Payment on results

November 29, 2002

The Australian model of learn now, pay later, could be the UK's ideal solution, says Bruce Chapman

In Australia in the late 1980s, university students were not required to pay for tuition. But this was seen by some key members of the Labor cabinet to be unfair and regressive. They reasoned that higher education students were likely to come from advantaged backgrounds and to enjoy enhanced salaries after graduation. Moreover, a "free" system is one paid for by all taxpayers, the vast majority of whom have not received the gift of a university education. This reasoning and its empirical basis hold true for any country not charging for higher education.

In 1980s Australia, there was an unsatisfied demand for university places. Queues of prospective students were unable to enrol because of the shortage of government-funded places. But the Labor government was unwilling to expand the size of the system through additional outlays of taxpayer resources, partly for the reasons noted above and partly because Labor wanted to be seen as a low-tax party.

As a result, in 1989 the government introduced a charge for university attendance - the Higher Education Contribution Scheme. This had a unique characteristic: students could choose to pay their university fees after they graduated, and only if and when their incomes reached a specified threshold - about A$34,000 a year (£13,000) at the time, although it has since been lowered.

The effects of Hecs have been studied extensively, particularly its consequences for access for the poor to university. The bottom line is that there have been no implications: higher education enrolments by all socioeconomic groups have increased by an average of 40 per cent. The university system is thus much larger than it was 13 years ago, and this has happened because of the creation of a healthy Hecs revenue base.

Hecs is not an important political issue in Australia. It is generally seen to be fair, far preferable to any form of upfront fee, and a major contributor to the expansion of the university system. In a recent reform, it has been extended to incorporate charges for postgraduates.

Broadly, there are three methods for charging students for university: upfront fees without assistance; fees financed with help from banks; and income-contingent repayment, such as Hecs.

Unassisted upfront payments, including top-up fees, erect barriers to entry for the poor. Such fees are pernicious because they help cement the already strong nexus between family background and life opportunities. And when a person is denied access because of an upfront fee, society wastes talent. The non-student ends up doing something that does not maximise his or her professional potential, and this affects a country's economic performance.

The second approach to student financing, in operation in many countries, is for banks to provide loans. But this has many unfortunate effects: governments have to guarantee repayments, and default rates tend to be high. Moreover, many students do not qualify for assistance and some prospective students are reluctant to take out loans because of concerns that they might not be able to repay them.

The third way is for repayments to be dependent on students' incomes, and this is how Hecs operates. It was also the approach recommended for the UK by the Dearing committee in 1997. Such systems can work well because explicit account is taken of the student's ability to pay. If, at some point in future, a graduate's income is low, then no payment is required at that time.

To an outsider, it is difficult to understand why the UK university fee debate has remained unresolved for such a long time. It is especially surprising given that Nicholas Barr and Iain Crawford, both from the London School of Economics, have been articulate and convincing advocates of a proper higher education income-related charge mechanism for the UK since the late 1980s, before such a scheme was introduced in Australia.

Bruce Chapman is professor of economics, Research School of Social Sciences, Australian National University.

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