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Comment on the background papers to the Base Funding Review

26 April 2012

Base Funding Review: background papers

The Government has released the background papers for the Base Funding Review:

1.    an assessment of the externality (public good) value from higher education (Chapman and Lounkaew).  Concludes that the value is the same regardless of degree field and could be valued at between $6000 and $10,000 a full time study year;
2.    an assessment of the private rate of return.  This, similar to other previous studies, is greatly limited by the graduate models it uses, the basis of comparison with the non-graduates and, as a contribution to future policy settings, through its inclusion of cost factors specific to 2006.

The data presented shows:

  • a lower rate of return for generalist arts and science degrees and fairly comparable returns for professional degrees;
  • that women gain more from the generalist degrees than men, but less from the professional degrees; and
  • that masters degrees provide higher returns for those in arts and science than in professional areas.

It also suggests that the student contribution itself is a significant factor in the rate of return (through the comparison of rates of return against the student contribution band for the discipline as at 2006).  This should allow estimation of at what level of charge the private return falls to zero (but the report does not do so);

3.    an analysis of the impact of changes in student contributions on application numbers.  This includes a very handy summary of changes in student payments since the initial HECS, including tables of the rates by year and discipline group.  
Overall the analysis shows there is an immediate impact from increases across the board to student contributions and the repayment point for loans plus that there is minor correlation to changes in price by discipline and student background but that these are minor against the underlying expectations for higher education; and

4.    the analysis of the costing study.  The final report reflects the report, showing the expenditure by field, with the expenditure on teaching and scholarship lying just under resourcing but just over once base level research activity is included.  There is variation by university - a point the report worries at more than seems justified.  It shows that each institution does pay some regard to internal priorities and preferences while ultimately living within the overall resourcing envelope.

1.    The value of externalities for Australian higher education

The Chapman and Lounkaew paper carefully lays out the issues in estimating the costs and benefits of higher education that are not directly gained by the student.  It does so "to encourage humility and caution with respect to the meaning and clarity of the estimates that emerge of the value of higher education processes" (p5)

The analysis uses the notionally typical student to compare the differences from entering the workforce at 18 with undertaking a degree before entering the workforce to conclude that each year of a degree is worth to Government between $6000 and $10,000 (p12).  $10,000 in my estimate is close to the average Government payment per student at current rates but for many clusters the Government funding is much higher.

The paper then uses that estimate to consider the implications for student charges.  
One interesting conclusion is that "externalities do not differ between the courses in the higher education system" (p15) based on the range of individual incomes achieved by graduates from a particular field and the variety of careers graduates follow post-graduation.

They therefore argue that the charge to student should be the cost to teach less the value of externalities.  In the current system they would thus have a standard Government contribution matched to a variable student contribution set to achieve the notional required funding level for the discipline.

This is the inverse of the IRU argument for a standard student contribution matched by a variable Government contribution.

The paper's approach implies that the remainder of the cost is a question for the student to meet, presuming that they will make good decisions based on their assessment of the value to them of the variable costs by discipline.  In effect if you pay more for dentistry than history (the example in the paper) you are doing so expecting a greater benefit.  It works where the cost of the course has some alignment to the likely future income but falters where that is not so (eg agriculture).  
The risk of the Chapman-Lounkaew approach is that students' decisions will not produce the desirable mix of graduates, to gain the positive externalities.  Removing the common amount from the cost only makes each discipline look a bit cheaper than it is, it does not encourage pursuit of different disciplines based on interest and capability.

The review panel did not embrace the paper's proposal.

2.    The private rate of return to a university degree in Australia

The second paper is by a team from the University of Canberra's Centre for Labour Market Research.  It sets out the various ways in which comparison of the value from future earnings from a degree have been estimated, and then identifies the particular approach this paper will follow.  The essence is to estimate the higher earnings post-graduation compared with someone with year 12 qualifications and then allow for the costs of studying and the loss of earnings in the years of study.  It is based in 2006 data.

It has three important problems:

  • reliance on models of 18 year olds completing a degree and then working, ignoring the other student variants;
  • in all cases comparing against the average of all school leavers in the workforce rather than aligning graduates and year 12 leavers by discipline or field; and
  • being too historically based in 2006 data relating to student charges to assist in consideration of future student charge arrangements.

All models are trapped within the 18 year old school leaver paradigm.  It is a major limitation of such studies that they do not model the older student variants.  Assumptions are required but not I would think beyond doing, and not notably less reliable than for the 18 year old model.

We have substantial numbers of students who do come to university after a period away from education.  These students are as individuals making stronger statements about the gain to them from doing so than those who come straight on from school for whom foregone income while studying is theoretical rather than experiential.  If you assume the return is less than for the 18 year old model (because fewer years of graduate income are available) the data in the report could question whether it is worthwhile for the older students.

For some reason the team chose as the base case payment of student contributions in advance, even though the standard case is to defer most or all of the contribution.  Subsequent models then allow for this and also for students have some earnings during the study years.  Models are also done for masters degrees.

The tables of results are presented by discipline.  The comparison is made of graduates from a discipline with the average year 12 school leaver, despite the latter group also pursuing, I presume, a wide range of employment fields.  This is partly to do with the data set - for graduates they have the field of study and disregard the sector of employment.  This shows up most clearly in the case of visual and performing arts graduates who, on the report's figures, either are losing out from their degree or making a very modest return.  The comparison would be more relevant if compared to those in the creative arts industries without degrees.  It seems clear that low incomes from this set of graduates is tied to their individual commitment to pursuing artistic endeavours.

The results show variable levels of return by discipline, with humanities in particular, and science to a lesser degree, being much lower than for other disciplines.  The various professional areas produce similar returns to the student.  This puzzles initially - why are the medical professionals or the lawyers not doing so much better than the economist?  Payment of the band three rate is one possible explanation - the costs of study are higher hence the return is dampened. If so, it makes clear the importance of the student contribution to the outcome.

We therefore reach another major problem with this sort of study (and this study is not the problem - it is an issue for all of them), which is that they are too tied to the historical facts of the time of the data set.  The analysis we have includes the student charges as they were in 2006.  Not long thereafter the economists and business students joint the lawyers in paying band three contributions.

We are now considering a range of different approaches to student charges.  To influence these discussions we need to understand the raw advantage of a degree over not completing a degree, and to then test the impact of different student charges on that.  This would allow modeling to show at what level of charge the return to the average student reduces to zero.  This could be of some import in the current debate about whether removing caps on charges, or simply raising the student contribution, is key to future policy changes.

Overall I am not convinced that the data reported inform discussion to any notable degree.

3.    The impact of changes to student contribution levels and repayment thresholds on the demand for higher education

The analysis across all applicants suggests that:

  • the 1997 changes (tri level HECS, all higher than 1996 rate, and reduced income threshold for repayment) reduced demand in 1998, primarily from  older age applicants while the 2005 changes (+25% for most fields; higher repayment threshold) reduced demand but primarily from school leavers.  The main difference between 1996 and 2005 is that the repayment point for HECS was lowered in 1996 but raised in 2005, perhaps the more important factor for the mature age students;
  • the 2008 and 2009 changes to specific discipline groups had little overall impact.  2008 is associated with fewer older applicants, but confounded with good employment conditions;
  • year 12 completion rate increases feed greater numbers of applications;
  • unemployment rates (rises support demand increase) and average wages (increases hold back application growth) have expected impact overall and for older applicants but school leavers are more likely to apply when employment conditions improve.  The latter confounds the writers but perhaps reflects that for school leavers a positive employment market reduces pressure-worry about getting a job allowing a focus on education first.

The analysis at the discipline level struggles very hard to find significance (statistical or otherwise).  Little or no evidence can be found for impacts on demand from the differential treatments of education and nursing (protection from the 2005 25% increase and then inclusion in 2009) or for the movement of administration, accounting and commerce into band 3.

The report puts considerable effort into analyses of the impact of relative price changes - as particular discipline groups move between charges bands the relative price for all other groups changes marginally.  At the margin this seems to impact on demand for those groups such that a 1% increase in relative price can produce a reduction in relative demand of less than 0.1%. The impression I took away is that discipline changes do not affect student preferences for which field to pursue.

There is some minor evidence for low SES students reacting to increases in costs, but it is not large.

Conor King
26 April 2012

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