are much more price sensitive to higher education than Chinese or Indian students?

Well, perhaps not all Australian students. Maybe it is just, as Professor Marginson suggests, ‘parts of the community’. Professor Bruce Chapman notes that university participation direct from school is dropping, particularly among country students. But this is far more likely to be due to alternative employment opportunities and maximising Youth Allowance eligibility than tuition costs, which can of course be deferred. The prolonged drought may also be causing rural rural student numbers to drop, as families cannot afford to send them away to study or need them to contribute to family income by working (this DEST indicator may not be reliable – we need to know whether there has been a decline in the youth population in the areas classified as ‘rural’).

And why would there be a lag? The history of HECS increases suggests the reverse; that there is a dip in total applications when cost increases are announced, but then recover once people realise that the sums still add up, that the graduate earnings premium means that courses are still bargains, particularly for school leavers who can gain benefits for the 40 or more years of their working lives. Admittedly, there is a lag in the national statistics becoming available, but universities can monitor the data constantly.

One of the many problems with the centrally-controlled higher education system is that experiments in student behaviour are system-wide. Markets by contrast constantly conduct thousands of experiments, seeing how students will respond to various prices for the courses on offer. If the price is too high, universities have quick feedback (empty places, lower revenue) and a strong incentive to think again.

Policymakers could make far better decisions if they were able to use this information generated in markets, responding to real problems rather than (probably) spending hundreds of millions of dollars to no educational or equity effect. It would certainly be a better source of information than the intuitions behind much public commentary on higher education.

15 thoughts on “Testing the waters on uni fees

  1. You flagged this before in an earlier thread, and now I agree that there probably would not be a significant drop in enrolment numbers, but I’d be interested to see the effects post-graduation of a substantial fee increase. If a significant proportion of the community is walking around with an extra $50 000 in debt which prior generations did not have, this will serve as a strong price signal with employment choices.
    I’d be particularly interested to see how the relatively lowly paid but high prestige positions (compared to their private sector counterparts), in the community sector, human rights, even some areas of public policy and advocacy, would fare in attracting quality grads with this sort of price signal hanging over their heads.

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  2. Matt – doesn’t that just say that the “lowly paid but prestigious positions” should be paid more? If these jobs are important, we should pay for them.

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  3. Sure it does, but you try telling that to community organisations already running on a shoestring budget, and then faced with accusations that all their donations are going to high paid whitefella jobs, or something similar. In other words, I don’t think it’s going to happen, or could happen.

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  4. It might. But does that mean that a minister’s job is overvalued because there’s an uproar every time the salary for that goes up? There are certain jobs within the community that are understood to attract a lower salary because taking them on is seen as a civic duty, a ‘from each according to their ability’ kind of attitude which I believe still exists today.
    My broader point was that large student debts could have a ‘chilling effect’, on the kinds of work that people perform, much in the same way that the US healthcare system disciplines the labour market over there.

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  5. Or to use a better example, the way that family obligations/ mortgage currently discipline job choices towards being able to service that debt and provide for your family.

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  6. Matt,

    I think a better example along the line of reasoning you are using is the 50% of new New Zealand doctors moving to Australia to pay off their students debts (or at least that is what I have seen has been claimed — it would be interesting to know what percentage would move anyway). I’m personally not convinced of the argument in Australia at least, since with HECS style systems you don’t have to pay the debt off at all until you reach a certain amount and the debt is not indexed at proper loan rates.

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  7. Conrad,
    I agree that HECS does ameliorate this somewhat, but I wonder whether income contingent loans could survive such a massive expansion in its current form. If around 25% of HECS debt isn’t repaid now, what’s that going to balloon to in a post-liberalisation environment? Could the government tolerate a situation like this?

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  8. Matt – The estimate is more like 12% or 13% of the amount lent won’t be recovered. The higher figure, most recently 19%, is because of the accumulating effect of previous doubtful but not written off debt. For example, most people who took out HECS loans in the scheme’s early years have repaid in full, eliminating their loans from the total outstanding. However, those who have not repaid still have their debt sitting on the books, along with the debt of current and recent students who will eventually repay. It means that the doubtful debt is a disproportionate share of the debt owing at any one time.

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  9. There are certain jobs within the community that are understood to attract a lower salary because taking them on is seen as a civic duty

    I tend to see this as a mechanism to underpay people for their work. Also should point out these jobs tend to be in the government sector, which isn’t subject to the same market forces (if at all) as most other jobs. As to your broader comment, that is an argument often made. But it seems to me that those students who can’t work out that HECS is a fantastic deal shouldn’t be at university in the first place.

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  10. Matt,

    that 25% of people don’t repay HECS is an argument for your suggestion, not against. It shows that (a) people probably don’t change their job choices a great extent based on their HECS debt; and (b) people that do jobs in Australia that pay poorly never have to pay this debt back. Thus they get their education for free (although of course some proportion of these will be people that work OS, don’t work etc.)
    I agree with SD about this. The idea that some jobs are civic minded or not seems to me government propaganda designed to try and under pay people, and that propaganda generally doesn’t work in the long term. The obvious example with the obvious consequences are teachers.

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  11. Conrad & Sinclair,
    It may be propaganda, but it’s been working. Community legal centres, legal aid, etc, are still competing with the private sector, if not for the very top students, then the very next rung down. (I apologise for my law focus – I’m seeing a lot of my friends go through grad recruitment at the moment). I guess the bigger question is what calibre of a grad do you need to perform these lower paying jobs? How far behind on the pay scale do you start losing your ability to attract capable employees? I guess that’s an empirical question.

    I agree with Conrad that if we keep HECS in its current form, then this isn’t really going to be a problem – it effectively becomes a government subsidy to those who take lower paying jobs. But I don’t know how sustainable that is once the debts really start racking up. Andrew wrote an interesting piece about this last year, where he suggests revamping the loans system, and making targeted loans based on ability to repay. I can just picture the DEST loans officer now, “how many times in the past 2 weeks have you thought of running off and teaching in a Burmese refugee camp?”

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  12. Matt – ‘Civic duty’ is perhaps part of it, but I doubt that this is burdensome civic duty. People do these jobs partly because they feel it is more meaningful or interesting than other options open to them. In the circles human rights/legal aid lawywers move in, this is probably highly-praised work. While financial rewards are relevant to career decision making, they are part of a range of other considerations.

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  13. Matt: I guess it depends whether you see the glass as half full or half empty. At least until recently (I’m not sure what this years cut-off score is) you could fail high school and still become a primary school teacher. I therefore see it is as half empty. It also depends on what you think is important, and it is never obvious — I think that Douglas Adams realized this with his line about the person that cleans the headsets of public telephones.

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  14. Andrew, I agree with your analysis – it follows then that when debt levels are changed, the importance of financial rewards in career decision making changes with it.

    On this topic, I heard an interesting story from my housemate today, which slightly changes my view on this. She works at a non-profit organisation, and as such, her salary package is structured very differently. As it is registered as a non-profit, it has a fringe benefits tax exemption, so they pay half her salary in the form of expense payments. The upshot of this is that although her taxable income is lower, her employer can offer her a comparable amount of takehome pay, at a lower cost to it.
    The way they explained it to her is that a non-profit would in normal circumstances not be able to compete in the labour market, but this tax subsidy allows them to get staff for ‘less’. I hadn’t heard of this before, and I imagine it levels out the playing field a bit more.

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