The government has found some gold in its reforms to higher education, but lost the plot along the way. An extension of income contingent loans to TAFE and other vocational qualifications is a smart move. Forcing PhD students to pay fees is not. Reforming fee structures was necessary, but has been cocked up.

In the ‘old’ model (from a month ago), caps are placed on the amount universities can charge for courses, but they in turn receive an amount (the HECS subsidy) of public funding per student. This amount is set by the government at will (it doesn’t require legislation). The subsidy is included in the sticker price of courses. This ensures a demand driven system, but has a significant drawback, namely a perverse incentive. Because universities face budget shortfalls from the caps and extreme uncertainty about how much money they receive per student, they are incentivised to enrol as many students as possible and reduce the cost of administering their courses. This has a strong negative impact on quality.

One reasonable solution proposed by the Group of Eight was to move to the postgraduate system across the board. In this case, universities respond to market demand for a certain quality-cost balance and set appropriate fees and quality to maximise revenue and other outcomes like international prestige. Postgraduate degrees typically cost around $25000 and you get what you pay for. Students consider the cost and quality and decide whether they want to buy. They can then apply for an income contingent loan from the government for the full value of the degree. The government pays this to the university and then collects the debt from the student. The university knows exactly how much it is getting per student, so it can ensure quality is commensurate to demand, and that the cost of delivery is met.

The main problem with this proposal is the difficulty of retaining a demand driven model for public funding. Some decent suggestions include block grants for teaching based on student enrolment numbers and block grants for research based on research output, research staff numbers or some other criteria that ensures some universities specialise in high end teaching and research, and others in low-end teaching or specific kinds of research (e.g. into agriculture at rural universities).

The new system post-budget is something else entirely. Essentially, everything is the same as before, but now universities can make the sticker price of a degree whatever they want.

This system has three key problems. First, there is a still a government subsidy incorporated into the sticker price. This means the universities are still unsure of how much money they get per student. Economic theory tells us that they are thus likely to overcharge to ensure they don’t incur a loss. But in the context of a budget emergency, the government may respond by dropping funding to zero on the grounds that the universities are now making all they need from fees. This is a bad situation. Fees go up but there is no guarantee that quality will match, and public funding for universities evaporates.

Second, income-contingent loans now come with a real rate of interest. This is a silly policy. The government hopes to make some revenue by charging interest on student debt. But what’s just as likely to happen is that the interest will encourage more people to elope overseas with debts and simply never pay them off.

Importantly, the equity of our higher education financing system depends heavily on there being no real rate of interest on income contingent loans. Free education is a regressive policy. It results in the taxes of the poor going to subsidise the rich to get richer. It is also fiscally unsustainable in the face of current demand—that’s why a Labor government introduced HECS in the first place. Income contingent loans have been shown empirically to maintain the enrolment rates of disadvantaged individuals while alleviating the financial burden of publically providing higher education. But real interest rates muddy the waters. Wealthy individuals able to pay up front now essentially get cheaper degrees than those who must pay later. Individuals with debt burdens will also be forced to pay them off faster, which will discourage them from partaking in low-paid internships in the early part of their careers. Yet many of the most lucrative jobs require such internships. The government gets its money back a little sooner, but at a cost to social mobility.

Third is the decision to charge PhDs fees. This will discourage international talent from attending Australian universities, exacerbate the brain drain and deter many students from postgraduate study entirely. It will deprive universities of quality research assistants and tutors and industry of highly trained staff. In many disciplines, PhDs are a crucial professional requirement. For example, much high end scientific equipment cannot be operated without a PhD spent learning the machinery. Statistical techniques in high demand in business are learnt predominantly in postgraduate courses. Perhaps more importantly, PhD students are currently paid less than an apprentice on a union construction site. The decision for someone with a master’s degree and huge earning potential to pursue further study is thus already an enormous financial sacrifice. Why make it even more difficult?

A final bone of contention in these reforms is the potential explosion in the cost of a university degree. The jury is still out on whether this will occur, though treasury modelling suggests it is likely. Undergraduate courses are fundamentally cheaper to deliver than postgraduate ones, so we are unlikely to see costs like those associated with postgraduate degrees in Australia. However, the Group of Eight has expressed a desire to compete with top international universities, many of which charge in excess of $25000, so we will have to wait and see.

The fact remains though that these costs will not make degrees a bad investment. The net present value of university degrees is still many times the cost of acquiring one. Income contingent loans make these costs manageable even for those with no initial capital. There are valid concerns that an income contingent debt burden of $30000 is fundamentally different to a debt burden of $120000, but we won’t know the effects for some time because other countries with high student debt burdens don’t have income contingent loan systems the way we do.

The government tried to do some good things in the most recent round of higher education reforms, the extension of HECS to TAFE is particular praiseworthy, but on balance, they botched it. A desire to respond to analysis from commentators like the Grattan institute and advocacy from higher education providers was muddled by an obsession with balancing the books. There’s a good chance we’ll all be worse off for it.

The author blogs at markfabian.blogspot.com