How much should a degree cost, or why HECS fees aren’t as important as anyone thinks
by Robert Wiblin on Thursday, March 24, 2011 at 8:12am
***This is a more wonkish post than usual, but in this case it is called for.***
Last week’s National Union of Students 'Day of Action', advertised at ANU with the banner Fund Our Future: Say No to a HECS Increase, ignited quite a heated debate about the equity and efficiency of the HECS system on the event’s Facebook wall, if not in college dining halls. Unfortunately, and partly due to my own simplistic contribution, the debate missed the real bone of contention: whether HECS fees should be higher or lower than they are now and why. Those who oppose students paying anything towards the cost of their education are few and far between today. Here I will try to outline how we might determine the right price to charge for a degree, and why I think HECS fees should in some cases be higher and others lower than they are today.
There are two reasons often given for why students should contribute towards the cost of their education. One is efficiency: education is expensive to provide and if students do not bear that cost some might be induced to study longer than they should. The second is equity: university students come, on average, from high socio-economic status (SES) families and in part thanks to their education enjoy well above average wages and quality of life after study. When non-students pay to educate students, this transfers income from the relatively disadvantaged to the relatively advantaged. While this ‘regressive’ movement of income could later be unwound with higher ‘progressive’ income taxes to fund larger transfer payments, both of those typically discourage work and so are costly to society. A third issue I would add is that taxing the public to pay for education carries special costs that charging HECS fees doesn't. In Australia economists estimate that it costs the public on average at least $1.20 to raise $1 in tax revenue, the extra 20c being the cost of compliance and the tax discouraging economic acitivity.
On the other side of the ledger there are three big reasons offered why students should not have to bear the full cost of their tuition. The first is the mirror of the efficiency concern above: there exist ‘public benefits’ to education which are not received by the graduates themselves, and so if students are not subsidised some may choose to study less than is optimal for society. These public benefits would include more informed voters, reduced crime, higher tax revenues, a more innovative culture, and so on. The second is equity again: if students have to pay for their education then the poor may be unable to attend university or less inclined to do so, and this would lead to a more unequal and unjust society. The third highly related concern is that potential students, lacking any assets to borrow against, may be unable to pay upfront for their education even if doing so would be a great investment both for them and the country. In finance jargon students could be ‘liquidity constrained’'.
How should we weigh up these complex and competing concerns to determine the right price to charge for a degree? Doing so is much easier than you'd think because most of them can be dismissed as insignificant.
The issue of students being ‘liquidity constrained’' is almost entirely solved by the HECS system, which only requires students to pay anything towards the cost of their education once they start earning over $45,000 a year. Both efficiency concerns, regarding students studying too much or too little, can largely go as well. So long as students are able to defer the cost of tuition until they graduate, the level of HECS fees seems to have nearly no effect on whether they study, how long they study, or what they study. The 'equity of access' issue turns out to be unfounded as well. The best research on the topic finds that tuition costs are not what discourages the poor from attending university in Australia. It finds that “HECS is an effective funding scheme and largely removes a student's or household's ability to pay for university tuition fees from the entry decision. … equally talented and qualified students of differing socioeconomic status and credit availability are likely to have equal access to university programs.” [1] All of this shows how sensible young people are; relative to the other huge costs and benefits of higher education, HECS fees are insignificant, so almost nobody's decision should hinge on them.
One issue is left standing: university subsidies require other taxes to be higher, firstly to pay for all the education and then later to undo their ‘regressive’ effect. What is the virtue of a system that imposes taxes on someone else to pay for your education, and then later on you to pay it back? At both points these taxes cost at least 20c on each dollar raised, and ultimately they just churn money back and forth. Why not just charge you directly instead? Note also that tuition subsidies paid from general tax revenue represent a gift to those who attend university but never earn more than $45,000 and a penalty for those who manage to make good money without receiving higher education. The fairness of that is a mystery to me!
The vigilent among you will have noticed a possible bit of accounting slight of hand. Won’t HECS repayments discourage people from working, just like income taxes do? Fortunately they probably won't, because most graduates expect to pay off their HECS debt during their lives. Each dollar of your HECS debt that you pay off this year is an extra dollar you don’t have to pay in the future [2]. By contrast, you can never finish paying off your income tax ‘debt’ so each dollar you pay this year is one less dollar you ever earn.
My strategy for setting the right HECS fees would be simple: keep raising them until doing so seems to discourage enrolments, or you reach ‘cost price’, then stop. This may mean different HECS rates for different fields of study, with some higher and some lower than they are today, but so be it. Possibly in the pursuit of economic equality there is no reason even to stop at 'cost price', but I’ll save that more provocative claim for another day.
Nonetheless the message to take home to your family is that all of the costs and benefits described above are surprisingly small. This is just as well, because HECS fees as they currently stand follow no rhyme or reason, being blown about as they are by the ill-conceived whims of politicians. Lawyer jokes aside, why should law students (or economics students for that matter!) pay more than the full cost of their education, but chemists only a small fraction, especially if this results in no fewer lawyers and no more chemists [3] [4]?
One last thing to mention is that if you would like the tax system to be more progressive overall, higher HECS fees imperfectly mimic the effect of that change. Conversely, if you think the tax system should be less progressive, lower HECS fees are a second-best (or maybe eighth-best) policy option for you. This flips the knee-jerk ‘left’ and ‘right’ positions, so try using that to tangle up any political ideologues you know!
Ultimately the level of HECS fees is a second tier issue in education policy. Improving the quality of school teachers, university lecturers and tutors; giving special help to struggling kids in primary school before they fall behind; getting degree places to match up with student and business demand; ensuring income support removes the ‘liquidity constraint’ for poorer students without becoming a handout to the wealthy. These are the issues both Facebook debating shut-ins and NUS Labor hacks should be talking about.
[1] (Cardak and Ryan, 2006) http://www.accessecon.com/pubs/PET07/PET07-07-00284S.pdf
[2] In economics jargon HECS resembles a 'lump sum tax', which is the ideal kind of tax.
[3] Some say nurses, teachers and so on should be subsidised to compensate them for being underpaid by State Governments during their careers. I would only support this if it got us more or better nurses and teachers, which is unclear. And in any case the best response to the problem would be to pay nurses and teachers more rather than subsidise their HECS.
[4] Others say that we should subsidise university because some graduates go on to perform public services with their degrees and earn very little (providing pro bono legal advice for example). Again, I don't think we should give more to those people unless doing so induces them to do more good works. And if we really wanted to get more people doing public works, it would be much smarter to pay them when they provide those services directly rather than subsidise all students indiscriminately. Also note that those with low incomes do pay less under HECS, as each year whittles away the real value of their HECS debt.
What principle should underlie the cost of a degree?
There are two reasons often given for why students should contribute towards the cost of their education. One is efficiency: education is expensive to provide and if students do not bear that cost some might be induced to study longer than they should. The second is equity: university students come, on average, from high socio-economic status (SES) families and in part thanks to their education enjoy well above average wages and quality of life after study. When non-students pay to educate students, this transfers income from the relatively disadvantaged to the relatively advantaged. While this ‘regressive’ movement of income could later be unwound with higher ‘progressive’ income taxes to fund larger transfer payments, both of those typically discourage work and so are costly to society. A third issue I would add is that taxing the public to pay for education carries special costs that charging HECS fees doesn't. In Australia economists estimate that it costs the public on average at least $1.20 to raise $1 in tax revenue, the extra 20c being the cost of compliance and the tax discouraging economic acitivity.
On the other side of the ledger there are three big reasons offered why students should not have to bear the full cost of their tuition. The first is the mirror of the efficiency concern above: there exist ‘public benefits’ to education which are not received by the graduates themselves, and so if students are not subsidised some may choose to study less than is optimal for society. These public benefits would include more informed voters, reduced crime, higher tax revenues, a more innovative culture, and so on. The second is equity again: if students have to pay for their education then the poor may be unable to attend university or less inclined to do so, and this would lead to a more unequal and unjust society. The third highly related concern is that potential students, lacking any assets to borrow against, may be unable to pay upfront for their education even if doing so would be a great investment both for them and the country. In finance jargon students could be ‘liquidity constrained’'.
How should we weigh up these complex and competing concerns to determine the right price to charge for a degree? Doing so is much easier than you'd think because most of them can be dismissed as insignificant.
The issue of students being ‘liquidity constrained’' is almost entirely solved by the HECS system, which only requires students to pay anything towards the cost of their education once they start earning over $45,000 a year. Both efficiency concerns, regarding students studying too much or too little, can largely go as well. So long as students are able to defer the cost of tuition until they graduate, the level of HECS fees seems to have nearly no effect on whether they study, how long they study, or what they study. The 'equity of access' issue turns out to be unfounded as well. The best research on the topic finds that tuition costs are not what discourages the poor from attending university in Australia. It finds that “HECS is an effective funding scheme and largely removes a student's or household's ability to pay for university tuition fees from the entry decision. … equally talented and qualified students of differing socioeconomic status and credit availability are likely to have equal access to university programs.” [1] All of this shows how sensible young people are; relative to the other huge costs and benefits of higher education, HECS fees are insignificant, so almost nobody's decision should hinge on them.
One issue is left standing: university subsidies require other taxes to be higher, firstly to pay for all the education and then later to undo their ‘regressive’ effect. What is the virtue of a system that imposes taxes on someone else to pay for your education, and then later on you to pay it back? At both points these taxes cost at least 20c on each dollar raised, and ultimately they just churn money back and forth. Why not just charge you directly instead? Note also that tuition subsidies paid from general tax revenue represent a gift to those who attend university but never earn more than $45,000 and a penalty for those who manage to make good money without receiving higher education. The fairness of that is a mystery to me!
The vigilent among you will have noticed a possible bit of accounting slight of hand. Won’t HECS repayments discourage people from working, just like income taxes do? Fortunately they probably won't, because most graduates expect to pay off their HECS debt during their lives. Each dollar of your HECS debt that you pay off this year is an extra dollar you don’t have to pay in the future [2]. By contrast, you can never finish paying off your income tax ‘debt’ so each dollar you pay this year is one less dollar you ever earn.
My strategy for setting the right HECS fees would be simple: keep raising them until doing so seems to discourage enrolments, or you reach ‘cost price’, then stop. This may mean different HECS rates for different fields of study, with some higher and some lower than they are today, but so be it. Possibly in the pursuit of economic equality there is no reason even to stop at 'cost price', but I’ll save that more provocative claim for another day.
Nonetheless the message to take home to your family is that all of the costs and benefits described above are surprisingly small. This is just as well, because HECS fees as they currently stand follow no rhyme or reason, being blown about as they are by the ill-conceived whims of politicians. Lawyer jokes aside, why should law students (or economics students for that matter!) pay more than the full cost of their education, but chemists only a small fraction, especially if this results in no fewer lawyers and no more chemists [3] [4]?
One last thing to mention is that if you would like the tax system to be more progressive overall, higher HECS fees imperfectly mimic the effect of that change. Conversely, if you think the tax system should be less progressive, lower HECS fees are a second-best (or maybe eighth-best) policy option for you. This flips the knee-jerk ‘left’ and ‘right’ positions, so try using that to tangle up any political ideologues you know!
Ultimately the level of HECS fees is a second tier issue in education policy. Improving the quality of school teachers, university lecturers and tutors; giving special help to struggling kids in primary school before they fall behind; getting degree places to match up with student and business demand; ensuring income support removes the ‘liquidity constraint’ for poorer students without becoming a handout to the wealthy. These are the issues both Facebook debating shut-ins and NUS Labor hacks should be talking about.
[1] (Cardak and Ryan, 2006) http://www.accessecon.com/pubs/PET07/PET07-07-00284S.pdf
[2] In economics jargon HECS resembles a 'lump sum tax', which is the ideal kind of tax.
[3] Some say nurses, teachers and so on should be subsidised to compensate them for being underpaid by State Governments during their careers. I would only support this if it got us more or better nurses and teachers, which is unclear. And in any case the best response to the problem would be to pay nurses and teachers more rather than subsidise their HECS.
[4] Others say that we should subsidise university because some graduates go on to perform public services with their degrees and earn very little (providing pro bono legal advice for example). Again, I don't think we should give more to those people unless doing so induces them to do more good works. And if we really wanted to get more people doing public works, it would be much smarter to pay them when they provide those services directly rather than subsidise all students indiscriminately. Also note that those with low incomes do pay less under HECS, as each year whittles away the real value of their HECS debt.
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