21 September 2004

Election 2004: Is free university education affordable?

Ben Spies-Butcher, The University of Sydney

University education is a core responsibility of the federal government, and consumes a significant proportion of total federal education outlays. However, over the past fifteen years, commitment to universal, fully funded university education has waned. Students now pay fees, some deferring payment through the tax system, others paying up front. At the same time class sizes have increased and academic incomes have fallen against average weekly earnings (Chapman 2001). Although the major parties have different policies on the funding and regulation of universities, there is a consensus that a return to the days of ‘free education’ is fiscally impossible, despite evidence that Australians would be willing to pay higher taxes to finance this type of expenditure (Withers & Edwards 2001). Both parties accept the claim that tertiary education is a part-private, part-public good, and therefore accept that some student contribution is justified.

Is free education is a realistic proposition or a social democratic dream?

I question this consensus here. Is free education is a realistic proposition or a social democratic dream? Before proceeding, I need to note some qualifications. I don’t propose a specific model for establishing free education. Most of the data I examine remain in aggregate form, and so don’t account for variation between institutions and courses. I don’t employ econometric modelling techniques to account for the interaction of supply and demand forces, and so may miss some flow-on effects. However, in this relatively short paper, I do attempt to give a broad feel for the scale of the task.

Examining the financial realities of providing free education may appear to be a straightforward task. But on closer inspection it is not entirely clear what ‘free university education’ might mean in practice. For example, were the number of university places to be dramatically reduced, then the current pool of government university funding could clearly cover a higher proportion of the costs; if the number of places were reduced enough, current funds could cover all costs. However, such restrictions on access would surely undermine the principle of free education. (Current arrangements do not allow all those who apply to a university to gain entry, and so there is already some restriction on supply.) There are other restrictions to access, such as the ability of students to meet living costs during their tuition. We may also be concerned for the quality of education. Some might judge that unless all these issues were addressed, university education would not be truly ‘free’.

Accordingly, I examine three separate changes that might be seen as necessary to achieve ‘free education’. The first, and most obvious, is the abolition of fees for domestic students; I look at both fees under the Higher Education Contribution Scheme (HECS) and the Postgraduate Education Loans Scheme (PELS). Second, I look at changes to the quality and quantity of university education. Third, and finally, I explore the cost of increasing student income support.

ABOLISHING FEES

After significant increases in scholarships and student support during the 1950s and 1960s, the Whitlam Government formally abolished university fees for Australian undergraduate students in 1972. Fees were reintroduced in 1986, and the HECS system introduced in 1989. Under HECS, students can elect to pay their fees upfront or to defer payment through the tax system, paying off their debt when their income reaches a given level. Since its introduction, HECS fees have increased significantly, the repayment threshold has fallen as a proportion of average earnings and differential fees have been introduced, with higher fees for those degrees deemed to most increase a student’s future income. The same principle now extends to postgraduate courses through PELS.

Public funding of universities currently constitutes less than one per cent of GDP.

In addition to increasing the proportion of costs borne by students, government funding has been falling as a proportion of both total university funding, and as a proportion of GDP. Australia now ranks fourth in the OECD in terms of the proportion of university funding that comes from private sources, behind the Korea, the United States, and Japan, and is the only country other than New Zealand to have seen a fall in the proportion of funding coming from public sources over the last decade (Organisation for Economic Cooperation and Development 2003, pp. 210, 212). Public funding of universities currently constitutes less than one per cent of GDP (OECD 2003, p. 208) and Commonwealth Government grants (not including HECS) represent only 41 per cent of total university funding (Department of Education, Science and Training 2003, p. 3). This relatively small contribution raises the possibility that a significant percentage increase may represent only a relatively modest increase in total expenditure.

Fees currently range from $3,768 to $6,283 per annum for undergraduate courses (although some students are still able to access the lower fees offered prior to the introduction of the three-tier system; in 2004 they were charged $2,830 per annum (DEST 2004, p. 59)). PELS fees are less standardised. In 2003–04 the government estimated that HECS and PELS charges to be just under $1.9 billion and estimated an accumulated student debt of over $10 billion as of 30 June 2004 (Department of Education, Science and Training 2004, p. 59).

At first glance then, the cost of eliminating these charges would be a recurrent bill of approximately $1.9 billion and a one off bill of $10 billion to retire outstanding debt. However, these figures are misleading. They reflect the debt students incur, but not the amount students actually pay. In 2003–04, for example, students will pay only $300 million up front. The rest becomes part of the accumulated debt.

Estimating the value of this debt to the Commonwealth is made more complex by the repayment provisions. Firstly, interest is charged at the rate of inflation, not at market interest rates, meaning the amount must be discounted, with the degree of discount increasing in proportion to the time taken to repay the debt. Secondly, not all of the debt will be repaid. The government has previously estimated the ratio of bad debts under HECS to average over sixteen per cent (National Union of Students 2002, p. 3), with women being significantly less likely to pay their debt in full (National Union of Students 2003, p. 11). Under the system, bad debts are simply written off; they do not come out of the estate of the defaulter. It is the amount that students pay, not the amount they are charged, which would be forgone if fees were abolished.

Current receipts from HECS and PELS provide robust estimates of the cost of abolishing
these fees.

Fortunately, the Commonwealth already reports how much it receives in HECS and PELS payments each year, broken down into upfront payments, voluntary repayments, and payments through the tax system. The estimated figures are $1.14 billion in 2003–04 and $1.23 billion in 2004–05. By the government’s estimates, student contributions as a proportion of total HECS special account funding have remained relatively stable since the beginning of the decade (Department of Education, Science and Training2004, p. 61). These figures may change somewhat as a result of the Nelson reforms, particularly due to the discretionary increase in HECS universities are now allowed, but it is not clear how significant this will prove to be.

Current receipts from HECS and PELS, then, provide relatively robust estimates of the cost of both abolishing these fees for future education services and forgoing outstanding debt. If the government were only to abolish fees for future courses the initial cost would fall below these estimates. However, the annual cost would increase over time as old debts were paid off and as no new debts were created. Eventually annual expenditure should converge to the same level.

In addition, in 2002, Australian universities received just under $228 million in fees from Australian postgraduate students who paid upfront and $70 million from full fee paying Australian undergraduate students (DEST 2003, p. 12). A government wishing to provide free education may wish to also eliminate these fees. Depending on the approach taken, the cost to the Commonwealth in the first year could be as little as $300 million, or as much as $1.5 billion, although in future years any plan would tend towards the higher figure.

QUALITY AND QUANTITY

Even if fees were abolished, we might still be concerned that the purpose of free education had not yet been achieved, because the quality of the education was not sufficiently high, or because access remained too restricted. My estimate of the cost of abolishing fees is based on an assumption that government funding stays at its current level, other than the government replacing the contribution currently made by students. However, we may wish to increase the government’s contribution, either by increasing the number of university places it funds, by increasing the rate at which current positions are funded (a proxy for quality), or a combination of both.

Universities are currently funded through a base operating grant. The current grant is supposed to fully cover the costs of teaching but not research. The figure is based on the previous year’s figure for the same institution, adjusted for changes in enrolments and cost increases. Under recent changes made as part of the Nelson Review, a new formula will now be used to calculate this funding. However, the magnitude of the funding has not changed significantly (National Tertiary Education Union 2003, p. 20).

The AVCC has argued that funding per student needs to increase by $1,200
by 2007.

Funding per student embodied in the base operating grants has varied significantly between institutions and courses. The relativities also change from year to year as targeted government initiatives increase funding to particular priority areas (see, for example, Department of Education, Science and Training 2004, pp. 51–5). Because of this, using an average figure (that is the total operating grants divided by total fully funded, full-time equivalent student places) is somewhat hazardous. However, again, I think these complications are unlikely to affect significantly the order of magnitude of the amount involved. Given these limitations, Department figures for 2004 show total operating grants of $4.78 billion. This funded slightly fewer than 400,000 student places (Department of Education, Science and Training 2004, p. 55), which works out at just over $12,000 per full-time equivalent student place.

The Australian Vice Chancellor’s Committee (AVCC) has argued that funding per student needs to increase by $1,200 by 2007 (2003a). This would mean an annual addition to the bill of approximately $480 million. Applying the same logic as above, a government wishing to abolish full fee paying domestic places may also need to increase funding for these places, bringing the annual extra funding required to increase the quality of higher education to $600 million (based on a total domestic student population of 500,000 (Australian Vice Chancellor’s Committee 2003b)).

What about increasing the quantity of university places? Access to university remains restricted on the basis of academic ability, usually measured in the form of marks in high school examinations. It could be argued that university access was not truly free until all those willing and able to complete a course were able to gain access to university. At present, many prospective students are excluded from courses for which cut-off levels are higher than a minimum required to ensure they are capable of completing the course.

The AVCC has estimated that this unmet demand is currently equivalent to between 18,700 and 25,700 places (2003b). This estimate is based on applications, and so may underestimate the true extent of unmet demand because some students who are able and willing to undertake university education do not even apply. The level of unmet demand is also determined by high school retention rates and the availability of other post-secondary education. As retention rates increase, so the number of students able to complete a university education will also increase.

The cost of additional places will depend on where those places are allocated, and in what degrees. However, taking the average figure used above, an additional 25,000 undergraduate places would cost $300 million at the current rate of $12,000 per place. If the extra places are funded at the higher rate put forward by the AVCC, this additional cost would rise to $330 million. In total, then, increasing base funding for domestic student places, and increasing the number of places, could cost almost $1 billion.

LIVING AND STUDYING

Poor students may be excluded from education because of the need to earn additional income.

Advocates of free university education are also concerned about the ability of students to support themselves financially while they study. If students’ incomes are inadequate, they can work additional hours at the expense of their studies, withdraw from education, or live in poverty. Thus, those with few financial resources may be excluded from education (or be unable to achieve their best) because of the need to earn additional income. Student incomes, then, are a means to ensuring the genuine equality of access sought by advocates of free education. Currently, approximately 29 per cent of Youth Allowance recipients supplement their benefits with other income, possibly indicating the inadequacy of available support (Department of Family and Community Services 2004, p. 153).

Estimating both the need for, and cost of, increasing student payments is a complex task. In the first instance, there are numerous payments for those undertaking some form of study. Most are primarily directed at other purposes, but consider study one means of meeting activity requirements. As many of these payments are higher than the primary student benefit, I have ignored them here. Of those benefits primarily targeted at students, Austudy and Youth Allowance cover the vast majority. Other payments cover either additional expenses or a very small target group and so have little effect on total cost (Australian Council of Social Service 2004).

The cost of these benefits is also difficult to determine. Austudy pays recipients a total of $265 million annually, and Youth Allowance (YA) costs a bit under $2.3 billion, although some recipients of YA are unemployed, not students (Department of Family and Community Services 2004, p. 31). It is unclear exactly what proportion of YA is paid to students, however, 309,040 are full time students, out of a total 372,000 recipients (Department of Family and Community Services 2004, p. 153), or 83 per cent. If benefits are paid proportionally, this would represent about $1.87 billion annually. Together then, students receive somewhere in the order of $2.1 billion annually in benefits from these two primary sources.

The rates paid to individuals vary for a multitude of reasons. Youth Allowance is means tested against both recipient and parental incomes, and is paid at different rates to those living at home with their parents, those living out of home, and those with dependents. It also provides for rent assistance, which Austudy does not. Perhaps the most useful figure is the amount payable to a single full time student on the maximum benefit, living outside home, but without rent assistance. This amount is the same for both Austudy and YA and is $318.50 per fortnight (see Australian Council of Social Service 2004; Department of Family and Community Services 2004, pp. 152–3). In comparison, someone in a similar position on Newstart (the main unemployment benefit) receives $389.20 per fortnight, while someone on the age pension would receive $464.20 per fortnight (Australian Council of Social Service 2004).

The cost of implementing ‘free university education’ will depend on how the policy is specified.

Unfortunately, taking these figures further requires far more sophisticated techniques than those used here. Estimating the cost of increasing student benefits requires a specific, detailed proposal, listing benefit rates and taper provisions, and econometric modeling using unit records. What can be gleaned from the figures I’ve provided is that student payments would have to increase by at least twenty per cent to be brought into line with alternatives. In addition, the Australian Council of Social Service (2004) advocates changes to the eligibility criteria (particularly the age of independence), which would increase the number of recipients, and increase average benefit levels. It is fair to conclude that any attempt to bring student payments into line with, say, unemployment benefits, could result in the total student payment bill increasing by at least 25 per cent, or roughly $500 million.

CONCLUSION

The cost of implementing ‘free university education’ will, of course, depend on precisely how the policy is specified. My aim has been to highlight some of the issues involved, and the scale of the endeavour. I have pointed to three dimensions that might be addressed: abolishing current fees (primarily HECS and PELS); increasing funding to enhance the quality of education and to increase student places; and increasing income support to students. Each of these would be a significant move in the direction of more accessible, high quality education.

The costs involved in these changes are considerable. The single largest annual cost would come from the abolition of student fees ($1.5 billion), although increasing the quality and quantity of education ($1 billion) and increasing student support ($500 million) are also significant. In total, addressing all of these areas would require substantial additional public expenditure, in the order of $3 billion annually.

This is a sizeable commitment of additional funding, and is unlikely to be embraced by either major party, given the current obsession with reducing government expenditure and debt. However, both the Coalition and the ALP have proven themselves willing to spend similar sums in other ways. The Private Health Insurance rebate (a tax subsidy) currently costs $2.5 billion annually, and changes proposed by the government would increase this to $3 billion. Likewise, the two most recent rounds of tax cuts will cost $6.25 billion annually when fully implemented, with both parties looking to add to this bill during the campaign.

Of course, such policies directly affect a larger proportion of the population. However, the size of the spending commitments they involve gives us an indication of the kind of resources both major parties are currently willing to expend in the form of tax cuts. Were this funding to be redirected to public services, including higher education, much of the task of removing fees and other barriers to participation, could be achieved.

REFERENCES

Australian Council of Social Services 2004, Proposals for reform to student income support, Submission to the Senate Employment, Workplace Relations and Education References Committee’s Inquiry into student income support, ACOSS, Sydney.

Australian Vice-Chancellors’ Committee 2003a, Public Investment in Higher Education Teaching: The Facts [Online], Available: http://www.avcc.edu.au/ [2004, Sep 3].

Australian Vice-Chancellors’ Committee 2003b, Growing Australia’s Universities: The Facts [Online], Available: http://www.avcc.edu.au/ [2004, Sep 3].

Chapman, B. 2001, ‘The Higher Education Finance Debate: Current Issues and Suggestions for Reform’, Australian Review of Public Affairs, 26 Oct [Online], http://www.econ.usyd.edu.au/drawingboard/digest/0110/chapman.html [2004, Sep 16].

Department of Education, Science and Training 2003, Finance 2002: Selected Higher Education Statistics, Government Printing Service, Canberra.

Department of Education, Science and Training 2004, Higher Education: Report for the 2004 to 2006 Triennium, Government Printing Service, Canberra.

Department of Family and Community Services 2004, Portfolio Budget Statements 2004–05: Family and Community Services Portfolio, Budget Initiatives and Explanations of Appropriations Specified by Outcomes and Outputs by Agency, Budget Related Paper No. 1.8, Government Printing Service, Canberra.

National Tertiary Education Union 2003, NTEU National Office Submission to the Senate Employment Workplace Relations and Education Committee Inquiry into Higher Education Funding and Regulatory Legislation, Parliament of Australia, Canberra.

National Union of Students 2002, NUS Submission to the Employment, Workplace Relations and Education Committee Inquiry into Higher Education Funding Amendment Bill 2002, Parliament of Australia, Canberra.

National Union of Students 2003, Supplementary Submission, Inquiry into Higher Education Funding and Regulatory Legislation, Parliament of Australia, Canberra.

Organisation for Economic Cooperation and Development 2003, Education at a Glance: OECD Indicators, Organisation for Economic Cooperation and Development, Paris.

Withers, G. & Edwards, L. 2001, ‘The Budget, the Election and the Voter’, Australian Social Monitor, June.

Ben Spies-Butcher is a postgraduate research student in Political Economy at The University of Sydney. He is convenor of the Economics Working Group of the NSW Greens.