Australian higher education financing: issues for reform

Abstract

The paper documents the recent history of higher education financing in Australia. It is argued that there have been radical changes to financing arrangements over the last 12 years or so, which have taken the form of the imposition and increase in student charges. Contributions from students are justified, and the collection mechanism used in Australia is argued to be the best arrangement: income contingency. A major part of the paper takes up this theme through the comparison of the economic and social consequences of different financing arrangements involving student charges. It is argued that bank loans and/or scholarship systems with up-front fees are necessarily inferior to arrangements that take into account a former student’s future capacity to pay. The HECS – or similar income contingent policies – are argued to be the only way to go. It is also argued that the Australian higher education financing system is in need of reform. The issues documented include: relative academic salaries have fallen significantly over the last two decades; enterprise bargaining is a poor collective bargaining instrument for public sector universities; and, there is a need for some institutional price flexibility. Even so, it is pointed out that unfettered price flexibility for Australian universities is undesirable, for two reasons. The first is that there have been many years of public subsidy for the well-established institutions, and the second is that these same institutions have considerable real estate benefits from their propitious geographic locations. Both issues necessarily mean that allowing full charge discretion will deliver considerable and unfair rents to the most advantaged institutions and their contemporary staff. However, a case for limited price flexibility is offered. The potential benefits are the encouragement of increased competition and to allow additional revenue. It is stressed that it is critical that policy reform along these lines should necessarily involve income contingent repayment, and it is explained how this might work. The final part of the paper analyses the Government’s recently announced plan to allow Postgraduate students the option of paying their charge with an income contingent loan. That is, HECS is to be extended to Postgraduate study. It is argued that, in principle, this is an excellent reform of higher education financing arrangements. The scheme is not, however, straightforward. Because HECS has a zero real rate of interest, the new scheme means that there will be a significant level of subsidy for both students and universities, and the extent of the subsidy is illustrated for a range of different student circumstances. An implication of these subsidies is that, eventually, the Government will very likely impose changes. It is argued that the worst possible reform would be to cap levels of student borrowing through HECS. A much better solution would be to offer a discount for up-front payment of postgraduate charges.