What are the likely consequences of HECS fee liberalisation?

The Australian government education minister Christopher Pyne has made his wishes clear for the tertiary education sector: he is following the wishes of the GO8 Vice-Chancellors and wants to remove the caps from the HECS fees asked of domestic students. This seems to fit in a vision of greater competition for the sector, and hence the fee deregulation is accompanied by changes to the accreditation regime to make it easier for competitors to come in. There seems to be no appetite for changes in university governance, nor any attempt to remove the benefit that existing inner-city universities have in the sense that they don’t have to pay for their premises whilst newcomers would have to pay rent for their premises.

Let us presume that the minister gets his way, either this time round or next time round, and that we will hence see HECS fee deregulation for domestic students with easier rules for accreditation, and no significant changes otherwise to the current environment. Following on from the efforts of Rabee Tourkey and Rohan Pitchford on this blog, what are the likely consequences?

First off, we can look at the consequences of a similar fee deregulation in the UK in 2010: at least a doubling of fees at the top and a proliferation of discounters at the bottom.

Should we expect these things to occur here too? One should expect both elements to occur here even more strongly because in our case there are less alternatives for students and hence a greater potential to increase fees and have chaos as the bottom: the main differences between us and the UK in this market is that the UK is more densely populated and that students thus have many more universities close by them, allowing for far more real competition than will be the case here. Thus, given that distances between cities are so large in Australia, one should expect the price hike to be well above double in this country. So from Hecs fees of around 10,000 AUS per year, I expect we would go to 30,000 AUS per year at the GO8s, pretty much within a year or two following fee deregulation.

At the bottom, it will be chaos, just like in the UK. You will get all sorts of scams and desperate ploys, essentially because the government is writing a blank cheque via the HECS scheme. Many will come to collect.

What kind of scams can one expect? Well, a HECS loan is effectively money from the government that the individual is supposed to pay back from her income in decades to come. If the person cannot pay back because she is abroad, not employed, or starts earning too late, then the loan never has to be paid back. There are many ways to exploit this.

One scam is to have large HECS-fees with almost no education whereby the institution and the student share the money. This can be quite overt, such as the ‘Cashpoint colleges’ in the UK, but can also be done in quite subtle ways that are very hard to police. For instance, one can have a degree in ‘car engineering’ whereby the institution provides a free car to the student, supposedly to ‘practise on’. In return, the student gets a hefty loan from the government that goes straight to the institution. The student eventually leaves the institution with a worthless degree but with a nice car and the institution makes off with the HECS money.

Which kind of student would go for this? The kind that does not think about the long-term future and the kind that doesn’t expect to ever have to pay back anyway, such as those who expect to be unemployed or working abroad.

Another type of scam is to promise students a great degree but have very low entry-criteria, and then charge hefty fees but deliver very poor yet very cheap education. Which kind of student goes for that? This sort of scam attracts the not-so-smart students who think they are much more brilliant than their high-school scores suggest. Sounds like most not-so-bright high-school students I know! This group is big in the UK and in the US and you have lots of universities in both those countries that fleece such students. Here, one should expect the fleecing to be much worse because here it is the government that foots the bill. One should thus also expect the number of students to increase quite strongly in the medium term and for an enormous blow-out in these loans, ie low repayment rates, just like in the UK.

Both these scams are of a similar ilk in that they exploit the least able members of society to defraud the government out of money. Interestingly, this will not immediately show up on the government books as the financial disaster that it is because the government can include the HECS-loans as equity on its balance sheet, even when the odds of getting full repayment are minimal. So it will only become visible as a financial disaster for future governments.

So at the bottom end of the market, we should expect the outcome one historically gets with unregulated personal services: snake-oil salesmen taking advantage of people, this time at the expense of the whole community.

What about the impact on academics? Well, I think in the short-run it will turn out pretty well for myself and my colleagues at GO8s. It will be a great time, at least for a few years. The higher fees for popular courses that lead to good jobs, such as economics, finance, medical specialisms, law, etc., will feed into greater demand for good teachers and good researchers. The teachers will be more popular with the university administrators and the students, and the good researchers will be even more important to advertise the merits of the institution. Me and my colleagues expect significant pay increases in the years to come!

It will also be a boon for university managers and administrators. You see, even though the universities are officially non-profit organisations owned by the community, the managers and administrators have the actual control over the money streams in the universities. That is why their salaries and numbers have gone through the roof in the last decades, such that a university manager in Australia easily earns three times what they earn in other countries. With more money flowing through their hands, their personal cut should also be expected to increase.

So it is a big win for VCs of GO8s whose lobbying is paying off handsomely. They should renegotiate their bonuses as soon as possible so that it increases with more university revenues, which is easy to do because they effectively negotiate with themselves! Similarly, the whole administrative layer will get a big influx of money, which they will spend on higher salaries for themselves and an increase in their ranks. Christopher Pyne will probably become a revered ‘market guru’ amongst them.

The medium term knock-on effects of this glut of money will mainly be in terms of protecting these benefits flowing from domestic student money. Given that most students don’t want to go to other cities for their education, the main thing to do is to keep them happy about their learning and confident that they will get a decent job later. So there will be some pressure to keep up reasonable standards, but the efforts to keep them happy and docile will also increase, meaning that universities will become more paranoid about bad publicity and tough teachers. So over time, the universities will try to attract more docile teaching staff.

In terms of the impact of these reforms on ‘academia’, ie on ‘communities of scholars dedicated to truth finding’, I am less pessimistic than most of my colleagues. Whilst academic values will be entirely unwelcome and ousted from undergraduate degrees, simply because independent academics are seen as a potential threat to students, the even greater importance of research excellence will mean that academics will retain and expand their own little playgrounds in the graduate education and research realms: academia will simply become even more divorced from undergraduate education, which will become more and more like an extension of secondary school.
Having said this, it is possible that a few universities will specialise in re-creating an academic environment for undergraduates if there is enough student demand to be ‘educated by the true experts’. Perhaps there is demand at the elite level, but the Australian market is too small to sustain many such places.

What can we expect in terms of innovation and competition for students? I would actually expect quite a bit of innovation and competition to occur in the medium run, simply because it is suddenly much more worthwhile to try and pinch the students of other universities. Even though students are unlikely to move cities, it is quite reasonable to presume that they will be willing to move to a franchise university in their own city with courses delivered by a university in another city.

So I expect the GO8s to try to pinch students from each other by means of opening up franchises in the major cities, possible co-opting the existing lower-tier universities already there. One can thus imagine the University of Melbourne trying to muscle into the Brisbane market by having a franchise agreement with Griffith on particular degrees. One can imagine the University of Queensland trying to muscle into the Melbourne market by doing deals with RMIT or Latrobe. There are also foreign high-status universities that might try a similar franchise deal, basically because there is far more money on the table to make this worthwhile.

So if the current plans for reforms go ahead and there are no knock-on reforms, then I would expect an explosion in fees at the top, pretty devastating snake-oil activities at the bottom, and real competition to gradually emerge between the surviving high-status brands.

Given that this trajectory involves a major increase in the government debt though, via an increase in Hecs-loans that wont be paid back, I very much doubt that this first round of reforms would be the last one: I expect that the first round will lead to later rounds that provide band-aids to the emerging problems. Given that the government and the ministry of education seems to take its cue from the top administrators of the GO8s, these later rounds might well be anti-competitive and hence primarily designed to undo the potential benefits of the current reforms, such as via new regulation that makes it harder for foreign universities to come in or that outlaws competition between GO8s in the form of domestic franchising. That kind of trajectory may be good for me and my colleagues, but not so good for the majority of the Australian public.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

8 thoughts on “What are the likely consequences of HECS fee liberalisation?”

  1. At this stage, there are no plans to lessen overall accreditation requirements other than the legal definition of a ‘university’, although the higher education standards are being reviewed as part of a process that started before the funding announcements. The big proposed change is creating a link between registration as a higher education provider and accreditation of courses and eligibility for public funding.

    While there are a number of franchise arrangements already, the Group of Eight universities have generally had very limited involvement. I don’t think this will change – they will want a premium, own campus-based brand which major franchising would damage.

    However it is quite possible that franchising more generally could increase.


    1. yes, the HECS changes in the budget are part of a longer-term process involving accreditation, which is why I spoke of the minister’s wishes rather than merely the budget plans.

      You seem to have contributed to this move, Andrew, with your call for fee deregulation (http://www.education.gov.au/report-review-demand-driven-funding-system). Are you confident that the plans, as currently set out, are not going to lead to the bad outcomes we see in the UK and the US?

      I think of franchising as different from setting up a campus in another country. I am thinking of having exactly the same courses and exams in different places at the same time. That way there is no brand dilution. There is now a lot more money on the table to entice this kind of competition. The excuse you give though ‘let us stick to our own campuses’ may indeed be a means of anti-competitive coordination.


      1. There is quality (and hence brand) dilution in many cases. You can see this in all the effort current universities make with their smaller campuses (many of which are getting closed/sold, showing it is very hard to get franchises to work — Monash Gippsland sold to FU , Swinburne Lilydale just got sold, and I think Latrobe Bendigo is probably shaking in their boots. There are a few that work I know of — I think Swinny and RMIT have campuses in Malaysia which are more or less independent, but what they teach is very limited).

        The basic problem for high prestige universities is that they will generally have one campus that has much better students than the secondary campus(es). But you need to make one course for both. Now, unless you want to slaughter the guys at the other campus (which will provoke endless complaints from high failure rates and course material that is too hard), it is very difficult to make one course that pleases (let alone gets the most out of) all the students. So you end up doing all you can, which is generally going for the lowest common denominator.

        Now just imagine if you are Harvard. At your campus, you have the smartest students in the world. Do you really want to franchise out your courses (which will need to be more or less identical) so that just average students can pass — those who don’t want to work too much, don’t think too hard, or really behave in any way like your really great students at the main campus? In statistics, for example, this might be monkey-press monkey-do using SPSS vs. learning actually what goes on using R. That might get you lots of money for being Harvard for some years, but the students on your main campus are sure going to be cheesed off and when people see how easy your courses are, there will go your reputation.


  2. I don’t see current accreditation reforms as diluting basic operating requirements, and I think these should stay demanding. While I cannot promise zero bad outcomes in either the public or private sectors, I don’t think there is a major systemic risk. We gave public unis that had expanded rapidly under demand driven funding special scrutiny in the demand driven review, without finding evidence consistent with major new problems. Some people in this debate are acting as if a private higher education sector is new, when some of the players have been around for decades and have had access to the HELP loan scheme for nearly 10 years. Even before the much tougher current accreditation system came into force in 2012 there was little evidence of the problems that have emerged in the vocational system and elsewhere. On basic things like teaching, the more likely hypothesis is that the private sector is ahead of the public universities on average. Now that they are all headed to common teaching and outcomes surveys, we will see.

    There is no brand dilution only if you presume that ‘courses and exams’ is the high-value Group of Eight product. I think most of the MOOC analysis was off the mark because that is only part of what higher education providers are selling.

    Unis sticking to their own campuses and missions might be non-competitive, but it is not anti-competitive in any way that should be legally relevant.


    1. We will have to disagree on the toughness of the current accreditation regime. The regime might function to keep lots of new universities out, but on the ground it does not prevent dilution of degrees at all.

      I would actually not mind at all if unis would stick to their mission. You see, unis sticking to their mission would entail a radical return to academia since the mission is non-profit and scholarship-oriented. The whole point of the reforms is to encourage universities to become market oriented (‘demand driven’), the exact opposite of their missions. Respecting the local monopoly rights of the other GO8s is the almost the opposite of being demand driven. It would be a cartel agreement that might well be legally relevant.


  3. The kind of franchising that you are talking about Paul worries me. In particular, the prospect of interconnectedness of risk for universities may get us into the same trouble as interconnectedness in the financial sector, which lead to systemic risk that had to be bought out by government. Will we in the future be bailing out a private university that is small but is of big to fail from a systemic risk view point? I think the notion of a narrow university sector that is guaranteed/funded by government is compelling.


    1. You and I want the same thing, Rabee, but I think the ability of economists to turn the tide is minimal. If fee liberalisation and university governance capture is here to stay for the medium term, then the question becomes how to make the best of it. Depending on how these franchise agreements are done, they need not increase systemic risks at all. The ‘EuroDysney’ model could for instance be applied, whereby it is the host institution that takes all the risks and the franchiser merely collects a rent for the IP and exam services it provides.

      As to increasing the risks of ‘too big to fail’, when is the last time a major public university went bankrupt and was liquidated in the Western world? The public seems to already bail them out so we already as a public are exposed to that systemic risk.

      There is another reason to like the franchise idea: the international market keeps growing and growing. Even though Australian universities have so far not made money from their foreign-campus adventures, it is quite conceivable that a cross-border business model will eventually be found that does make money and that takes off. Franchising in terms of course material and exams (perhaps via the MOOCs avenue I discussed in a previous post) might be such a model. If local experimentation and local franchising leads us to fine-tune a winning formula that is exportable, then that could be worth an awful lot in terms of service exports and make the whole enterprise worthwhile after all.


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