A nation’s higher education system is a key factor in its economic and social progress. An internationally competitive higher education system is important to maintain Australia’s high standard of living.
The universities sector is an integral part of this higher education system with nearly 1.3 million students in 2012 (Department of Industry, 2013a). Total funding from the Commonwealth to universities in 2012 was nearly $15 billion, including payments under the Higher Education Loan Program (HELP) student loan scheme (Department of Education, 2013a).
Australia’s 39 universities employ over 100,000 people and provide a wide range of qualifications and skills to domestic and international students (Universities Australia, 2013). In 2012, 326,000 overseas students studied at Australian universities (Department of Industry, 2013b), contributing over $9.7 billion to the economy and making education the country’s largest service export (Australian Education International, 2013).
Benefits from higher education arise both for the individual student (in terms of higher lifetime earnings) and for the broader society (in terms of lower unemployment and higher productivity).
Rationale for government intervention
Commonwealth investment in the universities sector promotes quality, equity of access and national consistency for higher education. This, in turn, contributes to a more productive workforce that is skilled and flexible, leading to higher wages and lower unemployment resulting in higher tax revenues, reduced unemployment expenses and improved international competitiveness. However, a large proportion of the benefits accrue to the individual – usually through higher lifetime incomes.
The most significant recent change in government funding of the universities sector was the uncapping of bachelor degree places from 1 January 2012 – so that universities can choose the number of bachelor degree students that they let into different degree courses. This allows for a demand driven system, with increasing student numbers contributing to a more highly skilled population and improved access for those from disadvantaged backgrounds. However, uncapping of places also led to strong growth in Commonwealth funding for universities, with additional costs from 2012-13 to 2016-17 forecast to be $6.5 billion, largely due to a greater than expected increase in student numbers.
Noting the large increase in student numbers, the Commonwealth has announced a Review of the Demand Driven Funding System, which will report back to the Government in February 2014 (Department of Education, 2013b). The review has been tasked with recommending possible areas for improvement to ensure that the higher education system better meets its objectives, is efficient, is fiscally sustainable and supports innovation and competition in education delivery.
The Productivity Commission found that government investment in research consistently provides high economic and social returns, and identified two strong rationales for public funding support of science and innovation (Productivity Commission, 2007).
- The first rationale is that governments exercise many functions (such as defence, health and environmental regulation) and need to fund research and development to discharge those functions effectively.
- The second rationale is that spillovers that result from innovation cannot be captured by the innovator; so research that would benefit the economy is not undertaken by business as each individual business would not receive sufficient return.
Current structure of funding for Australian universities
Chart 9.13.1 shows that the Commonwealth was the largest contributor to universities’ $25.2 billion revenue in 2012 (Department of Education, 2013a). Commonwealth grant payments of almost $11 billion were the largest single source of revenue, while HELP payments of $3.7 billion were also a major revenue source, as highlighted in Chart 9.13.1.
Commonwealth support varies depending on the type of qualification or research outcome being sought by students, with undergraduates, postgraduates, vocational education and training (VET) and research all attracting different sources of Commonwealth university funding.
The number of bachelor students per degree is uncapped for domestic students. However, fees for domestic bachelor students are regulated by the Commonwealth.
The total funding per degree varies depending on the cost of teaching each degree; so funding for medicine is substantially higher than funding for humanities.
The split between private and public funding per degree varies, depending on the expected private and public benefits arising from that degree.
Degrees are allocated into one of eight clusters, with different Commonwealth funding applying to each cluster (see Chart 9.13.2 below).
- The private return on law is expected to be much greater, so courses such as law and accounting attract only 16 per cent public funding and 84 per cent private funding.
- The public return on nursing or education is expected to be much greater so nursing, in Cluster 6, attracts 69 per cent public funding and 31 per cent private funding.
Source: Department of Education, 2014.
Higher Education Loan Programme
Student contributions to the cost of university education can be paid up-front or deferred by taking out an income contingent HELP loan from the Commonwealth.
There are currently five types of HELP loans (Australian Government, 2014), with differing administrative terms and conditions:
- (Higher Education Contribution Scheme) HECS-HELP covers university tuition fees for Commonwealth-supported students;
- FEE-HELP covers university tuition fees for domestic students paying full fees;
- (Vocational Education and Training) VET FEE-HELP covers VET tuition fees for eligible domestic students;
- (Overseas Study) OS-HELP assists with university tuition fees for Commonwealth‑supported exchange students;
- (Student Amenities) SA-HELP covers the student services and amenities fee.
Students’ accumulated HELP debt is indexed each year to reflect inflation, so that the real value of this debt remains constant over time. However, as the Commonwealth has to borrow at an interest rate higher than inflation to make these loans to students, this leaves the Commonwealth worse off over time.
HELP is treated as a financial asset (a receivable) on the Commonwealth balance sheet and is included in the calculation of net debt. The value that is recorded in the balance sheet is adjusted to take into account bad and doubtful debt (as a result of people not earning enough to hit the repayment threshold, moving overseas, or dying) and the difference between the CPI return and the government’s cost of borrowing.
The estimated fair value of total outstanding HELP loans provided by government to students as at 30 June 2013 was $21.6 billion (Australian Government, 2013a). This takes account of:
- write-offs for doubtful debts of 17 per cent – the amount people will never repay because, for example, they do not reach the repayment threshold so will have debt outstanding when they die. This proportion may well increase over time, given the increasing number of students accessing HELP and the increasing average debt per student. Bad and doubtful debts impact on book value, but not the underlying cash balance – when someone dies with an outstanding debt, then it hits the underlying cash balance; and
- deferral rates of 5½ to 6 per cent (as determined by Australian Government Actuary). This reflects the difference in interest rates between CPI and the government yield curve, and the amount of time students take to pay back their loan.
Students begin to repay HELP debt once the Australian Taxation Office assesses their annual repayment income as being greater than $51,309 (in 2013-14), with the rate of repayment starting at 4 per cent of total income and increasing as income increases, up to 8 per cent of total income when income reaches $95,288 (Australian Taxation Office, 2013). Note that these are average payment rates, applying to all income earned, not just the income above a given threshold. Thresholds are indexed to Average Weekly Earnings.
Postgraduate fees are not regulated and the Commonwealth provides a limited number of Commonwealth Supported Places (CSPs), which are often allocated on merit by universities. The Commonwealth also offers income contingent FEE-HELP loans to both CSP and full fee‑paying students to assist meet their student contributions.
Vocational Education and Training
A number of universities offer VET qualifications, such as diplomas. Universities are free to set their own fees and places for these programmes, but are regulated to ensure delivery of nationally agreed training packages for each qualification.
Government funding support for VET degrees is managed by the States, which receive Commonwealth funding to contribute to agreed outcomes. The Commonwealth also offers income contingent VET FEE-HELP loans to domestic students undertaking VET courses at the diploma and above level, so that those students may defer their student contributions.
Universities access a range of Commonwealth funding support for their research activities, as outlined in Section 10.2 of the Appendix.
Chart 9.13.3 shows Commonwealth and student contributions over time, highlighting the strong growth in both contributions over time. The Commonwealth pays around 60 per cent of domestic bachelor degree university costs while students cover around 40 per cent; with 87 per cent of students deferring their student contribution through a HELP loan.
Source: Department of Education, 2013c.
While noting the large increase in student numbers following the uncapping of bachelor places, the latest enrolment data from the Department of Education suggests that this was a one-off level increase responding to the reform.
Chart 9.13.4 shows the growth in students with a HELP debt, and the growth in the average HELP debt over time, since the introduction of income contingent student loans in 1989.
Chart 9.13.5 shows that higher education expenses are projected to grow at around 5.8 per cent per year over the next decade. This is higher than inflation, but substantially lower than in recent years.
University funding for students, and students’ contributions via HELP are both driven by university student enrolments and the qualifications being undertaken.
With the recent uncapping of university places, university student numbers and course availability are a result of individual university decisions on eligibility criteria.
Deregulation of places
The recent uncapping of university places led to a large increase in student numbers and a resultant significant increase in costs to the Commonwealth (as shown in Chart 9.13.4). However, the latest enrolment data (Department of Education, 2013c) suggests that this was largely a one-off level increase responding to the reform.
Higher education funding is projected to grow at around 5.8 per cent per year over the next decade (above CPI but substantially lower than in recent years).
Some universities have expressed concern that the removal of student caps may have affected the quality of education.
Uncapping bachelor degree places led to a decrease in university entrance standards, encouraging those who would not otherwise have pursued university-level studies to now pursue it. This was one of the fundamental reasons for removing the cap, thus allowing a larger number of people, particularly those from disadvantaged backgrounds, to access university level studies.
If universities have significant concerns with the quality of education, they are well placed to manage their own entrance requirements to preserve quality outcomes. Government has placed no constraints on how many, or how few, students can be admitted to different courses.
Overall, the introduction of a demand driven system has achieved its desired outcomes, in making higher education opportunities available to a wider range of Australians. However, the Commission is concerned by the decrease in university entrance standards. Uncapping university places with open-ended Commonwealth funding of HELP provides a commercial motivator to universities to lower standards to increase student numbers. Retaining the quality and integrity of our university qualifications is equally important.
The Review of the Demand Driven Funding System will look at further options to ensure that the demand driven system is fiscally sustainable.
Deregulation of fees
Some universities have argued for the uncapping/deregulation of university fees, so they can freely determine the level of fees for undergraduate students.
Australian undergraduates are currently paying among the highest levels of tuition fees in the world. The OECD (OECD, 2008) reports that Australia ranks 23rd among 31 OECD countries in terms of students’ ability to finance their education costs as measured by the ratio of tuition and living costs to available individual funding. Australian students generally face a much higher ratio of education costs to available sources of finance than their counterparts in other developed countries.
Allowing universities to determine their own prices should improve efficiency through the operation of competitive forces. A range of prices should arise based on the quality of service offered by each university in each field of study.
Increased competition within the university sector should drive innovation and quality improvements for Australian students.
However, there is a clear assumption under a deregulation model that market forces within the higher education sector would prevent prices rising to excessive levels.
Both domestic and international experience suggests that uncapping university fees could lead to very large fee increases.
- While universities are currently able to set student contributions below the maximum level, almost no universities have taken up that opportunity.
- Undergraduate students appear fairly insensitive to price rises, particularly in the presence of a student loan scheme such as HELP, so there is little incentive for universities to keep fees low to attract students. There was minimal change in student demand in 1997 when the student payment for some disciplines more than doubled.
- In New Zealand, where a HELP-type scheme was instituted in 1992, the universities were allowed to set their own prices, but after experiencing ongoing real rises in fees the government in 2003 instituted price caps, which were justified with reference to both affordability and future price certainty.
- In the United Kingdom, when the maximum price for tuition was lifted by 300 per cent, all institutions chose the highest possible level.
Regional universities have raised concerns about the emergence of a two-tier higher education system if university fees were deregulated. The Bradley Review of Higher Education noted that:
Arguably, the more established universities have considerable market power, associated with locational advantages, reputational status, and the existence of quasi-monopolies in certain courses of study. These factors, plus the status of a degree from such an institution as a positional good, mean that there is a high likelihood that prices at these types of institutions would rise very sharply resulting in the delivery of considerable economic rents for more established institutions. Whether or not sufficient competitive pressures would eventually emerge to constrain such price increases is a matter for conjecture.
The Commonwealth would not benefit from higher fees and could be made worse off, as HELP loans would account for the majority of any increase and this would be likely to lead to a rise in bad HELP debts.
Equity of access would be affected by any significant increase in fees, particularly if combined with restrictive HELP lifetime limits.
There is also no clear evidence that higher fees would lead to improved student outcomes. Universities have not suggested that current fees are inadequate to conduct their education programmes. On the contrary, universities can use tuition fees to cross-subsidise their research activities.
There is also a risk that student outcomes would suffer, if universities replace their current system of ability-based discrimination with price-based discrimination (although this is unlikely to be a long-term problem, because poorer student outcomes would be likely to lead to lower demand and reduced prices in the long-term).
This is an area where the Commission considers that further work is required. There are clear questions around whether market forces in Australia are strong enough to yield distinct price differentiation between different courses and universities operating under a HELP model.
The Review of the Demand Driven Funding System is expected to provide further analysis into the sustainability of university funding over the next decade and inform future government decisions around potential fee increases.
However, a full review of the pros and cons around full or partial deregulation of university fees would greatly assist to inform future policy directions.
Commonwealth takeover of universities
All universities, except the Australian National University, were established as State institutions. However, the Commonwealth has, over decades, taken an increasingly direct funding and regulatory role.
The Commonwealth is now the major funder of Australian universities, through Commonwealth grants and via the HELP system. State and local governments provide only around 3 per cent of ongoing funding (Department of Education, 2013a).
However, State and local governments are generally responsible for the provision of the land on which universities stand and for some of their new capital expenses.
Universities are governed by a combination of Commonwealth and State legislation.
The Commonwealth could consider taking over full responsibility for universities.
It would improve simplicity and transparency – and potentially reduce reporting burdens – to have universities administered by a single level of government. However, this could remove the States from areas where they do have an interest, such as the provision of vocational education and linkages between schools and universities.
Moreover, a full scale takeover by the Commonwealth could potentially require the Commonwealth to compensate the States for the land on which all universities currently stand and to fund any new land required for universities.
Any further reform in this area should be pursued cautiously.
Potential areas for reform
Balancing public and private funding
Benefits from higher education arise both for individual students (in terms of higher lifetime earnings) and for the broader society (in terms of lower unemployment and higher productivity).
- The 2013 split of public to private funding is around 41 per cent private funding and 59 per cent public funding (Department of Education, 2013c).
Australian research (Borland, 2002) indicates that, compared to a year 12 graduate, someone with a bachelor qualification could expect to earn, on average, $430,000 more over their lifetime in current dollars. This highlights the significant private benefit that accrues from Commonwealth supported education.
An appropriate balance of public and private (student-based, via the HELP system) funding for universities should broadly reflect this split of benefits. This would allow for a rebalancing of tuition fees away from public funding and towards private funding.
A rebalancing of public and private costs to better reflect the substantial private benefits arising from education could see the split of public to private funding shifting to the Commonwealth paying around 45 per cent of domestic bachelor degree tuition costs, on average, while students cover 55 per cent.
A rebalancing toward private funding of university costs will result in higher student loans through the HELP scheme. Box 9.13.1 has further details.
Box 9.13.1: Options for rebalancing public and private funding
Currently the different funding 'clusters' for Australian universities allow for a different split of public and private funds for different courses; partly reflective of the relative public and private benefits. Cluster 1 courses such as law and accounting attract only 16 per cent public funding and 84 per cent private funding; whereas nursing in Cluster 6 attracts 69 per cent public funding and 31 per cent private funding.
A rebalancing in the split between public and private funding could be achieved in various ways:
- a set amount (for example $1,000) could be moved from public to private funding across all Clusters;
- a proportional (for example 10 per cent) reduction in public funding across all Clusters, could be made up by an equivalent increase in private funding in each Cluster; and
- there could be different changes between different clusters, informed by relative public and private benefits (for instance, all public support could be removed from Cluster 1 law and accounting courses, but with no change to public support for Cluster 6 nursing courses).
With five different HELP schemes (HECS-HELP, FEE-HELP, VET FEE-HELP, OS-HELP and SA‑HELP) there is merit in streamlining the schemes to align administrative arrangements, including administration fees and early repayment thresholds. This also provides an opportunity to reconsider the need for the SA-HELP scheme for student service and amenity fees.
Chart 9.13.4 shows that HELP debt has grown strongly over time, with the total number of people with a HELP debt now exceeding 1.8 million and total HELP debt greater than $30 billion. Managing this HELP debt effectively is becoming increasingly important.
HELP loans are indexed each year to reflect inflation, based on the Consumer Price Index (CPI) — so students are effectively paying the government an interest rate on their HELP loan which is limited to the rate of inflation. However, when the Commonwealth has to borrow during times of deficit, it pays an interest rate which is higher than inflation, leaving the Commonwealth worse off over time. Increasing HELP indexation to reflect the true cost of HELP loans, including borrowing costs, bad debts and administration costs would ensure that HELP loans do not have an adverse financial impact upon the Commonwealth.
An increase in the interest rate applying to HELP loans, from the current level (CPI) to a level which reflects all of the costs to the Commonwealth of making the loan (incorporating the government borrowing rate, the cost of bad debts and administration costs) would ensure that the Commonwealth is no worse off as a result of the HELP programme.
- An equivalent option would be to impose an upfront administrative fee (which would be rolled into the amount of the loan), which was equivalent to the costs to the Commonwealth of making the loan. Under this option, indexation would remain at CPI, so the real value of student’s HELP debt would remain the same rather than growing over time.
Increasing the rate of HELP repayments would free up money for debt repayments or other Commonwealth policy objectives and could be achieved through a combination of:
- a lower threshold for HELP repayment; and
- reducing the indexation rate for HELP thresholds (for example, moving from Average Weekly Earnings to CPI).
The minimum HELP repayment threshold could be reduced to be equal to the full time minimum wage (currently $32,354 per year – Fair Work Ombudsman, 2013), with a low repayment rate of only 2.5 per cent. The rate of repayment would then increase with income, until it matched the current initial repayment rate of 4 per cent at an income of $51,309.
Outstanding HELP debts are written off by the Commonwealth when the debtor dies. This reflects the fact that the student never realised the returns from their education through higher wages during their lifetime.
There is also some ‘leakage’ of HELP repayments because debtors who move overseas are not under any legal obligation to repay their HELP loans. However, recent research (Chapman and Higgins, 2013) suggests that less than 0.8 per cent of students are expected to move overseas permanently; so this is not a major compliance concern.
Under the current system, the Commonwealth also loses out when HELP payments are deferred by students living overseas. However, under the Commission’s recommendation to increase the rate of interest on HELP debts, the Commonwealth will no longer be worse off if HELP repayments are pushed back by a number of years – students’ HELP payments will continue to grow in real terms in their absence, giving them an incentive to make payments even while overseas.
Implementation of arrangements to enforce repayment by people outside of Australia would require a change of policy and legislation and would be administratively difficult and costly.
Securitisation of HELP loans
The Commission has also considered the option of selling the Commonwealth’s book of HELP loans to the private sector (or ‘securitising’ the HELP debt).
As at 30 June 2013, the total value of HELP loans outstanding was $30.1 billion, while the fair value of the debt was $21.7 billion.
Under a securitisation arrangement the current HELP receivable would be sold to private investors, backed by the cash flow (both principal and interest) from the HELP loans.
The Commonwealth effectively books a loss in borrowing to pay HELP loans, because the Commonwealth cost of borrowing is greater than CPI (the latter is the rate at which the HELP debt is indexed each year). The private sector has an even higher cost of borrowing than the Commonwealth, making HELP an even less commercial proposition.
HELP provides a rate of return which is lower than those provided on (largely risk-free) Commonwealth bonds; so HELP would not seem to be a good risk‑adjusted investment option for the private sector.
It is therefore likely that securitising HELP loans would either yield a sale price less than the current book value, or require an ongoing subsidy to investors to increase their return.
Grattan Institute analysis using corporate bond rates suggests that the government could expect to receive only around two thirds of the current book value of the HELP loan if it were to be sold (Norton, 2013).
Selling HELP loans at less than their current book value would result in a deterioration of the Commonwealth’s net debt position and have an adverse impact on its balance sheet.
The alternative of providing an ongoing subsidy to investors would be likely to result in an ongoing negative impact on the underlying cash balance (when taking into account the removal of associated interest charges and public debt interest).
In order to continue administering and collecting HELP debts in an efficient manner, the Australian Taxation Office would still need to maintain the function (and associated administrative costs) of debt collection.
Furthermore, securitising the debt could reduce the flexibility of future governments to make reforms to HELP repayment arrangements.
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