What If?

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

23 thoughts on “What If?

  1. This is a very good essay. Suppose, however, that the University of Melbourne decides to do a Harvard, enrol 2000 students per year and charge them $50,000 per year. (I’m not saying they would if they could, just suppose. Melbourne has a good enough brand name for such a strategy to be feasible). I doubt that any government is going to stump up loans for that amount, so only the children of the rich get to go to Melbourne. Do you reckon this would be a problem, or would be like the market for 7 series BMWs? If you can afford it, fine; if you can’t, tough.


  2. S of R – One of the ideas I want to examine in the student loan research I am doing now is whether we should keep the current no-questions-asked HELP system up to a cap, and after that only lend on at least a quasi-commercial basis, ie assessing prospects of repayment and charging interest sufficient to cover government costs. In such a scheme, students with forecast sufficient future income streams could borrow.

    But if any uni in Australia charged that much per year for a standard arts or commerce degree I would say that clearly they are making a very generous contribution to that uni’s research budget. On the assumption that research has some public good element, we should not stop rich people making such a contribution.


  3. Andrew, like you I’m perfectly happy for rich people to contribute to research, the more the better. I’m less happy about the rich being taught by the (relatively) high standard academics at Melbourne, and having access to the high standard labs and libraries, while the poor have to make do with what’s on offer at the University of Moe, even if only costs them SFA.


  4. I suspect that as in many cases (cars, appliances, etc) the rich pay massively more for a functionally similar product plus a few bells and whistles and a bit of prestige. I’m not sure why education should be seen as less acceptable than this; indeed as so far as I can tell high fee income at unis is currently used for research and for sustaining lower-fee students. From that perspective, from your implicit egalitarian/public good perspective it should be more acceptable.


  5. “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.”

    I think this view of low SES debt aversion comes from listening to what people say, rather than observing what they do. Lots of working class kids bag uni study as too expensive and a waste of money, but they weren’t actually ever going to study there because they aren’t academically inclined. The expense of HECS is a convenient cover-up of “I didn’t get into what I wanted” or “I’m not interested in that style of study” or “I’d rather start working and earning now, not in 3-4 years”.

    Plenty of kids from low income backgrounds go to uni, get HECS debts, graduate and pay them off pretty quick.

    One issue is that many people don’t understand debt well and assume that all debt is bad. HECS is really an interest free loan since it is tied to CPI. Others assume that all education should be free, since government provides it at primary and secondary level.


  6. Andrew, you are assuming that a brand name university is not actually much better than a non-brand name university and that the rich choose Melbourne for the same reason they choose a Miele dishwasher. I’m not so sure about that. This discussion has been had before and I don’t intend to reopen it but I think that, on average (acknowledging there is plenty of variation around the average) a graduate from a brand name uni gets a better education and has better immediate post uni job prospects.


  7. S of R – As noted in previous posts, we have no Australian empirical evidence on long-term earnings according to university, though there was this interesting finding on starting salaries, which found no sandstone premium. I recall one US study that found SAT scores were more predictive of future earnings than university status.

    What gets overlooked here is that people are not just buying a ‘human capital’ asset. There is a significant consumption component (university is fun for many students) and personal development and status considerations that students perceive as valuable, but which have no exchange value in the labour market.

    If people want to buy this stuff I see not issue with it. But there is no case for public subsidy, or any egalitarian worries different from the fact that rich people live in nicer houses and get to go on more overseas holidays.


  8. For those who are concerned about top universities only serving wealthy students, this is not a real concern because in an competitive education market it is very important for unis to have the top students. If they reject everyone who cannot pay $50k per year, they will end up with a very mediocre student population, and their reputation will quickly fall.
    The top unis in the US have long recognised this, and most have policies where they provide scholarships and loans based on the parents’ ability to pay (and they have “need blind” admissions policies, so ability to pay is not considered when accepting students.) I came from a perfectly comfortable middle class family, but Stanford gave me about a 50% discount on tuition and expenses, and 25% in loans. This has become even more generous in recent years, with students from families earning less than $100k paying no tuition whatsoever.
    This is not out of benevolence on their part, but is done out of fierce competition between the top unis for their spot in the rankings. So if the top universities were to “do a Harvard”, the lowest socio-economic groups would end up paying less!


  9. Bruce – Though the US system only works for historical reasons that will be very hard to replicate here, in that very large endowments built up over long periods of time and supplemented with generous alumni donations finance needs blind admission. In Australia, unis largely rely on income ‘earned’ each year from fees and subsidies, with alumni donations a trivial part of annual revenues.

    I agree with you that prestige maximisation is a useful framework for understanding the behaviour of sandstone universities. On that basis, I would predict that annual $50K standard degrees are extremely unlikely as smart students would sensibly refuse to pay. In the local market, prestige depends as much on the quality of the intake as research performance.


  10. Bruce

    Actually Harvard “did a Princeton.” Princeton was the first mover. Any person who would pay $50,000 a year for an Australian degree, should be sent to the loony bin.

    One way the top universities have found around the ban on locals paying full-fees for undergrad courses is to rebadge their former LLBs as JDs (Juris Doctor). A JD is the US equivalent of an LLB – that is, the entry level degree needed to become a lawyer.

    It’s such a scandal. The truly ethically vacant university sector have spent a fortune marketing this “brand new,” “US Style!” “Masters Level!” “Internationally Recognized!” degree, but it is now a post-graduate MASTERS degree!

    WHY have the truly beyond-the-pale university administrators committed this brazen fraud? Because the universities ARE allowed to choose locals full-fees for MASTERS and other postgrad degrees.

    These JD degrees are identical to the co-existent undergrad LLBs. Except the universities can now charge full fees. The going rate? $25-30,000 PER YEAR. That is, $90,000 for an undergrad Australian law degree.

    Personally, I think the people who have concocted this scam should be jailed.


  11. Peter, there is obviously a market for $30K a year for degrees, so it’s not that big a step to think there will be one for $50K a year degrees. It might seem like a lot of money, but if it gets you a job at Macquarie Bank …


  12. I think most of the JDs let you complete in two years, which substantially reduces their effective total cost (ie direct costs plus opportunity costs). In a limited comparison of international student fees for LLBs and JDs, the latter incurred a 7% to 30% premium, with fees ranging from $15K to $31K.


  13. No. You can if you take a full course load over both summers, but that is still 6 semesters; and that is what you pay for.


  14. SOTR

    In Australia, if you can only get a full fee place, that signals you are at the bottom of the intake’s quality. The better students get HECs places. So, there would be an inverse link between paying full fees and getting a job at Macquarie.

    The current JD arrangement is that the unis are allowed to transfer the HECS allocation from their old LLB degrees. On top of that they are allowed to admit foreign full fee students, and a quota of local full fee students. I’ve got some rough figures [from U.Melb, I think]

    Local HECS places: 100
    Foreign Full Fees: 40
    Local Full Fees: 40 (which they plan to progressively raise)

    I am neutral on the whole fee paying issue. My bitch here is the sheer lying and grasping administrators. They really make my skin crawl.


  15. U of M has a special deal – so far as I know, it is the only uni with CSP JDs.

    Employers don’t know your fee paying status, and in any case it is much lower value information than your actual grades in the course. In most JD programs, everyone will pay full fees.

    Comment 13 – I know you pay the same tuition, it is the opportunity cost that is different. If you are headed for Macquarie (admittedly, not a typical outcome for JD students) you can pull in $90K in your first year, so spending another year at uni is very expensive in opportunity cost terms.


  16. No, there are about 10 universities offering JDs now, Even Usyd starts next year. Just off the top off my head there’s ANU, Monash, UNSW started last year, UNE, Bond.

    I know that Sydney, UNSW, and ANU all have mostly CSP places in their first year of operation, which they of course intended to reverse quick smart. For example, already only 50% of Melbourne’s local JD students get CPS. The other 50% have to pay $90,000 for the degree. Plus ALL international students have to pay $90,000. I’m not sure what the local/international split is. Do you?

    Monash is still offering both the LLB, as well as the JD. Monash must be the only university in the country that still offers a straight Law degree, straight of school. Every other university only offers combined Law. Anyway, Monash’s local JD students also have to pony up nearly 90 ground, if they don’t ‘win’ a CPS place.

    Sydney’s JD starts next year (that is, like ANU, UNSW, and a few others, they no longer offer the graduate LLB degree). But, it has hit a real snag. The university’s wider regulations do not allow Masters degrees to be awarded with honours. Now, everybody knows that nothing compares to the Law degree for obsession with a student’s rankings, and the sweat for an Honours degree, which is awarded on the basis of the aggregate of every subject over the 3 years.

    Sydney Law School is desperate for a way around this. So far, the best they’ve come up with is listing every student’s rank.


  17. Peter – I checked on UNSW and ANU and was interested to see that you are right on this, because postgraduate CSPs are controlled from Canberra and until recently there were very few outside teaching and health. In the funding agreements there are about 1400 p/g places allocated to cluster 1, which has commerce and law, of which Melbourne has 500. So that leaves 900 places for all p/g courses in the rest of Australia for all law and commerce students. The government hasn’t said how it will treat p/g CSPs in the new demand driven system from 2012, so it will be interesting to see what approach they take to proliferating JDs.

    I’ve long been interested in the idea of starting everyone on full fees and then converting them to CSPs – this gets average revenue per student up to feasible levels without the current unfortunate practice of charging very similar students very different fees.


  18. “Students can spend as much as they like on almost anything except one crucially important asset: their initial post-secondary human capital.”
    Is there some ban on hiring private tutors or buying books? Do employees learn nothing on the job?
    There are lots of ways to learn. What universities offer that’s special is an institutional pathway to certain careers like the public service, teaching, law, medicine and accounting. This is what many students and their parents value so highly.
    Teaching and learning are only part of what a university is about. The reason egalitarians worry about fees is because they see it as a way for wealthy families to buy status and income streams for their children and keep others out.
    The most sensitive area is access to the professions. In many fields of business there are no real limits to the number of people who can succeed. Those who create value for their customers can increase their income without diminishing the chances of others. Amost everyone wins when you create a better product.
    But in fields like medicine this isn’t always true. How many students would be happy to pay for a medicine degree if they knew they weren’t going to end up with a Medicare provider number?


  19. Don – True, people can buy books and hire tutors (though there does not seem to be much of an industry providing this service, in contrast to schools). But if you want something like small classes, better facilities, or proper tutoring bundled into the degree the current system provides major obstacles. The ‘under-investment’ Labor politicians complain about is almost entirely due to their price control policies, since we have observed very little price resistance when fees have increased.

    Students don’t buy on-the-job learning – though for students with generalist degrees much of their human capital will be what they learn during employment (eg I learnt about higher education at work). Though they may implicitly pay in some contexts, eg taking a low paying job ‘for the experience’.


  20. The comparison with schools is interesting.
    In high school you’ll find some parents paying for both private schooling and after school tutoring. But in universities it’s less common to find students or parents paying for private tutors.
    I suspect the reason for the difference is the rationing of places in university courses — particularly courses that are gateways to high status careers.
    With schooling final marks matter a great deal. Students compete against each other for places in university courses. Unless you outperform your competitors you miss out. Your final mark matters a lot.
    But once accepted into a university course, a student’s marks don’t need to better than everyone else’s — often they just need to be good enough for a pass. Unless you want a postgraduate scholarship, there’s not the same degree of competition.
    Of course the most sought after employers may value high marks, but — unlike the bureaucratic process of university entrance — it’s far from being the only thing they care about.
    As a result, students aren’t as intensely interested in their learning performance at university. They will only invest in private tutoring if they think they are at risk of failing.


  21. Don – I think that is all plausible. Other possible factors:
    1) School curriculum is more standardised and there is a much larger pool of potential clients;
    2) There is a smaller pool of people with the skills needed to tutor at university level, and many of them will have better career options. As a result, one on one uni tutoring tends to be informal, non-career work, eg older students making a bit of extra cash helping younger students.


  22. “starting everyone on full fees and then converting them to CSPs”

    So what you would pay for a JD at Melbourne? $15K per year or thereabouts? That seems reasonable.


  23. “any person who would pay $50,000 a year for an Australian degree, should be sent to the loony bin.”
    I’d pay that for mine if it was the only choice — and if I listened to the average moron, then I would find out that I got mine in a supposedly useless area from an average university. I think my degree has paid off many many times over, and I still use some of the skills I learnt in it. I don’t think I’m the only one from my course either — most people I know have done very well — some extraordinarily so. I can’t think of any people from my course I know that don’t get paid at least 1.5 times the average wage (most much more).


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