The idea of the government forgoing HECS payments for graduates who do things it wants seems to be growing in popularity. Maths and science graduates who become teachers will have half their HECS repayments refunded. Then there was the 2020 Summit proposal for a community corps funded by discounting HECS repayments. And in The Australian this morning a Law Council suggestion that the federal government pay all or part of law graduates’ HECS debts in return for agreeing to work in regional centres.
What this means, in effect, is that the Law Council wants the federal government to subsidise legal services in regional areas. But it is hard to see why legal services should be subsidised on a regional/city basis, rather than as at present through legal aid on an assessment of the client’s financial situation.
I’d have thought that there is a fairly simple market solution to this problem: if there are too few lawyers in country towns, then the price of legal services in those places will rise and attract more lawyers to them.
This HECS reduction proposal also has the same problem as all its equivalents. If we are going to spend money attracting people to particular occupations, activities or areas, why restrict the pool of potential applicants to those who happen to have a HECS debt? If the jobs are unattractive, surely we need to cast the net as widely as possible? Funding via HECS reductions may be slightly cheaper than direct wage subsidy, because the real value to taxpayers of the HECS debt is less than its face value, but the price for the broader program objective is that the potential applicants will be the least experienced people with the relevant qualifcation.
The Australian article also contains the usual complaint about how much HECS law graduates pay. Using census data, I did some calculations this week on the earnings premium of law graduates compared to other graduates. Or at least I tried to, but I hit a problem: more than half of male law graduates from their mid-30s to mid-50s ticked the highest census earnings category, of $2,000 a week or above, making it hard to know how much they actually earn. My conservative estimate is that the median law graduate woud have career earnings of $700,000 more than graduates generally.
These very strong earnings figures help explain why regional law firms may be having trouble recruiting. They also explain why any reduction in HECS for law would be highly regressive.
Andrew Norton 
One of the funny things about these comments is that they show how strong the effect of representativeness is (Kahneman would pleased I’m sure). People only ever argue for professions everyone has heard of and people think are important. There are of course heaps of professions in exactly the same boat — next time you need an audiologist (for example), there’s a shortage of them too, but you’d never know, and no-one will ever offer them HECS relief.
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Andrew, when will there be data on whether the “HECS rebate” for maths / science grads teaching appears to have any effect?
Are there similar schemes at the moment (nursing?) for which there is useful data? Here’s to evidence-based policy! (my primary policy approach if I’d been elected to the City of Sydney Council).
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Sacha – I seriously doubt this program will be evaluated, for the obvious reason. We might be able to work it out from the Graduate Destination Survey though. My prediction is that it will have no long-term effect, since few people would be swayed by a once-off few thousand dollars if money considerations are driving their choice of careers.
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even simpler solution – scrap restrictions on contingency fee arrangements? make it easier for convenyancers and paralegals to do legal work. how would the lawyers union like that?
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I agree with your points – a poorly considered policy option. However your argument about the simple market solution won’t necessarily hold.
Take doctors for example – if they move to a rural area they will earn over 5x what they earn in the city, but going bush doesn’t seem to be very price sensitive. By the time they have finished all their training, they have kids at school, partner employed in the city and a formed friendship group. Even for large pay increases the move isn’t considered value.
If lawyers have similar city based training I wonder if the same applies?
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Mitchell – I agree that living in the country is rarely an attractive option for young adults raised in the city. On the other hand for law, unlike medicine, there is not a shortage of new graduates with law degrees, so perhaps more would consider it to get at start in the profession if the salary improved relative to other jobs that were available to them. As Jason noted, there are other options as well.
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Based on my understanding of the facts, I have some sympathy for law graduates on the issue of how much HECS they are required to pay. In a market without HECS, one would expect that fees (ie the ‘price’) for legal education would fall somewhere between the maximum amount students are willing to pay (WTP) and the cost of the course, assuming these can be calculated in some way. Where exactly the price falls between these two extremes will depend on a range of factors, including the level of supply-side competition and the elasticity of demand. Based on oldish data I found on the web, it seems that law graduates pay a similar amount of HECS to dentistry, medical and vet science graduates. Yet all of these other courses cost a lot more than law and their graduates (at least medical and dental) would earn similar or more than law graduates on average, as well as face much lower levels of risk in terms of future earnings dispersion. So why should law graduates pay a larger share of the difference between their WTP and course cost than medical and dental graduates? If a policy decision is to be made to favour doctors over lawyers, it should be made explicitly. Moreover, if the bottleneck to supply of more health professionals is at the hospital/practical training level, then lower university prices will simply result in larger rents to medical and dental graduates.
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Rajat – At the U of M this year, the annual market price (ie, the fee charged to international students) for law is $27,300, and for medicine $53,250. So HECS students in either course receive massive discounts on the market price.
With price control, price setting is inevitably politicised and so we can argue about what criteria should be used. If the principle is ‘those with the highest earnings pay the highest amount’ the equivalence of law and medicine seems reasonable. Essentially, it is a form of progressive tax to partially fund university education.
If the principle has something to do with costs then as you point out the gap seems anomalous. The issue of course costs was mentioned when differential HECS was introduced. Costs were never a consideration before 1997, as everyone had paid the same amount, regardless of course.
In an essentially non-market system, it is not clear why the costs of particular courses must be relevant, and it is not clear that the stated principle was in fact applied, given the obvious anomalies: low cost courses like law in the highest fee band, and commerce in the middle band, while middle costing courses like nursing and performing arts went into the cheapest HECS band.
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Andrew, I take your point that both law and medicine HECS students receive a massive discount. But even in a non-market system, it is possible to design the system to promote more rather than less efficiency: I would suggest that – based on an application of Ramsey Pricing – economic efficiency requires equivalent percentage mark-ups over (or under) course costs, assuming identical demand for courses (for which future expected income could act as a loose proxy). Equivalent % mark-ups (or % discounts) would help ensure the right fee relativities between courses, so that even if ‘too many’ students were studying overall (due to the massive across-the-board discounts), at least the choice between medicine and law, etc, would not be distorted. I suspect that the overseas (unregulated) fee levels provide a good indication for how the HECS fee relativities should look.
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..having said that, I acknowledge that the inefficiency of non-equivalent mark-ups will be fairly limited where the total number of places for each course are fixed.
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Just as a side note to add to the discussion. There is a consistent trend these days for Medicine to be offered at the graduate level instead of the undergraduate level. This is currently the case with Deakin and I am currently completing my undergraduate course in the hopes to *fingers crossed* enter medicine at the year starting 2010. This means that I would have already accumulated a HECS debt for a 3 year degree before even beginning my Bachelor of Medicine. Although HECS debt does not feel like “real debt” to an undergraduate it does concern me and I know of at least one other student who has chosen not to apply for medicine due to the accumulated HECS.
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HECS is a great method of encouraging some personal responsibility in education decisions while not acting as a barrier to entry. It shouldn’t (and isn’t, as Andrew notes) be based on course costs as that could skew decision making for high teaching cost low future remuneration courses.
Jarryd’s point that someone decided not to do medicine because of HECS costs suggests some bizarre reasoning. In this situation HECS is an interest free loan to improve your qualifications to enter a profession that is highly paid with no unemployment. If you are swayed by the HECS cost you have to question how much you are really interested in medicine.
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Mitchell – Perhaps, but the opportunity cost of doing medicine rises if the student already has a degree that could get him/her employment. So that, plus the direct and indirect costs of the previous degree, means that the total return on investment in human capital is clearly heading downwards compared to what would be the case if the person had entered medicine directly from school. The potential income from medical practice is high, so it probably still makes sense. There is room for more than one model of medical education in the market, but the economics of direct-entry medicine look attractive to me.
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Andrew – in reality, the first degree that the vast majority of postgraduate medical students do is Bachelor of Medical Science (3 years), the main vocation this prepares students for is to enter a medical degree (4 years). I think the postgraduate model has been encouraged by the universities who now have 7 years of fee income rather than 5 or 6 for an undergraduate course. The opportunity cost is the direct and indirect costs for the extra two years. So I agree direct-entry is superior economically, although not by as big a margin as you may be suggesting.
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