Christopher Pyne’s Universities Plan: The Challenge

Crows July 14

Number 213


STONE the crows there’s a debt and deficit disaster. But it isn’t in education, at least not yet.


While it is not much noticed outside education, the big budget proposal is to hike the cost of university. Education Minister Christopher Pyne proposes reducing funding for Commonwealth Supported Places from 60 per cent to 40 per cent and upping what students pay by the equivalent amount. And to encourage public universities and private providers to compete, the Coalition will allow them to slug students with their own additional fees.


But to ensure people who can’t raise the dosh up front aren’t excluded the feds will loan everybody the cash under the HECS income contingent loan, repaid after graduation through the PAYE tax system.  And just to add to the expense the feds propose charging a real interest rate – the Commonwealth bond rate (capped at 6 per cent), instead of CPI as now.[i]


There are all sorts of arguments about this. Critics complain that universities degrees will make Harvard look like a bargain. [ii]The government replies competition will prevent this. [iii]


But what nobody is paying much attention to is how much money the feds will loan and how people will go at paying it back.


According to the National Tertiary Education Union, Canberra will have $279bn in student debt on the books in a decade, $126bn more than net Commonwealth borrowings. [iv]


This is no big deal, as long as graduates earn enough to make the payments, which does not always happen under the existing arrangement where they borrow around $6bn a year. According to industry expert Andrew Norton, doubtful debt runs at 17 per cent.  [v]


But opponents of Minister Pyne’s package say it will get worse. In particular they point to the impact of a real compound interest rate (admittedly lower than any bank charges). [vi] And they warn graduates working in low paying professions and women who take the mummy track, in and out of the workforce for years at a time, will never maintain their income potential because of childcare commitments. [vii]


There are reasonable responses to both arguments. For a start, universities do not need jack up fees for relatively low earning degrees, teaching and nursing for example, they can take Commonwealth funding for student places and allocate it how they like. [viii] Working out what courses will attract which fees is fiendishly difficult but while there will likely be huge hikes over time in some courses, other courses may not cost much more at all. [ix]


The same argument applies to fees universities will set themselves, if Mr Pynes’s package gets up. A university relying on teaching and nursing will not jack up what these degrees cost to rates which graduates will be paying off into old age.  For a start, students will not wear them and competitors will undercut them [x]


Which raises a worry. Minister Pyne argues increased fees are justified by the rate of return graduates earn on their degrees, that even at a 40 per cent subsidy the taxpayer is still presenting them with a gift.  “Australian university graduates on average earn up to 75 per cent more than those who do not go on to higher education after secondary school. Over their lifetime, graduates may earn around a million dollars more than if they had not gone to university,” the minister said on Thursday.[xi]


Fair point. But what if it doesn’t? What if, in a world where Canberra will pay a university to teach every student a university will accept, we end up with an over-supply of graduates and wages fall?


The official-wisdom all over is that this does not happen. According to the OECD there is a correlation between higher education and income, that people with tertiary education earn 50 per cent more than those with no tertiary study in member countries. [xii]


Despite all the arguments about US student debt, in the present debate university there is still a good deal. The average graduate owes $30 000 – which is hefty but not ruinous (graduate study which does not generate the lucrative job is the killer). [xiii]


But drill down for darker details. A degree in the US is not the great deal it was. Jaison Abel and Richard Deitz, from the New York Federal Reserve, argue that while graduate earnings are higher than others this is not because they are increasing. In fact they are falling, just not as fast as what people who only completed high school make. The author’s advice for kids wondering what to do after high school isn’t exactly encouraging, “despite the recent struggles of college graduates, investing in a college degree may be more important than ever before because those who fail to do so are falling further and further behind.”  [xiv]


Can’t happen here? Not if the past is any predictor. For a start the GFC did not crunch wages and employment here as it did in the US. The ABC asked economists what they thought of Mr Pyne’s claims about the benefits of doing a degree and the strongest criticism they could come up with was “overblown”.


But the trends aren’t terrific. University of Canberra economist Phil Lewis argues that a degree is not economically worthwhile for one in five graduates now, which could rise to one in three if the Pyne package passes. [xv]


And graduate wages are sliding. In May last year 28.7 per of the 2012 graduating class was looking for fulltime employment, up from 23.7 per cent in 2011. And starting salaries were at 74 per cent of male average weekly earnings, down from 83 per cent in 2009. [xvi]


Nor do degrees deliver like they used to. Last year Tom Karmel, ex head of the National Centre for Vocational Education and Training, told the Crows all about it.


In 1997, 80 per cent of higher degree graduates had a job in the top quintile for skills and income. By 2011, grads in top jobs were done to 70 per, 60 per cent for higher degree holders. And two years back diplomas only elevated 20 per cent of holders into the top quintile. “The prime cause is that the expansion in education is greater than is dictated by changes in the labour market. The other part of the story is regulation. You now need a degree where you used to need a diploma,” Dr Karmel said.[xvii] 


If rising fees and increasing numbers of under-employed graduates in the job market start shaping people’s perceptions of education as an investment Mr Pyne will not have a problem – it will take a few years for faith in education to unravel.


But universities will.


Policy and politics: whatever case you need I can make it.


[i]Commonwealth of Australia, Budget 2014-15: Higher Education May 13 @ recovered on July 13

[ii]Matthew Knott and Heath Gilmore, “Graduates could pay up to $120,000 in debt, HECs architect warns, Sydney Morning Herald, May 14

[iii] Rick Morton, “Competition to force down university fees: Christopher Pyne,” The Australian, June 1

[iv]Paul Kniest, “Fear and debt shifting in higher education,” National Tertiary Education Union, May 29 @ recovered on July 13

[v]Andrew Norton, Doubtful debt: the rising cost of student loans, Grattan Institute, April 2014 @ recovered on July 13

[vi]Andrew Trounson, “Bruce Chapman appalled by fee market,” The Australian June 4

[vii]Peter Martin and Matthew Knott, “Women to be hit hardest by student loan debt,” Sydney Morning Herald, May 27

[viii]Coral Dow, “Reform of the higher education demand driven funding system,” Parliamentary Library, May 2014 @ recovered on July 13 

[ix]Geoff Sharrock, “Fee deregulation and HELP debts after the 2014 budget: some scenarios, L H Martin Institute May 26 @ recovered on July 13

[x]ABC News, “Christopher Pyne says universities will not get away with exorbitant fee hikes,” June 1 @ recovered on July 13

[xi]Christopher Pyne, “Speech to the Innovative Research Universities senior staff forum,” July 10 @ recovered on July 13

[xii]OECD, Education at a glance recovered on July 13

[xiii]Blake Ellis, “Average student loan debt,” CNN December 4 2013 @ recovered on July 13

[xiv]Jaison R Abel and Richard Deitz, “Do the benefits of college still outweigh the costs,” Federal Reserve Bank of New York: Current Issues in Economics and Financial 20, 3 2014 @ recovered on July 13

[xv]ABC Fact check, “Chris Pyne’s claim that graduates earn more is overblown,” May 29 @ recovered on July 13

[xvi]Graduate Careers Australia, Gradstats, December 2013 @ recovered on July 13

[xvii]Stephen Matchett, “Degrees don’t deliver like they used to,” The Australian, July 12 2013