The Great Myth of Fee Deregulation

If you were to listen to the arguments of most students at the ANU, fee deregulation of higher education sounds like an evil conspiracy by right-wing free marketeers. The Socialist Alliance go so far as to portray it as something destined to screw over the little guy in the name of ‘corporate’ interests. In this vein, the argument goes that deregulation of fees in an Australian context is something that is incontrovertibly inequitable. A fee hike, according to such arguments, puts poorer students in a vulnerable position where they cannot afford their education, whilst leaving the rich untarnished. It is also asserted that student debts would also become increasingly problematic, à la USA, and Australia’s university system would become further stratified, with poorer students funnelled into cheaper institutions, and wealthier ones getting to go to prestigious Go8 universities.

As intuitive and ‘progressive’ as these arguments seem, however, they are in no way accurate portrayals of the actual consequences of fee deregulation. In fact, they conceal an ugly truth about free education.

The first reason why fee deregulation may be a good idea in an Australian context as opposed to elsewhere, like the US, has to do with the fact that we have HECS/HELP. Under the HECS system, an individual is able to accumulate their student debt through the tax system, rather than through private finance. Once that individual then graduates they are not immediately required to repay their debts, but rather required to start repayments only once they reach a threshold of income. That income is defined as median income, so approximately $50 000. At this level fee repayments are capped at 2% of annual income per year, with the cap of repayment increasing up to 8% as incomes eventually rise above $100 000. The crucial point is that students who graduate and are not employable, and/or remain in the lower socio-economic brackets of society get a free pass, whilst those who used society’s resources to climb the ladder are required to pay back a bit of their government funded gift. Furthermore, the interest rate on the HECS debt is between 2-3%, whilst annual nominal wage growth is 5%, meaning that the real value of this debt actually erodes over time, rather than compounds.

Given this, increased university fees under a HECS loan system is equivalent to simply raising marginal tax rates on the top half of income earners in Australia. The important thing to note here is that the baseline comparison of an Australian education system becoming more and more like the USA’s broken arrangement is a false counterfactual. The American system does not have HECS. As such, it is costly for students to defer their debt repayments (unlike in Australia) and either working families have to foot the bill, or students are forced into a lifetime of compounding debt.

Moreover, a system of HECS repayments is actively more equitable than the alternative of free education. This is not just ‘intuitive’ economics, but rather empirical fact that explains why Whitlam government abandoned its free education platform. The reason why free education is an actively regressive policy is because it involves a transfer of income from those who do NOT go to university to those who do. Implicitly, we have TAFE students and blue collar workers funding the education of university students who either go on to be upper class, or already come from the upper echelons of society. Bearing in mind that most students at university come from high SES backgrounds, and that government fully funding universities means government not funding other programs, such as welfare or universal healthcare, free education very rapidly appears inequitable.

Another reason why fee deregulation may be necessary in the near future, has to do with the trending political climate regarding university funding. When fees are capped at a low level, universities are forced to rely on government to get the majority of their revenue. In recent times, government’s willingness to fund university research has been in considerable decline, and universities need an alternate funding source if they wish to maintain high research standards whilst running a large range of courses. In this respect, deregulation of fees (or at least a higher fee cap) is probably the only thing that can stop Australian universities from declining into mediocrity. There is a reason that the best universities in the world come from the largely deregulated markets of the USA and UK, whilst European education consistently underperforms in global rankings. (For example Australia has 5 universities in the QS top 100, whilst Germany- a country of 4 times the population- has only 3).

Thus when seen under the light of these considerations, fee deregulation is hardly the evil that it is portrayed to be by the average university student. When faced between the alternatives of a more inequitable system with worse universities, and a more equitable system with better universities, fee deregulation seems to be one of those rare instances of a free lunch.

All things considered though, there are considerable disadvantages to the Liberal Party’s plan to deregulate universities. Originally, the Abbott government wanted to increase the HECS rate from 3% to approximately 6% (which would make the debt compound substantially), whilst plans were made to retract funding even as fees became uncapped, thus resulting in a far smaller increase in resources for the university sector. Furthermore, there are strong arguments to suggest that the fee cap should merely be doubled, or tripled instead of active deregulation due to certain market failures (the UK model).

Deregulation in any form isn’t necessarily an inherent good – the Liberal model proves that – but a well-executed deregulation plan would provide a better resourced, more sustainable, and more equitable model than either the status quo or a free university system.