Loan limits only way to stop gouging

Tuesday 30 September 2014

The square Swinburne logo on the west side of the Advanced Manufacturing and Design Centre building in Hawthorn.

This is an edited version of Swinburne Vice-Chancellor Professor Linda Kristjanson's presentation to the Deregulation in Higher Education conference in Melbourne. It was originally published in The Australian.

 

To my mind, the biggest danger ahead in the brave new world for Australian higher education is fee inflation.

The first Australian university to announce new, deregulated fees—the University of Western Australia— has signalled that it will raise the cost of its Bachelor of Arts degree by 166 per cent in 2016, the first year in which deregulation will take effect—up from $6,000 to $16,000 per year.

Higher education is a positional good. This is fundamental to understanding the strange economics of higher education pricing.

In markets in which quality is difficult for consumers to assess, in which people are making one-off rather than repeat purchases, and in which information is asymmetrical, price becomes a very strong signal for quality.

In this context, creating a market in which fees are entirely deregulated has many dangers for consumers.

Recently, a number of people within and beyond Australia’s higher education sector have begun to call out this problem.

The solution lies in finding an appropriate mechanism by which some downward pressure can be applied to price in the deregulated fee environment from 2016. And as we are in the early stage of this debate, some solutions are beginning to take shape.

So what can be done? Two options stand out.

The first is a regulatory mechanism, such as the ‘market monitor’ proposed by the Business Council of Australia, a body that may have the authority to disallow excessive price rises under certain circumstances.

I am not convinced that such a body would have the capacity to actually hold fees down. Take, for example, that big price rise at University of Western Australia. On what basis would a market monitoring body decide that increasing the cost of a Bachelor of Arts from $18,000 to $48,000 is wrong?

There are immense difficulties in creating a regulatory regime around fees which would ensure that decisions by a regulator were made on the basis of objective, clearly defined and non-arbitrary principles.

Effectively, this would hand final decisions on university fees to a committee deliberating over a basket of factors such as the relationship of the price of the degree to the cost of its delivery, to future earnings of graduates and to what may be reasonably necessary to cross-subsidise other functions within a university.

It would raise many questions which are very difficult to answer.

The most obvious one is this: to what extent is it appropriate, within such a regulatory model, for students to subsidise research activities of the university with only a loose connection to teaching?

Is it acceptable for each university student to contribute, say, $5000 each year to subsidise the research activities of the university, possibly in a different discipline to the one that the student is studying? Or would that offend a pricing regulator weighing up whether the price charged by the university is ‘appropriate’?

These are matters which will need to be spelled out in detail as neither universities nor private colleges, whose fees would come under scrutiny by such a body, can be expected to operate by guesswork.

So while I think the Business Council of Australia has nailed the problem, the regulatory mechanism it has proposed is less than ideal.

Swinburne has put forward a second option—one that would be a proper market response, rather than a regulatory one.

This is the creation of a maximum annual loan limit for undergraduate degrees.

Let me be clear about this. What we are not proposing is a cap on fees. That would not be consistent with the government’s objectives to deregulate price.

A maximum annual limit on HECS-HELP would be a useful market mechanism which would operate to put downward pressure on price.

The power of this solution is that it lets the market do the work.

It is consistent with the Government’s wish to deregulate the price that students pay.

It would achieve the objective of deregulating price as well as volume.

It would provide universities with the freedom and autonomy to set prices at any level for which there is market demand.

It would benefit consumers by exerting downward pressure on prices.

We already have such a market mechanism in place for postgraduate fees – it’s called FEE-HELP and it actually works pretty well.

It works so well that there are only a handful of postgraduate courses that are priced at more than the maximum amount that most students are permitted to borrow through FEE-HELP, currently $96,000.

The overwhelming majority of courses for which FEE-HELP is available – and there are thousands – are priced at less than the maximum allowable loan. Fears that all universities will ‘price to the cap’ have not been borne out.

A maximum annual loan limit for HECS-HELP would be the most effective mechanism for keeping prices in check in a deregulated market.

Will it be popular among university leaders? Definitely not. And that tells you something about how effective it will be.

It’s very easy – too easy – to charge students too much if all they need to do is to ‘put it on HELP’.

Having to explain to students that they can’t put it all on the Commonwealth credit card is where the pricing decision gets hard – and that’s exactly why a maximum annual loan limit would be so effective in keeping prices down.

 

Read Professor Kristjanson's speech 'Higher Education Navigation in Uncharted Waters'