Last night I went to the Melbourne launch of What If?, a new book edited by Peta Seaton in which 30 contributors set out their answers to various what if scenarios, from privatising the school curriculum to recall elections to abolishing subsidies for the car industry. I asked what if universities could set their own fees, copied in below.
What if universities could set their own fees?
Free university education, a fondly-remembered Whitlam government reform, lasted just fifteen years. But one assumption survives from the free education era: that the federal government should set prices for university courses. The price cap is no longer zero, but there is still a price cap. This ghost of Gough haunts higher education policy.
Like a ghost, the price cap is good at hiding from scrutiny. Abolishing it is a what if? rarely considered except to be dismissed. But price control contradicts other assumptions and goals of higher education policy, and needs re-thinking.
For example, the Rudd government says Australia needs to invest more in higher education. Yet its actual policy, via price control, is to prohibit more investment in higher education. Students can spend as much as they like on almost anything except one crucially important asset: their initial post-secondary human capital. Unless price caps generate optimal spending, for some students price control means mandated under-investment in education.
If existing price caps are at optimal levels it is purely by coincidence. Course charges are not set by economists after careful analysis of student aptitudes and abilities, university costs, and potential returns on investment. Indeed, they are not set based on any recent or careful analysis at all. Their origins are 1997 back-of-the-envelope calculations of how large an increase the government could get away with given likely graduate earnings, plus a 2005 25% increase—a number picked out of the air as a Senate compromise.
Even by the standards of price control’s sorry history this is a poor effort. Recognising this, the current government has at least promised a review. But the review has an impossible task. It is not possible for one price to take account of students’ varying needs and preferences. Students differ in their learning styles; some do best if taught in a small class where they talk with and ask question of teachers and classmates, while others are happy to share a lecture theatre with several hundred others or study online. But in an industry where the biggest cost is usually staff salaries, these differences in learning styles have huge price implications. Where the price is kept low, as it has been in Australian public universities, the small class option is not available.
If we allowed tuition fees to be set in the market, one of the first things we are likely to see is smaller classes at some institutions. We already observe them in the rapidly growing private higher education sector in Australia. Since a HECS-like income-contingent loan called FEE-HELP was introduced in 2005, under which graduates repay their tuition fees via the tax system, private institutions with small classes such as Bond University have grown rapidly. In the United States, where university fees are unregulated or less regulated than here, we also see that there is a strong market for institutions with smaller classes.
Other aspects of educational quality would also be affected if tuition fees were deregulated. Particularly in vocationally-oriented courses, academic salaries are typically modest compared to what the same people could earn in the relevant professions. Universities regularly struggle to fill vacancies with suitably qualified people. Some studies predict an academic workforce crisis as current staff retire without enough younger academics to take their places.
Under price control, this problem will be hard to solve except by employing lower-quality staff who cannot get better salary packages elsewhere. Without price control, universities could adjust by paying higher salaries to secure the necessary staff and passing on the cost through price increases. As in other professional service industries, some education clients would be more willing to pay extra than others, and this would be reflected in varying fees. Students would make their own assessments about whether or not the extra investment was worthwhile.
University study is often about more than just the course. For many young people, their undergraduate years are an important life experience, part of a broader transition from adolescence to full adulthood. A campus that provides opportunities for clubs, sport, theatre, student politics and for informal socialising is, for them, likely to be something worth a premium price. For part-time students without the time to take advantage of these opportunities, or mature-age students without any need for late-adolescent self-creation, these higher education optional extras are unnecessary.
Until 2006, this aspect of university pricing was at most lightly regulated, with widely differing fees between campuses. But in a Whitlamesque moment of zero-level price control, the Howard government banned amenities fees if bundled with tuition fees. Though the Rudd government hopes to bring amenities fees back, it wants a price cap of $250 a year —much less than many students previously paid. Rather than letting universities and students decide for themselves on services and prices, the government wants to chose for them a mid-point between high and low preference for additional services.
Abolishing price control would also help entrepreneurship, by making feasible educational options that are difficult or impossible within the funding constraints created by price caps. For some institutions, they need look no further than their own history for entrepreneurial possibilities. The benefits of specialised institutions, of single-minded staff and student focus on one or a small number of fields, have largely been lost in the Australian public sector. Only one of the pre-1989 small institutions survives in the main public funding system, the Batchelor Institute of Indigenous Education, kept open with special federal subsidies. Low per student funding rates under price control have driven a need to build economies of scale that other small institutions could not achieve.
Yet small and specialised is often what students want. In the United States, surveys of undergraduate applicants indicate that many prefer smaller colleges where they are not lost in the crowd. Especially in the American private sector, numerous colleges with fewer than 2,000 students meet this demand. In the Australian private higher education sector we also see a pattern of small and specialised institutions. Many of their students could attend public universities, but instead choose to pay typically much higher fees to go somewhere that offers what they want in their higher education.
If universities could set their own fees many ideas about how to teach and learn would suddenly become possible, and no longer be the financial fantasies they are now. Though Australia can never match the fabulous wealth of the American Ivy League universities, we can start to offer much better and more diverse higher education options than we do today.
But debate over fees is paralysed by a very different what if? scenario. Many fear that fees mean ‘social exclusion’, with the poor priced out of university. If everyone had to pay their fees up-front that would indeed be a risk. The economist Milton Friedman—not known for his left-wing sympathies—pointed out half a century ago that there was a problem in financing higher education. The young adult target market typically doesn’t have tens of thousands of dollars to spare, and banks are reluctant to lend money for an intangible investment that cannot be repossessed.
To solve this problem Friedman suggested an idea very similar to what Australia did in 1989 when it introduced HECS, later expanded into the broader HELP (Higher Education Loan Programme) scheme. The government would lend students money to pay their tuition fees, and recover it from their future earnings above a certain level. These income-contingent loans schemes assume that the main obstacles to higher education participation are cash flow and risk, rather than prices. They solve the cash flow problem by lending money, and solve the risk problem by not requiring loan repayments from people on low incomes.
This theory of higher education access does not convince everyone. Explicitly or implicitly, proponents of the negative fees what if? assume that young working class people are prone to irrational debt aversion or other financial phobias. The experience of HECS shows otherwise. Substantial increases in HECS charges did not dent low socioeconomic enrolments. A study that tracked young people’s progress through school to post-school outcomes found that social background made no difference to who went to university. For a given year 12 result, rates of transition to university were the same across all socioeconomic groups.
If universities could set their own fees we are likely to see more of the same. The same intelligence and future-orientation that leads working class young people to good year 12 results would lead them to sound judgments on the value of higher education investment. Motivated students with high exam scores are likely to think the more prestigious and expensive options worthwhile. Other students might decide that cheaper more practically-orientated courses will serve them best. There should be advisers to help them choose, but not governments second-guessing their interests by closing off opportunities.
Ironically, it is not working class students but opponents of letting universities set their own fees who are gripped by financial phobias. Like Oscar Wilde’s cynic, the fee controllers can see price but not value. They won’t let others decide how much a course might be worth, or what other educational possibilities are worth exploring. They won’t ask what if things were different? And unless we ask that question, we’ll never have a great university system.
Andrew Norton is a Research Fellow at the Centre for Independent Studies