Providing me with my second page one dial-a-quote this week, the SMH this morning leads with a story titled ‘Student debts out of control’. Drawing on an article by Bruce Chapman in this week’s Campus Review, it says:
GRADUATES from private colleges and universities are costing taxpayers more than those from public universities, and new ministers of religion present one of the greatest burdens.
Though for reasons I will explain this is not correct, Chapman’s original article does make a valid point. This is that under the FEE-HELP loan scheme for full-fee students there are implicit subsidies because student debt is only indexed to inflation, meaning that the taxpayer bears most of the real cost of lending students money to pay their tuition fees. (Aspects of this issue were discussed on this blog last October.)
Undergraduate FEE-HELP students do pay some real rate of interest, because they have to pay a 20% surcharge on any amount they borrow (eg, if they borrow a tuition fee of $10,000, they will owe the government $12,000). If these students repay quickly, that could work out at quite a high real rate of interest. But if they borrow a large sum that takes many years to pay back then their real rate of interest will be low, and they will effectively receive a subsidy from taxpayers.
Chapman uses the example of what he calls a ‘private sector bachelor of law’ student with a debt of $92,000. As such a student can borrow a maximum of $81,600 this year, some of that must be the surcharge. He calculates an implicit subsidy of between 20% and 30% on average. No doubt using much less sophisticated statistical techniques, indeed the Excel equivalent of back-of-the-envelope, I tried to replicate this finding.
Assuming an original tuition fee of $80,000 (the original, now inflation adjusted, maximum) incurred over four years and using an income derived from a lawyer’s salary survey (assumption: a mid-range salary at a mid-tier firm) and a cost to taxpayers of 4% p.a. above inflation I arrived at a similar conclusion to Chapman, with an implicit subsidy of about 24% of the original cost, or about $19,000.
Because law is a low tuition subsidy course, a Commonwealth-supported place with price control would be a cheaper option for taxpayers. Including the tuition subsidy, for a graduate with the same job as in the above example, I estimate a cost to taxpayers of about $15,700. Though Chapman finds low implicit interest subsidies for Commonwealth-supported students, I find (in % terms) that they are about the same in this example, because these students do not contribute a surcharge (this is I think where I differ with Chapman – though HECS students who defer do pay a surcharge and from their perspective have a real rate of interest, the Commonwealth pays this money to the universities. Consequently, a HECS student is making no contribution to covering the cost of the implicit interest subsidy.)
These issues aside, it is a mistake to say that the costs of FEE-HELP are primarily incurred by private colleges and universities. Though the figures have to be pieced together from several sources, in 2006 full-fee students at public universities borrowed $309 million, and at private colleges and universities students borrowed $123 million. The average amounts borrowed per student were quite similar – $7949 at public universities, and $8633 at non-public colleges and universities (I have not extracted the TAFEs etc that effectively operate as private providers in the higher education sector).
And apart from Bond University, it is likely to be the public universities that are enrolling FEE-HELP students in the long-haul and expensive degrees that generate the high subsidies mentioned above. It is the Group of Eight universities who both dominate the full-fee undergraduate market and charge very high fees for their undergraduate courses. The non-profit private institutions tend to be quite cheap, and even the for-profits charge much less than the Group of Eight.
While I disagree with some of Chapman’s analysis, his basic point is a sound one: regardless of who triggers these subsidies they are high. We should look carefully at whether they are warranted, and if not how to reduce them. Chapman has favoured price control, though he does not mention it in this piece. I oppose price control, but there seems to be a prima facie case for increasing the debt surcharge.