What are the likely consequences of HECS fee liberalisation?

The Australian government education minister Christopher Pyne has made his wishes clear for the tertiary education sector: he is following the wishes of the GO8 Vice-Chancellors and wants to remove the caps from the HECS fees asked of domestic students. This seems to fit in a vision of greater competition for the sector, and hence the fee deregulation is accompanied by changes to the accreditation regime to make it easier for competitors to come in. There seems to be no appetite for changes in university governance, nor any attempt to remove the benefit that existing inner-city universities have in the sense that they don’t have to pay for their premises whilst newcomers would have to pay rent for their premises.

Let us presume that the minister gets his way, either this time round or next time round, and that we will hence see HECS fee deregulation for domestic students with easier rules for accreditation, and no significant changes otherwise to the current environment. Following on from the efforts of Rabee Tourkey and Rohan Pitchford on this blog, what are the likely consequences?

First off, we can look at the consequences of a similar fee deregulation in the UK in 2010: at least a doubling of fees at the top and a proliferation of discounters at the bottom.

Should we expect these things to occur here too? One should expect both elements to occur here even more strongly because in our case there are less alternatives for students and hence a greater potential to increase fees and have chaos as the bottom: the main differences between us and the UK in this market is that the UK is more densely populated and that students thus have many more universities close by them, allowing for far more real competition than will be the case here. Thus, given that distances between cities are so large in Australia, one should expect the price hike to be well above double in this country. So from Hecs fees of around 10,000 AUS per year, I expect we would go to 30,000 AUS per year at the GO8s, pretty much within a year or two following fee deregulation.

At the bottom, it will be chaos, just like in the UK. You will get all sorts of scams and desperate ploys, essentially because the government is writing a blank cheque via the HECS scheme. Many will come to collect.

What kind of scams can one expect? Well, a HECS loan is effectively money from the government that the individual is supposed to pay back from her income in decades to come. If the person cannot pay back because she is abroad, not employed, or starts earning too late, then the loan never has to be paid back. There are many ways to exploit this.

One scam is to have large HECS-fees with almost no education whereby the institution and the student share the money. This can be quite overt, such as the ‘Cashpoint colleges’ in the UK, but can also be done in quite subtle ways that are very hard to police. For instance, one can have a degree in ‘car engineering’ whereby the institution provides a free car to the student, supposedly to ‘practise on’. In return, the student gets a hefty loan from the government that goes straight to the institution. The student eventually leaves the institution with a worthless degree but with a nice car and the institution makes off with the HECS money.

Which kind of student would go for this? The kind that does not think about the long-term future and the kind that doesn’t expect to ever have to pay back anyway, such as those who expect to be unemployed or working abroad.

Another type of scam is to promise students a great degree but have very low entry-criteria, and then charge hefty fees but deliver very poor yet very cheap education. Which kind of student goes for that? This sort of scam attracts the not-so-smart students who think they are much more brilliant than their high-school scores suggest. Sounds like most not-so-bright high-school students I know! This group is big in the UK and in the US and you have lots of universities in both those countries that fleece such students. Here, one should expect the fleecing to be much worse because here it is the government that foots the bill. One should thus also expect the number of students to increase quite strongly in the medium term and for an enormous blow-out in these loans, ie low repayment rates, just like in the UK.

Both these scams are of a similar ilk in that they exploit the least able members of society to defraud the government out of money. Interestingly, this will not immediately show up on the government books as the financial disaster that it is because the government can include the HECS-loans as equity on its balance sheet, even when the odds of getting full repayment are minimal. So it will only become visible as a financial disaster for future governments.

So at the bottom end of the market, we should expect the outcome one historically gets with unregulated personal services: snake-oil salesmen taking advantage of people, this time at the expense of the whole community.

What about the impact on academics? Well, I think in the short-run it will turn out pretty well for myself and my colleagues at GO8s. It will be a great time, at least for a few years. The higher fees for popular courses that lead to good jobs, such as economics, finance, medical specialisms, law, etc., will feed into greater demand for good teachers and good researchers. The teachers will be more popular with the university administrators and the students, and the good researchers will be even more important to advertise the merits of the institution. Me and my colleagues expect significant pay increases in the years to come!

It will also be a boon for university managers and administrators. You see, even though the universities are officially non-profit organisations owned by the community, the managers and administrators have the actual control over the money streams in the universities. That is why their salaries and numbers have gone through the roof in the last decades, such that a university manager in Australia easily earns three times what they earn in other countries. With more money flowing through their hands, their personal cut should also be expected to increase.

So it is a big win for VCs of GO8s whose lobbying is paying off handsomely. They should renegotiate their bonuses as soon as possible so that it increases with more university revenues, which is easy to do because they effectively negotiate with themselves! Similarly, the whole administrative layer will get a big influx of money, which they will spend on higher salaries for themselves and an increase in their ranks. Christopher Pyne will probably become a revered ‘market guru’ amongst them.

The medium term knock-on effects of this glut of money will mainly be in terms of protecting these benefits flowing from domestic student money. Given that most students don’t want to go to other cities for their education, the main thing to do is to keep them happy about their learning and confident that they will get a decent job later. So there will be some pressure to keep up reasonable standards, but the efforts to keep them happy and docile will also increase, meaning that universities will become more paranoid about bad publicity and tough teachers. So over time, the universities will try to attract more docile teaching staff.

In terms of the impact of these reforms on ‘academia’, ie on ‘communities of scholars dedicated to truth finding’, I am less pessimistic than most of my colleagues. Whilst academic values will be entirely unwelcome and ousted from undergraduate degrees, simply because independent academics are seen as a potential threat to students, the even greater importance of research excellence will mean that academics will retain and expand their own little playgrounds in the graduate education and research realms: academia will simply become even more divorced from undergraduate education, which will become more and more like an extension of secondary school.
Having said this, it is possible that a few universities will specialise in re-creating an academic environment for undergraduates if there is enough student demand to be ‘educated by the true experts’. Perhaps there is demand at the elite level, but the Australian market is too small to sustain many such places.

What can we expect in terms of innovation and competition for students? I would actually expect quite a bit of innovation and competition to occur in the medium run, simply because it is suddenly much more worthwhile to try and pinch the students of other universities. Even though students are unlikely to move cities, it is quite reasonable to presume that they will be willing to move to a franchise university in their own city with courses delivered by a university in another city.

So I expect the GO8s to try to pinch students from each other by means of opening up franchises in the major cities, possible co-opting the existing lower-tier universities already there. One can thus imagine the University of Melbourne trying to muscle into the Brisbane market by having a franchise agreement with Griffith on particular degrees. One can imagine the University of Queensland trying to muscle into the Melbourne market by doing deals with RMIT or Latrobe. There are also foreign high-status universities that might try a similar franchise deal, basically because there is far more money on the table to make this worthwhile.

So if the current plans for reforms go ahead and there are no knock-on reforms, then I would expect an explosion in fees at the top, pretty devastating snake-oil activities at the bottom, and real competition to gradually emerge between the surviving high-status brands.

Given that this trajectory involves a major increase in the government debt though, via an increase in Hecs-loans that wont be paid back, I very much doubt that this first round of reforms would be the last one: I expect that the first round will lead to later rounds that provide band-aids to the emerging problems. Given that the government and the ministry of education seems to take its cue from the top administrators of the GO8s, these later rounds might well be anti-competitive and hence primarily designed to undo the potential benefits of the current reforms, such as via new regulation that makes it harder for foreign universities to come in or that outlaws competition between GO8s in the form of domestic franchising. That kind of trajectory may be good for me and my colleagues, but not so good for the majority of the Australian public.

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meika
7 years ago

This is why I sometimes feel we should just shut down all universities and start again from scratch.

conrad
conrad
7 years ago

I think I agree with you on almost all of those points, although I think it is unlikely the GO8s will try and franchise out in any serious way (in Aus) — The record of failure in their overseas ventures by managers with various mania problems and rather poor business sense (or perhaps just sense) suggests that if they wanted to expand in Aus, they would simply set up new campuses, but that hasn’t happened. So something must be stopping them (possibly real-estate prices).

I also think that you are probably too conservative on fees — many private schools charge almost 30K, and the big US universities charge 60k. So I can’t see why places like Melbourne wouldn’t go far higher than 30K in a few years . This would be a boon for the middle tier universities that are not in too much competition with the University of Phoenix online and other drudge providers of negative worth that will no doubt turn up. Basically, not only would they get smarter students who didn’t want to pay 60K, but 25K as a comparison would seem like a true bargain for a degree that might still be worthwhile.

Paul Frijters
Paul Frijters
7 years ago
Reply to  conrad

I am more optimistic about local franchises, but the real estate issue will indeed be crucial, which is why one would have to think of deals with existing lower-tier universities who also have property.

The 30,000 number is of course somewhat loose. Still, I do have some reasons for it: it is the current price overseas students have to pay and the price you can get a reasonable education in other countries for. Hence at that price you will get a large demand reaction whereby the internationals go elsewhere in Australia (if one university goes significantly above it) and elsewhere in the world if the Australian unis form a cartel and jointly go above it – a not unlikely possibility for the GO8s. Australia furthermore has a lot of people with dual nationality who can send their kids overseas (something like half the population is borne elsewhere), meaning there is some demand elasticity related to overseas costs. Finally, 30,000 is roughly what private schools charge for secondary education. As university becomes akin to extended secondary school, a similar price seems likely. Indeed, private schools might be amongst the first to try and enter the market for university education.

Rex R
Rex R
7 years ago

Nice analysis – but surely it could be said a lot more succinctly.

-The top tier universities will become world class will be priced out of the reach of the middle class
-The lower tiers will have their remaining subsidies slowly eroded because, hey, we’ve got world class Universities in this country, so why should we worry about the also rans.
– The upward social mobility that characterised Australia from the 70s onward will go into reverse as access to a reasonably good education to the middle and lower classes becomes too hard to get.
– Australia begins the slow process of dumbing down
– Parity is reached with Chinese wages in 20 years. Ginia pops a bottle of Veuve Clicquot with her mum by her sickbed.

Crocodile Chuck
Crocodile Chuck
7 years ago
Reply to  Rex R

‘Deathbed’.

Have a heart.

john Walker
john Walker(@johnrwalker)
7 years ago

Paul what percentage of current HECs loans are ‘derelict’ ?
BTW I think the situation for skills/knowledge oriented education could be even worse; you can not really teach complex ‘hands on’ skills- such as actually doing a tricky root canal, to a class of 100, but you can teach the theory of root canal treatment to a class of 100.

paul frijters
paul frijters
7 years ago
Reply to  john Walker

The budget papers apparently claim about 25% wont be paid off, but one of the links in the blog above claims the rate of non-payment is much higher in the UK, above 40% now.

We don’t actually know what the current repayment rates are, simply because most of the first generation of HECS students hasnt reached retirement yet and is hence still busy paying it off. On top of that, there have been so many changes through the years that the re-payment rates on 1985 loans will differ from the 2010 loans, meaning we wont know the repayment rate for recent loans for another 40 years!

There are estimates based on modelling (http://www.natsem.canberra.edu.au/storage/dp1.pdf) which say non-repayment currently is around 20%, higher for women than for men. Bruce Chapman, who really is the expert on this sort of thing, seems to think the actual non-repayment rates are higher.

john Walker
john Walker(@johnrwalker)
7 years ago
Reply to  paul frijters

I would guess that among many ‘arts’ graduates (especially women) that the non payments rate would be very high, many of these graduates have, at best, part time jobs getting perhaps $30,000 or so p/a .

derrida derider
derrida derider
7 years ago
Reply to  paul frijters

Strong international experience with student loan schemes (both income-contingent and other) is that the bigger the debt, the less likely it is to ever be paid off. For one thing, it makes the young with the longest education head overseas (which is actually the New Zealand experience – why do you think Bondi is full of highly educated young Kiwis?).

So whatever current repayment rates are, I reckon they’ll be considerably less under the new regime. Of course Bruce has some proposals to limit this effect, but I’m not sure they’d work. As we’ve seen with the recent “backdoor death duties” fracas they certainly wouldn’t be popular.