Economist ‘gobsmacked’ by Australia’s uncapping of fees

Architect of Australia’s HECS says change will leave universities free to raise charges far above the cost of teaching students

July 24, 2014

Source: Alamy

Wave of protests: plans to lift the student fees cap have been controversial and have attracted international attention

When the Australian government recently announced plans to deregulate tuition fees and let universities set their own prices, Bruce Chapman was “gobsmacked to see the radicalness of the suggested reforms”.

The professor of economics and director of policy impact at the Australian National University’s Crawford School of Public Policy is no easily shocked novice: he is seen as the architect of Australia’s Higher Education Contribution Scheme. When introduced in 1989, HECS was the first national income-contingent loan scheme to use a country’s income tax system for collection – a model eventually followed in England.

The Australian government has failed to appreciate just how successful income-contingent loans are in freeing students from worries about fee levels, argued Professor Chapman, who recently edited a book on the use of such loans in social and economic policy areas beyond higher education with Nobel prizewinning economist Joseph Stiglitz.

The sheer effectiveness of such loans kills any notion of a market in which universities compete on price and will leave universities free to raise charges to heights far above the actual cost of teaching students, predicted the economist, who also believes that the plans will not make it through Australia’s parliament in their current form.

Announcing the lifting of the cap in May, the conservative government framed it as allowing Australia’s universities to compete with the “world’s best”. There will also be a 20 per cent cut in direct government funding for universities. The plans sparked a wave of student protests and attracted attention from across the world of higher education – not least in England, where Sir Howard Newby, the vice-chancellor of the University of Liverpool, recently advocated uncapped fees.

Right now, the fee cap ranges from A$6,044 to A$10,085 a year (£3,358 to £5,603), varying with the type of course studied.

‘Misplaced and naive’ idea

Professor Chapman – who talked to Times Higher Education on a recent visit to London, where he spoke at an event hosted by the University Alliance, the Higher Education Policy Institute and Royal Holloway, University of London – said that some rise in fees was justifiable.

“I would have thought price discretion to cover [the 20 per cent cut in government funding] plus a little bit more would have been entirely reasonable and sensible.” And he argued that the example of England suggests that poor students would not be deterred by higher fees.

But the former economic adviser to Labor prime minister Paul Keating said of wholesale fees deregulation: “Those of us who’ve been involved know with some confidence that if you apply basic economic principles to higher education pricing and funding, you’ll get it wrong. The idea that this is a competitive market that will deliver allocative efficiency so long as government gets off its back is misplaced and naive.”

He added: “Once you start letting a government monopoly instrument – the income tax system with an income-contingent loan – be used by private interest groups like the universities, then you can very likely end up with a situation where the instrument itself becomes a [means] to seek rent from students.” And there would be “questions about the ethics” of that, he said.

Removing “the fear of poverty” makes income-contingent loans a highly effective insurance mechanism for students, Professor Chapman continued.

Many economists would argue that “budget constraints will determine the world” when it comes to higher education, as they do in other spheres. But “when you’ve an income-contingent loan, you don’t have a budget constraint, that’s the problem”, Professor Chapman said.

He said that under the planned changes, fees for domestic students would be capped at the levels of those for international students. In 2013, the University of Sydney charged overseas undergraduates up to A$40,000, rising to about A$62,000 in medicine. Such a framework on domestic fees “suits the powerful institutions” of the Group of Eight, Professor Chapman said, as their fees for international students are the highest.

The plans will also link the interest rate on student loans to the government bond rate, rather than to inflation, meaning that graduates will pay an interest rate of up to 6 per cent – up from 2.9 per cent now.

Legislative hurdles

But the whole package must pass through the Australian parliament, and Tony Abbott’s government lacks a majority in the upper house.

Professor Chapman said: “The package as a whole right now – I can’t imagine it getting through the upper house. I can imagine a reform of it passing. The reform might have a more subsidised interest rate and it might put a cap on [fees].

“But the government is very resistant on that. They say, pretty much without reservation, ‘deregulation is a great thing, we want competition, this is the way to turn the University of Western Sydney into Harvard’…They will fight very hard not to give up on an ideological position about the value of competition.”

And Professor Chapman warned: “The unintended consequence from this model will be that the fees will go up much more than they [the government] anticipate, and be beyond what students are [now] costing taxpayers. That to me is the big bottom line from it.”

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