LH Martin Institute

Public vs Private Benefits: Who should pay for Higher Education in Australia?

7 September 2012, by Peter Bentley

Peter Bentley is a Research Fellow at the LH Martin Institute.

We all know that there is no such thing as “free higher education” (or “free” anything): someone has to pay. The question is who and how much. In Australia, private individuals contribute the majority of funding of tertiary education (55%), the sixth highest by OECD standards. In practice, most domestic students pay roughly 40% of the cost of their higher education through tuition fees. Australian citizens are able to defer payment until their annual income reaches $49,000 (41,000 Euros) through income contingent loans. By comparison, in Norway and other EU countries there is almost no private contribution. Still, Australian Government tuition fee subsidies cost around $6 billion per year and are likely to rise with growing enrolments. A recent report by Andrew Norton of the Grattan Institute suggests that the $6 billion government subsidies could achieve greater public benefit if spent on other services or simply returned to tax-payers through tax cuts (thus lowering the government funding of higher education).

In Australia, demand for higher education is not particularly sensitive to price. As tuition fees have increased, demand for higher education has remained high. Norton argues that this is due to high private returns and income contingent loans. He argues that most Australian students would enrol in their degrees even if tuition fees were substantially higher (e.g. 50%). In almost all fields, university graduates can expect significantly higher lifetime earnings than high school graduates. This also equates to substantial public benefits because graduates pay more income tax (compared to high school graduates) over their lifetime. In fields where private benefits and lifetime earnings are low, such as the humanities and performing arts, decreased subsidies may lead to a decline in enrolment, but many would anyway enrol in these fields based on intrinsic interest. Secondly, Norton also sees no reason for government subsidies in low-earning fields because, given their lower lifetime earnings, society would be better off with fewer such graduates. Norton’s argument is essentially that degrees in high earning fields do not need subsidies to stimulate demand and degrees in low earning fields must demonstrate clear public benefits in order to justify subsidies. Tuition subsidies without justified public benefits are just a transfer of wealth from taxpayers to students and graduates. By reducing government subsidies, the public receives a greater share of the benefits relative to the individual.

Norton’s report received criticism from many higher education stakeholders. Student groups obviously objected to higher tuition fees due to concerns over student debt. Politicians are unlikely to win votes by increasing the cost of higher education for students (and their parents). University leaders objected for more complex reasons. Australian universities claim they are underfunded, so the idea that students can and should pay more can be supported. One common argument is that students would benefit from the better quality education that extra funding brings. However, universities are hesitant to claim that the quality of education is low and in desperate need for additional funding, and students would probably prefer lower fees over promises of higher quality.

Personally, I welcome informed debate on tuition fees and reports such as this one, even if I do not agree with many of the points. Although an individual may be in a comfortable position to repay student loans once reaching the income threshold (currently $49,000), this may not be the case for those with dependents. As the indebtedness of graduates increases, more graduates are repaying student loans whilst trying to start a family or establish home ownership (or delaying both activities further). There is also a question of intergenerational equity when older generations (many of whom paid low or no tuition fees) use the evidence of their own higher lifetime earnings to justify increasing the indebtedness of future graduates (and drop-outs), all in the name of the public benefit.

There is also a common perception that higher fees mean that students from disadvantaged backgrounds would not enrol in higher education. However, it is fair to say that if one was truly dedicated to improving access to higher education for people of disadvantaged backgrounds, the $6 billion could achieve more if spent on public schools in the primary and secondary education sectors. Students in the most lucrative university courses (e.g. dentistry, medicine, law) and most prestigious universities (e.g. the Group of Eight) overwhelmingly come from non-government high schools, some of which charge more than $20,000 per year in tuition fees (in addition to receiving government funding). This all makes the report’s suggestion sound reasonable that savings from higher education subsidies “could be reinvested in other areas such as disability or early childhood [education], or returned to the public through lower taxes.” The problem is that lower taxes will do little to address educational disadvantage and I suspect that lower taxes is the preferred outcome of the Grattan Institute. Earlier this year they produced a report recommending against increasing government funding of primary and secondary schools.

Overall, the report could have been a good news story for universities. Given the high private and public benefits reported, higher education appears to be a win-win for all involved. With a few exceptions, the public receives taxation revenue benefits well beyond cost of tuition subsidies, and the individual receives income benefits well beyond the cost of the tuition fees. If higher education causes higher wages and higher taxation revenue, society benefits when governments invest in higher education up until the marginal cost of each additional student subsidy equals the marginal benefit of each graduate’s increased taxation revenue. The problem is that we cannot attribute a causal relationship between higher education and higher lifetime earnings: we only know that those with higher education tend to earn more. We don’t really know how much the higher earnings of graduates is due to other factors (e.g. the higher ability and societal position of those entering higher education, signalling/credential effects of having a diploma). We also can’t be sure today’s graduates of a mass system will benefit to the same extent as previous generations of the elite system (and generate the same increased taxation revenue). Universities and conservative Governments may like to imply a causal effect in order to justify raising tuition fees, but ultimately it is the student who bears an increasing share of the risk. If higher tuition fees lead some not to choose higher education, by all accounts this would be a bad outcome for society and the individual.