Proposal for semi-flexible downward sloping demand driven HECS system


The government has put changes to higher education funding on the back burner. This precaution is prudent since as it happens any changes to the income contingent loan system that we have presently are likely to have consequences that are difficult to anticipate. Basically,  one would need to model the changes to university and student incentives under any new system and this turns out to be complicated when funding is based on the kind of risk sharing associated with income contingent loans.

I firmly think that full deregulation of university fees is not workable because the HECS loans system artificially creates an effective demand curve for education that is highly inelastic. Demand by students who have to pay student loans in a way that is contingent on their income is not greatly responsive to changes in fees. So the likely outcome of full fee deregulation is that universities such as Melbourne, Sydney, UNSW, and UQ will slightly decrease the number of students they admit and increase local fees to well above fees paid by international students. See figure (1) which illustrates the point.fig1

The proposal in this post involves a small iterative change to the present system, and is aimed at addressing  the following:

  1. Any change will maintain the demand driven system. That is, universities control through admissions procedures the number of students admitted to each degree (by basically setting ATARs).
  2. Change should provide universities with flexibility to set prices that are different from other universities.
  3. Changes are sustainable in the long-run (taking into account that HECS debt is a sharing of risk between students, universities and government).
  4. The change is small and is implementable, minimising the possibility of unintended consequences.
  5. The changes do no undermine our international students market.
  6. Ensure that universities compete with each other and do not collude on setting fees.
  7. Prevent the possibility of price discrimination (for local demand) by near monopolies such as Melbourne. Particularly, ensure that the only available instrument for setting fees by universities is affecting quantity of students admitted into programs.

Presently fees are fixed by government. Universities set quantities (students numbers admitted into degrees) and have an incentive to increase the number of students to the point where the marginal cost of educating a student is equal to the price they receive per student. In a totally deregulated environment, universities have the ability to set both price and quantity. Because income contingent loans induce a highly fee-inelastic demand function (of students), universities are, under the usual local assumptions, likely to decrease quantity demanded slightly and charge extremely high fees, something that may decimate the market for international students.

The proposal here is simple. The government provides a fee schedule that is downward sloping in quantity of students admitted to programs. The higher the quantity the lower the fee. If a university admits fewer students, then they get higher fees. So, as is usual in this kind of analysis, the universities’ main choices remain the quantity of students they admit (inversely related to ATAR scores).

Further, there is a need to prevent quantity-price collusion between universities, this can be done by utilising present competition laws. For instance, the ACCC can oversee the university sector making sure that Vice Chancellors do not coordinate on quantities.

The downward sloping fee schedule, should naturally lie between international student fees (set by the global market) and present government set fees for local students. Universities that admit the same number of students that they presently admit, get to set fees at the present fee rate. Universities wishing to increase their fees need to reduce the number of students they admit. A university may even be able to increase fees to international-fee levels, if it sufficiently reduces quantity. See figure 2, which illustrates the point.


What will happen in a university such as Melbourne under the proposed scheme? Well that’s easy, they are likely to reduce quantity, increase ATAR admission requirements, get more fees according to the fixed downward sloping schedule, and increase the profit they make, which in turn funds their research. Alternatively, Swinburne will likely maintain  present ATAR scores, maintain the quantity of students they presently admit,  and be no worse off.

With some analysis the downward sloping fee schedule can be chosen optimally based on fiscal budgetary variables



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