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Australian changes may saddle students with US-style debt levels

Proposed changes in the budget to higher education fees and loans have sparked widespread protests by students. They argue the university sector without a cap on fees, as the budget proposes, will become…

Education Minister Christopher Pyne wants Australia to have universities comparable to Harvard, but at what cost? Shutterstock

Proposed changes in the budget to higher education fees and loans have sparked widespread protests by students. They argue the university sector without a cap on fees, as the budget proposes, will become the elite model seen in the US and lead to growing inequality.

Education Minister Christopher Pyne lauded the American higher education model when he said “we have much to learn” from our “friends in the United States”.

The government has proposed three big changes to higher education: deregulating fees, lowering government subsidies for student places and charging real interest on HELP loans.

What is the “American Model” and will these changes really take us there?

Looking at Australian and American universities in 2014, the differences are diversity and debt.

In Australia, all of our universities are funded under a single model and student fees are capped. As a result there are only modest differences between our institutions.

In contrast, the American model has been deregulated to allow vast differences between universities. To give an idea of the disparity, annual tuition fees at elite universities can be enormous ($44,000 at Harvard) while the lower tier of regional universities charge significantly less ($4,500 at New Mexico Highlands University).

This desire for diversity is Pyne’s way of saying that he wants our top universities to be better and compete with the Harvards of the world, even if the cost is that other universities are worse off.

The government has said its main priority for higher education is “not getting left behind”. It wants more of our universities in the top 50 in the world. (Pyne litters many of his speeches with commentary on our status within the university world rankings, despite significant criticisms of how meaningful they are.) Deregulating fees is designed to create the disparity that will enable this, universities with a strong reputation to charge higher fees will increase quality, and lower status universities will have to compete on price rather than quality.

The second part of the US model is student debt. In Australia in 2014, the government provides student loans through the HECS-HELP scheme. Students pay the loan back at a rate that rises with income, with payments only kicking in once loan holders are earning over a certain threshold (currently $53,345).

The public purse contributes significantly to the cost of higher education in the form of this below-market rate of interest as well as debts that do not get paid back.

Only the wealthiest students can afford a top education in the US. Flickr/Chaval Brazil, CC BY-SA

In 2014, students in the US are eligible for a federal loan with an interest rate linked to the US Federal 10-year Treasury rate, plus a small margin. The rate is currently 3.86%, although students who have financial need have this interest subsidised by the government. In addition, all students taking out loans pay a 1% loan fee.

The 2014-15 budget proposal to link student debt to government 10-year Treasury bonds would bring Australia directly in line with the US model. Pyne’s claim that profits used from the loans will subsidise students with financial need is yet to be fully described, but also appears to be in line with the US model of subsidies for students in need. Like the US system the changes move towards a “user pays” model, in which the combination of higher fees and the introduction of real interest on debts will move the cost of studying onto individual students.

The American student debt problem

While the government’s main concern is raising the quality of our top universities, many academics and students are concerned about the social and economic problems the US model has caused.

There is evidence from around the world that higher fees disproportionately affect students from low socio-economic backgrounds. The prospect of high levels of debt discourages these students from attending university, and students from low socio-economic backgrounds and women on average take longer to pay off debts and are hardest hit by interest. Professor Bruce Chapman, who designed the current HECS system to combat these factors, is one of the many critics of the changes.

Shifting the burden of paying for education away from the public purse (coming largely from taxes on high income earners, generally the previous generation) and onto individual students is something a nation can only do once. The government that implements such a change can claim “savings”, but there are hidden negative consequences.

Student debt in the US is causing what some academics have called a “crisis of justice”, affecting the everyday lives of students who are still paying off their student debt years after graduating. One group that suffers most from higher fees are those students who for a range of reasons drop out of university before completing their degree.

The level of debt in the US has not just led to social inequity but also wider economic problems. For example, high levels of student debt directly correlate with the decreasing number of loans for homes and cars being taken out by young adults. In other words, student debt may be having a negative impact on the national economy.

And in case there is any doubt fees will rise, the US example shows that fees have risen at a rate that far outstrips inflation. In the ten years to August 2013 the CPI (inflation) was 26.1% while the cost of tuition rose 79.5%.

One reason for higher fees is that deregulating universities opens them up to market forces, obliging them to do what it takes to stay competitive. In the US a senate committee found that on average 23% of the budget of for-profit universities was being spent on marketing.

The reason students have been marching in the streets should not simply be seen as a knee-jerk reaction to being asked to pay more. It should be taken as a response to the government’s desire to emulate the American model. The students protesting, supported by a host of academics, are saying that embracing the US system is not what they want for the future of higher education in Australia.

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17 Comments sorted by

  1. David Stein

    Businessman

    Couple of points.
    First, the way the government is going about structuring these loans appears to suit a securitization of the loans - bundling and sale on to the markets. How the markets price the cashflows of these loans, contingent as they are on future income from people with very little credit history, is another question.
    Second point is HECS is not currently a dischargeable debt in bankruptcy. Once you sign up, it's with you forever. Unlike almost every other form of liability, it will always be there, regardless of your personal circumstances.
    Third point - future the economic consequences. Future professionals will have lower disposable income and all other things being equal, this will feed through to lower growth, lower real estate prices and higher unemployment.

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    1. Gavin Moodie
      Gavin Moodie is a Friend of The Conversation.

      Adjunct professor at RMIT University

      In reply to David Stein

      I think US and possibly English higher education loans are not a dischargeable debt in bankruptcy. Australian HELP and English higher education loans are different from almost all other debts owed to public and private lenders such as the Australian Taxation Office, credit cards, etc, in not being recoverable from the estate when debtors die.

      The Commission of Audit gave very good reasons why the Government should not contemplate selling off the HELP debt. The biggest problem is that governments, especially one with a AAA credit rating from all 3 ratings agencies bequeathed by Labor, can borrow far more cheaply than any private financial. So the HELP debt would have to be sold at a very big discount.

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    2. David Stein

      Businessman

      In reply to Gavin Moodie

      I agree Gavin - it would be a terrible idea to sell the HECS portfolio since the government would take a bath on the discount. Better just to collect it through tax revenue, although that doesn't mean this government won't try.
      Student loan securitizations in the US are rated a lot higher than you would think precisely because it can't be forgiven in bankruptcy. 90% are rated A or higher.
      Let's see if they make the debt recoverable in probate and if they tinker around with the income thresholds - if so, it's likely they will try to make the future loans saleable.

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  2. Jay Wulf

    Digerati at nomeonastiq.com

    Think of the changes as WEALTH BUILDING!

    By creating demand for credit, we allow financial institutions to step in to provide credit for that private debt.
    Where previously there was no rent-seeking behaviour for basic services, now there is.

    Monetarist extremists once more tick one on the win side.

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  3. Lydia Isokangas

    Australian

    I have no idea why the current government insists on sending young, vulnerable people into penury while removing any opportunities they have to improve their employment possibilities. Finland manages to adequately fund their universities AND pay their students a small living allowance without going broke or over-taxing their populations or sending their tax-paying industries overseas. Admittedly Finnish universities don't have much money for marketing, but nobody is complaining about that…

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    1. R. Ambrose Raven

      none

      In reply to Lydia Isokangas

      So many people have such trouble understanding that none of this has anything to do with quality of education, or even the devaluation of education. It has everything to do with the ending of government support for anything that does not make money for the obscenely rich. The less you get, the less I get, the more they can take. Pyne knows nothing about education, and cares even less.

      Which part of Pyne's "I don't care" do people have trouble understanding?

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  4. grant moule

    Consultant

    Another example of Tony Abbott helping to destroy Australia's quality of living.

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  5. Brad Farrant

    logged in via email @hotmail.com

    An excellent contribution to the debate. Thanks Nick.

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  6. R. Ambrose Raven

    none

    Despite the U.S. structure being brutal and evil, the Noalition is set to copy ALL repeat ALL its worst aspects. Coalition Education “Minister” Pyne is admittedly taking Labor/Noalition post-1984 deregulation to its ultimate conclusion – exploiting students to feed the greed of profit-seeker schools while maximising inequality of opportunity.

    Outstanding American student loan debt will exceed $1 trillion in 2011. Despite a brutal depression, both public universities and private colleges have…

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  7. Jan Dobson

    Business Manager

    "Raising the quality of our top universities", "not getting left behind". Sounds like unjustifiable sound bites from Minister Pyne.
    My small, regional university advertises it is in the top 2% Of The World. Uni Melbourne is ranked 43rd In The World, with four others in the top 100. Consider the number of universities world wide. Not too shabby.
    Yes, of course we should be considering ways to improve and I have no objection to students contributing, as they do now, to the cost of their education. But this new system, where a child of wealthy parents receives a discount for upfront payment & a less advantaged student will have compounding interest on repayments... Where fees could escalate due to deregulation... Where private universities could become the norm....
    This is ideology run mad.

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    1. Brad Farrant

      logged in via email @hotmail.com

      In reply to Jan Dobson

      Agree this is "ideology run mad".

      How about we aim to be more progressive in terms of a more fair, equal and enlightened society by taxing high incomes and profits rather than further taxing tertiary education? Indeed, why don't we tax the rich to fund free tertiary education for all? That way those that benefit most financially from tertiary education will be the ones who contribute most rather than some fairly arbitrary fee that often bears little relationship to the personal financial benefit obtained.

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  8. Garry Baker

    researcher

    Entirely missing from this editorial, is a notion that maybe Pyne and the LNP are not the only authors of this push for free market pricing. .Others join with them !

    What if the finance managers (nowadays running the more prominent Uni's) see a bigger cash flow in the "export an education' side of their businesses, where foreign students fess up noticeably more pro rata cash than the locals. Cash fixes everything they say, and the more of it, the better the Uni.

    Ergo, put the locals…

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  9. Sam Douglas

    PhD student (Philosophy) at University of Newcastle

    This was a timely article that did not receive enough attention (in my opinion at least).

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  10. Richard Jamison

    logged in via LinkedIn

    With the way this government is cutting science funding and research initiatives there's going to be no jobs for graduates anyway. The whole this is a belligerent forcing of idealogy onto the Australian culture.

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  11. Shaun Lehmann

    PhD Scholar, Tertiary Educator

    The fact that this is likely to hurt women more than men is worrisome. Any woman who decides to take an extended period of time off from work after having a child will ultimately be stung harder by interest. Does anyone know if the government has signaled a willingness to freeze interest for a period after a woman has given birth?

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    1. Richard Jamison

      logged in via LinkedIn

      In reply to Shaun Lehmann

      Thanks an excellent point Shaun. I haven't heard that issue raised any where in the MSM. I wonder Pyne and his advisers have identified that has an issue - probably not.

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