The cost of higher education

This post follows up on Joel Gilmore’s recent post on the Australian HECS (Higher Education Contribution Scheme) system, posted at Illuminating Science.

For those unfamiliar with the Australian higher education system, we have a system called HECS by which the cost of higher education is split between the government and students themselves. To pay their contribution, students have two choices. They may either pay for it up-front, in which case they receive a discount, or they may defer payment (effectively taking up debt) and repay it via a higher tax rate when they enter the workforce. This ensures that higher education is accessible to people who would otherwise be unable to afford it. In the later case, HECS repayment only kicks in once the salary reaches a certain threshold.

Recently the Federal Government (Liberal Party) increases the student contribution under HECS, a move which was, and still is, vehemently opposed by the Federal Opposition (Australian Labour Party).

In my opinion the student-to-state contribution ratio should be further increased. The central argument for this is that this creates a user-pays system, which simultaneously ensures universal accessibility. My arguments follow.

  • Incentive to make sensible long term decisions – If students are paying for their education they are more likely to make sensible long decisions regarding what they study. If we look at Western European nations which offer free higher education, we find a disproportionate number of students taking courses with very little chance of scoring them a job upon graduation. For this reason, higher education is doing little to contribute to overcoming high unemployment. I know numerous people in Germany who, despite having a university education, are unable to find jobs for this reason.
  • Incentive to complete studies, and to study full time – When higher education is free (in combination with government student living allowances), students have reduced incentive to study, and to complete their studies in a timely manner. Again using Western Europe as an example, as a result of free higher education in combination with state sponsored living allowances, it is not uncommon for students to take a couple of subjects per semester, and drag a standard undergraduate degree out over a five or six year period. Additionally, there is a sub-culture of career-students, who simply study one degree after another, with no intention of ever entering the work force. This is not the sort of culture a productive society needs to encourage.
  • Financial fairness – At the end of the day, there is no such thing as ‘free education’. Someone has to pay for it. The question is simply who. If the state pays for it, then it is payed for by all tax-payers. Whereas under a user-pays system only the person who receives the education pays for it. On average, people with a university education have significantly higher incomes than the average. Thus, higher education is a financial investment. It therefore seems to stand to reason that the ones receiving the dividends from this investment be the ones who pay for it. If tax payers were paying for my personal stock portfolio, to which only I was entitled to the returns, I’m sure everyone would agree that this would be very unfair. Frankly I see education in the same light. Why should the butchers, backers and candle-stick makers of society be the ones paying for my higher education, so that I can go and get a job earning twice as much as them.
  • Competition – If students are paying for their education themselves, this injects competitive forces into the education sector. Under the present system there is very little competition. Firstly this arises because the HECS system regulates the pricing of university courses. Second, what little variation in pricing there is between universities is almost invisible to the consumer (i.e. students) because the contribution they make towards this cost is comparatively small. If the HECS pricing structure were deregulated and the student contribution increased, the cost of courses would enter the decision making process, thereby driving competition.

In addition to these, I believe several other reforms of the higher education system are in order. Currently, the HECS debt system is government run, uses below market interest rates, and is based on your income tax statement. This means that it does not follow you overseas. The flaw with this is very clear. Every student with a HECS debt has an incentive on the order of tens of thousands of dollars to leave the country upon graduation. In my case, I have a roughly $40,000 incentive, which, needless to say, is very significant. And yes, it is an influencing factor in my current career plans. Frankly, I think its pretty catastrophic policy, to effectively offer every university educated person in the country a one off payment of this order to go overseas. I can’t imagine that this helps retention of intellectual capital, the so-called brain drain. The solution is to shift this system of debt to the private sector, such that it follows you wherever you go, as per any other debt. Then, if a person chooses to work overseas, make repayments mandatory. Alternately, if they remain in Australia, and their income is below the threshold, then the government kicks in with the repayments.

Additionally, I believe, as Joel also argues in his post, that we should eliminate the multi-tiered system of full fee paying positions and HECS positions. I propose to do this by making all places full fee paying, aided by the reformed debt system I just proposed.

2 thoughts on “The cost of higher education”

  1. Hmm! Bold statements! I agree with many of your points – particularly your thoughts on encouraging long term plans and incentive to complete.

    But as for making it full fee paying for everyone… Yes, user pays is the fairest system if only the user gets an advantage from it (much like my arguments for VSU). But I would think the general, non-studying Australian also gets an advantage, although I probably can’t back this up properly. They want well trained doctors, strong economic growth, new technological advances, etc, etc – all things that come from having a well educated society. And yes, a good doctor etc also gets compensated for that with a good salary, but I think asking everyone to contribute something is still reasonable. I would still support an increased user contribution (say, up to 50% at the best universities)

    But I agree it’s a real issue that your HECS debt effectively disappears when you’re overseas, and this should be looked at. But I think it’s really important that the loan remains interest free (just indexed) and I’d be worried about handing this sort of non-money making venture to the private sector.

  2. > But I would think the general, non-studying Australian also gets an advantage

    This is certainly true. The benefits extend beyond the person who receives the education. However, the other beneficiaries shouldn’t be paying directly for the cost of the education. They should pay as they benefit. They do this, for example, every time they go to the doctor, dentist etc. Under a market system, this is the mechanism by which the rest of society makes their contribution for the benefits they receive from other people’s education.

Leave a Reply