The review of higher education funding has been asked to look at the issue of the relative public and private contributions to tuition costs.
Some people think it is anomalous that law and business students pay more than 80% of the nominal cost of their place, while for example medical and engineering students pay a third or less.
Another perspective is to ignore cost shares and focus on the size of private benefits. Post-1996, this is roughly the perspective that has dominated. The basic idea is that students in disciplines with high incomes can afford to pay more.
Using occupational income data from the ABS Employee Earnings and Hours publication I’ve been playing with another version of the private benefits idea.
The idea here is that graduates pay for their courses in work effort, defined as the number of weeks it would take to repay their debt if they devoted their entire net weekly earnings to doing so. While some courses are much more expensive than others, the higher salaries their graduates earn mean that they can repay more quickly.
The table below shows that for most occupations the time to repay is closer to the average than the $ dollar cost relative to the average (closest number in bold). Mostly the differences are not large, though for arts professionals and medical practitioners there is major correction towards the mean on the time to repay measure (the figures are all based on average earnings for full-time males in May 2010).
Of course I should add the important caveats that this is very limited sample of occupations, and that the average salary figures are higher than graduates would be receiving early in their careers.
But I would be interested in feedback on whether time to repay is useful way of conceptualising the debt burden, and whether this idea might have any place in public policy discussions of fee setting (given the politically realistic parameters of the debate).
Andrew Norton 
I can understand the logic, but it still suggests that medical students are getting over-charged and law students are getting under-charged. What’s wrong with simply comparing the course cost to discounted future lifetime earnings? This would not only take account entire lifetime income but also the effect of high and low starting salaries.
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Rajat – Non-economists don’t find the idea of discounted liftime earnings intuitive, but the ratio of costs to earnings would be easier to understand.
Many law students feel hard done by because they get so little subsidy, but this table suggests that they are still better off than the average student.
I’m not sure whether this is a useful way of expressing the information. I thought that weeks of work might be easier to grasp than the larger dollar figures of costs and income, and the ratios easier to remember again. But I could be wrong.
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I guess you’re right that weeks’ work is more intuitive and in any case the advantage of taking account of starting salary is probably fairly small. Another way to think about it would be to focus on the earnings premium from study. That would massively increase the amount that doctors and lawyers pay (perhaps eliminating the law subsidy altogether) while perhaps leading to free Dip Eds!
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Of course that’s if you assume the purpose of the subsidies are to benefit the student (by making it cheaper to go into the career they want) versus society (by encouraging people to study things that provide a social benefit). If it’s the second the correct move is to provide greater subsidies for more “socially beneficiall” degrees, and less for the less beneficial. I’d prefer to decrease them all because that’s my standard anti-government program bias, but since that’s not politically feasible I’d prefer to go for social benefit as the goal.
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Tim – Though the subsidies are very much in the background here. To charge law a fee that gets them close to the average time to repay means that they get very little subsidy. But even though medicine already gets the largest subsidy, medical students take the longest to repay (their weekly income is the highest of all the groups, but their six year course means they accumulate a lot of debt).
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A law graduate in a big firm will pay back the debt in next to no time. If they work for Dennis Denuto in the suburbs they’ll be paying for the rest of their lives.
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Andrew – can you please do a post on how Government destroys charity. As a starting example, the good people in our small work office donated over $7K for the Queensland floods. Then the Government announced its levy. Do you how much they raised for the Vicotrian floods (and this is a Vic company) ??? Tell you how much, a lousy 235 bucks !!
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Baz – Or did the Qld floods crowd out the less dramatic and later Victorian floods?
While there are interesting empirical issues in the extent to which government action crowds out related private behaviour, they don’t really settle any debates.
After all, the left-wing argument for government intervention on social issues isn’t that there is no private activity, but that it is inadequate given the scale of the problems.
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I’ve been thinking lately that it’d be better to directly link the money paid to universities with the income earned by students after graduation. Currently (ignoring government contributions) students pay $X to the university up front generally by getting a loan from the government for $X and paying back at y% of income per year until paid off (ignoring government contributions). Why not have students agree to pay y% of future earnings (or perhaps y% of future earnings above average earnings) to the university for a set number of years?
The government could still contribute a portion of that y% to give incentive to students to undertake studies in particular disciplines, while providing a clearer link between that contribution and impact on future earnings. E.g. if the rate was 5% for medicine and 3% for law, the government could contribute the extra 3% to medial students to make the rates actually equivalent.
The main advantage I see with this system would be it incentivises universities to provide economically valuable education rather than simply mass producing degrees. Having different institutions compete on the basis of what the percentage rate is (perhaps within a regulated framework) would help keep the investment in education efficient.
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The Victorian floods occurred in the bush, where there’s no media. A more interesting question is why the Queensland floods raised much less charity than the Victorian fires.
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Desipis – There have been proposals for students to sell a proportion of their future income in exchange for the investor paying their tuition. That won’t happen while there are soft loan schemes as an alternative.
But I don’t support your idea because the purpose of university education is not just to increase future earnings, and because unis can’t control what their graduates do after they leave (it would also encourage unis to reject female applicants in favour of male applicants, who will earn more on average).
In a properly functioning higher ed market there will be some courses that focus on future wealth maximisation. But we would not want a uni system entirely skewed in that direction.
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Andrew
Do you any inkling into what kind of students the JDs are attracting? Particularly between the CSP places and full-fee places.
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PP – No idea, sorry. Depends how CSPs are being allocated. I think at U of M quite a few were offered to undergraduates on original uni admission provided they met the basic JD entrance requirement.
My main concern is that the differences will between the groups will be largely arbitrary and therefore the price discrimination will leave a bad taste in the mouths of full-fee students.
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I agree that or something similar will lead to bad blood. Think of the extraordinary marginal cost to the student just below the number of CSPs available. That’s why I’d like to some data on ATARs and WAM/GPA.
Then we could calculate not only the marginal cost of getting better grades in your non-Law undergrad, but also compare the two groups – CSP and full-fee – on ourcomes, whether class grades, job offers, etc.
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