Pyne's plan bold but disruptive

11 June 2014

When the federal budget and the proposed higher education reforms were revealed, I happened to be sitting in London with an expert on the impact of recent changes in higher education funding in Britain.

His reaction was first to say "Wow", swiftly followed by "WOW!"

I could see why.

Allowing institutions to charge fees in a deregulated model is a very big move. Changing how interest rates are calculated on student debt is another. A decision to effectively cut a 20 per cent swath through university budgets in their next budget cycle would, frankly, be something you might expect the IMF to impose on a country in a bailout. Taken together, seismic is not hyperbole.

But the biggest issue is that it is all happening at once, and it is not at all clear where the chips will fall.

The one fact is that fees will go up — they have to for all institutions just to stand still. I can see the logic of greater fee contributions from the student body. We know that the returns to a degree for Australia are, broadly, in line with international norms.

What we don't know is the impact of these changes on demand or participation.

The best parallel we have is perhaps the Britain that introduced quite far-reaching (but nowhere near ours) reforms to its funding structure.

The returns to a degree did not change, nor did the demand for university change to any great extent. But all it implies is that students are savvy to the gains and reflect that in their choices.

In Britain they figured that out over close to a decade of incremental change — unlike us, they didn't have to figure it out sometime before the start of the next academic year.

Similarly, the government believes competition will win out — that fees might go up but equally might go down, with new entrants coming in to undercut, keeping the existing providers in check. However, education is not the same market as haircuts or groceries. It is a market built on people's view of their future, with a built-in distortion through the repayment system. And, frankly, it is a market where suppliers can and do trade on the value of intangibles — prestige being the obvious one. Some research even suggests that students will flee courses that don't put their fees up — they assume the fees are low for a reason — and that can't be good.

Against this backdrop it will still be the case that students can defer their costs — a sort of hedged bet against future incomes. When the dust settles we will still have high demand even if it shifts around — students know the value of education. And as for those new entrants, they will struggle to prove that they can offer the same gloss to a CV as the established institutions.

This is why the big bang change is so odd. Full deregulation with simultaneous cuts to core budgets can only mean a greater debt being passed to the student and, potentially, on to the taxpayer. A repayment system with lowered thresholds and higher interest rates could encourage students to move towards high-value, high-return but higher-cost degrees. There is no group of new providers waiting to sweep away the perceived inefficiencies of the old guard. This is a complex market, with complex structures, and I am not sure the implications have been worked through.

Turning to participation among financially disadvantaged students, I don't believe that money is the ultimate barrier.

The government response — scholarships funded by the extra fees raised by institutions — ignores this. It replaces the very simple model that every high school student, rich or poor, knows — apply, be accepted, defer your costs, stick with your aspirations — with one that puts the onus on institutions to provide funding through individual programs with different rules.

This creates uncertainty and complexity. It weakens a system that is arguably one of the best-designed deferred payment structures in the world, with a more shonky system that lacks policy levers to promote participation or encourage students into particular courses with societal value.

The government's plan is big and bold. Perhaps it is too big and too bold. Policy changes always carry a law of unintended consequences caveat, but these reforms are riskier than most.

The government has an outcome in mind but has failed to articulate it fully. Right now, it seems like saving money is the motive, but in return for a lot of disruption.

I sense the minister has loftier aims and he should take his ideas — and his convictions — back to the sector to work through, with student outcomes at the heart of that discussion.

This article was first published in The Australian.