Why the Australian system is not the holy grail of HE

A recent report by the much respected Higher Education Policy Institute (HEPI)  recommends that UK policymakers pay much closer attention to Australia’s ‘advanced’ university funding system, which shares many of the features of the UK system, but at considerably lower taxpayer expense.

It is easy to see why HE finance policymakers should be tempted to look at Australia for inspiration. The recent finding that the RAB charge – or the proportion of unpaid student loan debt, that is covered by the taxpayer – may reach 45% shocked many. An IFS report out on Thursday put the figure at 43.3%. This means for every £1 lent to students 45p is not recovered. By contrast, the Australian equivalent – at 25% for standard tuition fee loans – is a much healthier figure.

On the surface, this would seem reason enough to adopt the features of the Australian tuition fee system. But this could result in unintended consequences if not thought through thoroughly.

A central reason that the Australian loan system is so much cheaper to the taxpayer is that tuition fees in Australia are significantly lower than they are in the UK – with fees at a maximum of £5,500 per year (and often much less) in Australia, versus upto £9,000 per year in the UK. The high debt levels in the UK hugely reduce graduates chances of fully repaying their loans. With such low debt levels, it is hardly surprising that the Australian government finds it easier to recoup their fee money.

The Australians further reduce their RAB charge by varying fees according to subject. Fees are lower for subjects that typically render lower returns (humanities and education students pay the lowest fees and tend to be low earning graduates) whereas those subjects that turn out the highest earning graduates (economics) and high cost (medicine) have the highest fee caps [Link]. By linking likeliness to repay to tuition fee levels, the Australian system minimizes the probability of non-repayment of the loan.

But it is not clear why the UK would want to emulate such a system. Charging fee levels according to how much one might earn in the future, rather than to the cost of actually providing the degree, could exacerbate socio-economic inequalities if debt averse students (usually from poorer backgrounds) choose to study low-priced subjects which will go on to deliver lower wages. There have been murmurings of a similar system in the UK, but with fees linked to the institution attended rather than the subject studied. Such a system would suffer from the same kinds of problems, with debt averse students potentially staying away from high-fee elite institutions.

Furthermore, whilst the Australian system has a lower taxpayer loss in the form of unpaid tuition fees, the taxpayer contribution in the form of teaching money is considerably higher in Australia. For example, for a humanities student, the Australian government contributes around £3,000 per year (versus zero contribution in the UK) – making the total government spend on fees for humanities students roughly the same in each country, assuming a UK RAB of 43% of £8,500.

If the UK government really wanted to minimise the RAB charge it could do so by lowering fees. If it wanted to reduce the RAB to zero – as is the case for some Australian loans – it could similarly do so by going back to the pre-1998 system of having no fees at all.

Another feature of the Australian system that the HEPI report highlights is the removal of caps on student numbers. The UK currently enforces a system of fee caps to control the high cost of the university system, though the controls are set to be removed in 2015. Here, we can learn from Australia’s experience, given their removal of number caps in 2008.

There are many positives coming out of the Australian experience. Universities have been able to meet the massive over-demand for places, with student numbers increasing by around 20% on average, and a slight rise in the share of places for low socio-economic status students.

But the Australian experience also highlights some downsides. The surge in student numbers has led to larger class sizes, and as popular courses balloon, there are reports of the graduate labour market becoming flooded in fields with limited job prospects. More worryingly, the policy was not accompanied by any kind of regulation on entry or exit standards, and has thus led to an inevitable decline in standards. Universities have been quick to relax entry requirements, and some have removed requirements for certain subjects – e.g. it is now possible for some students to read engineering without having studied mathematics up to the age of 18.

It would be deeply concerning if the UK were to make the same mistake here and let our reputation as a world leader in higher education decline. The Australian government now recognise this, and are considering applying a minimum entry standard that must be met before a place will be funded. The UK would do well to consider a similar type of regulation in time for 2015. Now that really would be learning.

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