Proposed policy change to HECS-HELP education funding

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In a previous post I outlined a way of thinking about higher education financing that does not break the HECS income contingent loans model and does not break the government’s budget. I proposed a small change to the way things are presently done that seems obvious from a theoretical view point taking into account Universities’ need for flexibility and the needs to address the following:

  • Moral hazard considerations associated with skin-in-the-game issues, which I wrote about here and here
  • Fiscal priorities of government
  • Economic efficiency
  • Distributional considerations

In this post I outline how to implement the proposed scheme within the context of the existing  HECS-HELP bureaucratic framework. Here I propose a change to the way we treat the Student Contribution Amounts set by government for Commonwealth supported places. The proposal allows different universities to charge different fees, provides needed flexibility in the sector, but limits the overall potential economic disruption of fee differentiation.

Proposed policy change to Student Contribution Amounts

As with the system at present, students enrolled in Commonwealth supported places will have to make a payment toward their education “student contribution per EFTSL studied,” which they can pay either upfront or through the HECS-HELP scheme, depending on eligibility to access the scheme.

Different areas of study are grouped into bands and the government sets a progressive schedule of maximum amounts that a university can charge for each EFTSL of study in each band. The schedule is the same for all universities. It is progressive in total EFTSL of HECS-HELP eligible students commencing in the year at the university.

The schedule is a schedule of maximum Student contribution amounts in which:

  1. The maximum Student contribution amount depends on the total number of EFTSL of students who are eligible to access the HECS-HELP scheme commencing studies in the band at the university.
  2. A university that wants to charge higher fees needs to decrease the number of commencing HECS-HELP eligible students, by increasing entry requirements for example.
  3. The maximum amount is always lower than international fees charged in the band.
  4. The maximum amount is may be lower than the maximum student contribution amount in the present system.

Notes: The minimum student contribution amount remains $0. Australian Government subsidies for Commonwealth supported places remain unchanged. Universities maintain full control of the number of students they admit into each program. The present system of Universities requesting a batch of Commonwealth supported places accordingly remains unchanged. A requirement be instituted that entry conditions for domestic and international students into programs not be unreasonably different be instituted (see my discussion here).

An Example

An example of the fee schedule that is given by the government is provided in the following table for the new band Commerce, Business, Management, assuming that international fees are above $24,000. Figures are indicative only, and are based on heuristic analysis. In this example I’m assuming that the government provides no additional subsidy to education this band. Note that the present (2016) Student Contribution range is fixed at $0-$10,044. 

The following fee schedule is provided to all universities:

Total EFTSL of HECS-HELP eligible commencing students at the university (Commerce, Business, Management)
EFTSL <100 101-230 231-400 401-799 >800
Student contribution range $0-$24,000 $0-$19,040 $0-$14,059 $0-$10,044 0-$2000

 

The universities then decide the year’s intake by setting an ATAR entry requirement or through other entry hurdles. They announce this intake decision to the government, this in turn provides them with the maximum fee that they can charge for the Bachelor of Commerce.

Students applying for a Bachelor of Commerce see the following fee schedule of student contributions (based on predictions I make below):

UMelb ANU RMIT HPU
Student contribution range BCom 0-$19,040 0-$14,059 $0-$10,044 $0-$2000

HPU in this example stands for Hypothetical Private University specialising in exclusively online education for students with low ATAR scores.

In this example, I envisage the following:

  1. The University of Melbourne increases entry ATAR for its BCom degree, reducing commencing EFTL to less than 230, and increasing fees from $10,044 to $19,040. The University of Melbourne’s revenue increases, but its cost of educating the smaller number of students decreases. Thus, its overall profit from the Bachelor of Commerce degree increases.
  2. The ANU may wish to decrease the number of commencing students to less than 400 EFTSL in the BCom/BEcon degrees and charge $14,059. It is choosing this band because its cost of educating Commerce students is lower than Melbourne, and it operates in a different market than the University of Melbourne.
  3. I anticipate that the number of commencing EFTSL in RMIT’s BCom degree will increase above 401 and RMIT charges $10,044 per EFTSL. RMIT’s revenue will increase and given the nearly flat cost structure involved in its focus on hybrid online-oncampus learning, its profits also increase. Noting that students typically will choose to do Commerce at RMIT only if they cannot get into Melbourne or Monash, I view RMIT’s ability to increase fees in the proposed scheme as limited.
  4. HPU is a new online private university that seeks mass enrolments above 800 EFTSL and provides low cost online education for under qualified students. I anticipate that many students enrolling in HPU will likely default on their HECS loan, which however is much smaller than that of students enrolling in the University of Melbourne.

Advantages of scheme over full fee deregulation and the present system

 In the present system Student Contribution Amounts are fixed for each band. In a fully deregulated system that is demand driven Student Contribution Amounts and the number of students that are admitted into each degree fully simultaneously determined by universities.

  1. The proposed 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. The change provide universities with flexibility to set fees that are different from other universities. The present system does not allow for any fee flexibility even when it is known that different universities have different costs and face different demand from students. In a fully deregulated system universities operating in near monopoly environments such as Melbourne will likely have a cost incentive to decrease student numbers and increase fees dramatically. The student behavioral changes associated with the HECS contingent loan system exaggerates this problem. Indeed, HECS by design artificially makes student demand less responsive fee increases, providing an artificial opportunity to university of Melbourne and ANU to institute dramatic fee changes under a fully deregulated system.
  3. The changes are sustainable in the long-run (taking into account that HECS-Help debt is a sharing of risk between students, universities and government). The government determines from time to time the fee schedule limiting the budgetary liability associated with deregulation. The proposed scheme provides greater flexibility to government than either the existing system or a fully deregulated system.
  4. The changes maintain and utilize existing bureaucratic framework for administering higher education financing. We envisage that a totally deregulated system will need greater oversight from government than our proposed scheme.
  5. The changes maintain and utilize existing administrative frameworks at universities for administering the provision of education to Commonwealth supported students. In the proposed system, as with the status-quo, universities need only determine the number of commencing students in each degree. This activity is well understood, and each university has administrative frameworks tasked with this activity. In a deregulated system, universities will need to determine both prices and number of students. We do not know how this can work or the kind of modeling that the universities need to undertake in a deregulated environment.
  6. Students making choices about courses and universities will easily understand the changes. Students in a deregulated environment will likely be burdened with bewildering choices involving future payments contingent on their income.
  7. The changes do no undermine Australia’s international students market. Presently, local fees are well below international fees. HECS by design artificially makes student demand less responsive fee increases, providing in a deregulated environment an artificial opportunity to university of Melbourne and ANU to institute dramatic fee changes for local students in a way that makes local students more attractive than international students. Indeed, top universities under a fully deregulated system may even want to substitute international students for high paying local students.
  8. The fee schedule limits the impact of choices by universities on government budget. The proposal can potentially limit government budgetary risk to the same levels as it presently faces.
  9. The scheme has the capacity to limit moral hazard problems associated with private providers whose business model is to provide low cost education to large numbers of students.
  10. The scheme has the capacity to limit moral hazard problems associated with existing high prestige university who wish to provide highly desirable degrees at high cost and extremely high monopolistic fees. To do this they need to reduce enrolments.
3 Responses to "Proposed policy change to HECS-HELP education funding"
  1. For this to work, universities would need to have an extremely good understanding of their fully burdened course costs, as a significant proportion of the cost of each course cost is fixed. So knowing the marginal cost of each additional student per course would be required, as tipping into the next band could be fraught with danger. Using the example above, enrolling 401 students (as opposed to 400) will reduce revenue by over $1.5m, yet a large proportion of your costs (predominantly central but some school level costs as well such as Deans and Heads of Schools) won’t reduce at all. And going to 800 students (from 799) would cause a reduction of over nearly $6.5m!

  2. Michael universities choose EFTSL loads. The also manage their own risks. So I doubt that any university will choose to declare a 401. Left entirely to universities, I anticipate that they will not choose to jump off a clif or get anywhere near a cliff.

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