Deregulation: A Maths Lesson For Ian Young

 

The debate surrounding the government’s proposed deregulation of university fees has been clouded with obscurity, despite the fact that modelling the changes to university fees is a simple exercise in high school arithmetic. As Vice Chancellor Ian Young has correctly observed, “we can speculate on the future, but I think you just need to actually work logically through the mathematics”. Fee deregulation advocates are having difficulty producing such computations, so some of ANU’s own mathematicians have done Young’s maths homework and modelled future university fees.

The result, an online HECS Debt Calculator*, was developed by lecturers and students from the ANU mathematics department. The calculator computes the cost of an undergraduate education as well as the number of years it will take to repay the acquired HECS debt both before and after deregulation, using completely transparent methodology. The aim of the HECS debt calculator is to let the public make an informed decision on whether or not to support the proposed radical changes to higher education. Thus, the calculator allows the user to choose their own assumptions within feasible ranges in order to determine the best and worst case scenarios for themselves.

Recently, both sides of parliament have made numerous assumptions regarding future university fees and the interest rate on HECS debt to argue a variety of claims. These are the two key factors affecting the future cost of university education, and it is not hard to determine a plausible range for both.

There is an obvious range of possible university fees after deregulation. Fees must rise in order to compensate for the cuts to the Commonwealth contribution. The minimum fee used by the calculator is hence the amount the university must charge in order to break even under the new funding arrangements. On the other hand, fees cannot rise above the international rate. Currently, HECS debt does not accrue interest but is indexed to inflation as measured by the consumer price index. Under the government’s proposed deregulated university fee system, HECS debt will accrue interest at the rate of the 10-year Treasury bond rate, capped at 6%. This is an interest rate at which the government borrows money. At the moment, the 10-year Treasury bond rate is 3.8%, but over the past decade has averaged at 5.0%.

Using the HECS debt calculator, we can understand the changes to fees under various potential scenarios. (See worked examples on opposite page).

The maths lesson to be learned here is bleaker than high school calculus. It is conceivable that some ANU students will end up with $100k degrees or will never repay their HECS debt under the proposed scheme. Furthermore, if the 10-year Treasury bond rate rises above 6%, current and future students will see their HECS debt grow alarmingly quickly.

Of course, if interest rates stay low and if students find high-paying jobs immediately after graduation, there are scenarios in which students can repay their debt after a decade or two. However, under the proposed fee changes, for most students and under most assumptions, fees will increase and will take longer to repay.

 

Worked Example 1.1: The $100k degree

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Ian completes a Bachelor of Science degree with Honours over 4 years. His university fees are the minimum fee the university must charge in order to break even, i.e. the current university fees for science, plus the amount of money the government is cutting from the Commonwealth contribution. The inflation rate is 2.9%, the same as the current rate, and the interest rate is assumed to be at the cap of 6%. (In the period between 1973 and 1997, the 10-year Treasury bond rate remained above 6%, so this scenario is plausible.) Upon finishing his undergraduate study, Ian does not work for 2 years whilst pursuing a postgraduate degree. He then finds a job with starting salary of $50,000 and 5% annual raises. How much will his undergraduate degree cost, including interest, and how many years will it take him to pay off, if he repays his debt at the minimum repayment rate?

Answer: 

Ian will take 30 years to repay his HECS debt of $103,805. This is in comparison to the current HECS scheme, in which his degree would cost $34,452 and take 17 years to pay off.

Worked example 1.2: The self-employed artist 

 

Screen Shot 2014-07-24 at 1.53.52 PMJoe completes the 3-year Bachelor of Visual Arts degree at ANU. His fees are $13.3k per annum, the average of the amount the university needs to charge in order to compensate for a loss of government funding and the international fee rate. Inflation is set at the 10-year average (2.8%). The interest rate is set at the average of the 10-year Treasury bond rate over the last decade (5.0%). Upon graduation, he spends 3 years selling Monet reproductions on the streets of Paris. He then returns to Canberra, initially scraping together an income of $40,000, which then increases by 4.1% per annum. Under the proposed changes to university fees, will Joe ever pay back his HECS debt?

 

Answer: No. 

50 years after graduation, Joe will have repaid $82,249 of debt and still have $8,868 of outstanding debt. This is in contrast to the current university fee scheme, in which Joe would have repaid his $18,132 HECS debt after 31 years.

 

*You can check out the the online HECS Debt Calculator at: https://maths-people.anu.edu.au/~alperj/deregulation/. v