There’s been a bit of fracas in the last fortnight or so over a recommendation in a Group of 8 Universities’ submission to the Abbott government’s review of higher education funding. The recommendation asks the government to allow universities to forgo HECS subsidised places in certain courses and instead charge full fees. The universities identify commerce, economics, accounting and law as the best places to roll out the policy. This is a complex issue, and much of the discussion thus far has done little to make that clear.

Student groups, including the ANU student’s association, have understandably condemned the proposal, which would see hefty fee increases for students in affected courses. They have cited equity as a critical issue. In the words of ANUSA: ‘ANU has a duty as the national university to be accessible to all domestic students’.

Yet while student associations are simply doing their job when they oppose such proposals, it is unclear that equity is a valid argument, especially when placed in the broader context of University funding.

First, removing HECS subsidised places and moving all students to a full-fee paying structure does not mean that students cannot get a very low-interest loan to cover the cost of their degree. The Australian student loans system, FEE-Help, covers full fee paying domestic students. Most Australian postgraduate degrees are offered on this basis. HECS is a subsidy, not a loan scheme. This proposal would mean students of low socio-economic status (SES) need to take out a larger loan to get a degree, but it would not privilege those from rich backgrounds.

Would this make university study prohibitively risky in a financial sense? The evidence suggests not. Under the current loan repayment structure, students do not need to repay their loans until they are earning just over $51000. According to a 2013 report by Graduate Careers Australia, the average University student is earning $75000 a mere five years out of University. As noted in the Group of Eight submission, a 2012 report by the Grattan institute found that the net-present value of degrees for male graduates in dentistry, medicine (currently unsubsidised) and law exceeded $1 million, while those in commerce, engineering and IT were above $600 000. In this context, it doesn’t seem reasonable to suggest that making the size of student loans larger makes it harder for low-SES individuals to access tertiary education.

Would it discourage poorer individuals from seeking higher education? Again, the evidence says no. In an interview for Woroni, ANU Professor Bruce Chapman, who pioneered the income contingent loan policy in Australia, noted that empirical research suggests the price elasticity of tertiary education in the presence of income contingent loans is negligible. Essentially, when individuals do not have to pay back their loan unless their degree pays dividends, increasing the price of a degree does extremely little to discourage someone from studying.

An anecdote might make this clearer. When they came to power, the current conservative administration in the UK abolished all subsidies for tertiary education. Enrolments did not budge.

One more equity issue needs to be mentioned. According to the Grattan Institute’s 2013 report “Keep the Caps Off!”, students with ATARs over 80 — the kind of ATAR required to enter an Go8 university — come overwhelmingly from high SES backgrounds. It could therefore be argued that HECS is essentially subsidising the rich to get richer.

In favour of the proposal is its potential effect on funding. At present, universities enrol students and government then pays an amount per student to the university — this is the HECS subsidy. The amount is rather arbitrarily set by the government. As such, universities cannot gain more revenue by simply increasing fees, because the government might not commensurately increase the payment to the university. This creates a perverse incentive for universities to lower the cost of teaching while enrolling as many students as possible. This has a deleterious effect on the quality of teaching. Grattan’s ‘course experience questionnaire’ suggests nearly 40 per cent of students are unsatisfied with the quality of teaching.

The proposal would make it so that fees go directly to the University the way they do for postgraduate degrees. The students would take a loan from the government, and the government would transfer the money to the universities. Because the universities would know exactly how much they make per student they could effectively balance their revenue against the cost of course provision. This would ensure the quality of a course, its delivery and the reputation of the university hosting it are commensurate to the cost of taking it. No more perverse incentives. It would seem then that while the proposal will increase fees it will also ensure value for money.

It should be noted that university funding has never proceeded along these lines, and it would represent a radical departure from current policy.

This article is not intended to be a criticism of public support for education. Regardless of whether the HECS subsidy turns out to be a poor way of publically funding education, public funding is probably still a good policy. This is because education is the textbook example of a positive externality. It benefits more than just the person getting educated. Among other things, research suggests educated individuals will raise the knowledge level of those around them, are less likely to commit crimes and more likely to support democratic processes. They are also likely to attract higher tech, higher-skilled industries to their location. If anything deserves a subsidy, it is education.

Yet the size of these positive externalities is almost impossible to measure, and so the ‘correct’ level of public funding for education will always be debated. It is an important question for Australia’s economic and political future, and we would all do well to be abreast of its complexities.

The author blogs at markfabian.blogspot.com

The office of the ANU Vice Chancellor was contacted for comment on this issue. They offered the following statement:

The Group of Eight canvassed a large number of potential policy options for funding Universities in a submission to the Government’s review of the demand driven system.  You can access the Go8 statement the submission, along with the other 80 submissions, in full via their website  http://www.go8.edu.au/media/media-releases/2014/go8-media-statement-on-the-governments-review-of-the-demand-driven-system.