A Submission on Financing Issues to the Department of Education Science and Training Inquiry into Higher Education

At the end of 2002 or thereabouts the Commonwealth Government will be announcing changes to the financing of Australian higher education. The paper addresses the major issues, beginning with a brief history of university funding arrangements. This is followed by an conceptual analysis of financing models, on which it is demonstrated that the best way to manage student charges is with an income contingent loan, such as HECS. The paper explores some aspects of current university conditions. It is shown that over the past twenty years or so there has been a significant decrease in the relative salary levels of academics, and that over the last few years staff/student ratios have fallen significantly. Some part of the deterioration in conditions can be traced to the implementation of an inadequate indexation arrangement for government grants, instituted in 1995. That is, with respect to allowing the maintenance of earnings matching average Australian wage increases, public sector outlays have been falling. These falls are above and beyond what has occurred with the justifiable switch in financial contributions from taxpayers to students. Those arguing for some restoration of government support have a point.

Higher Education Financing in Australia

Hochschulfinanzierung, Hochschule, Bildungsökonomik, Australien, University financing, Higher education institution, Economics of education, Australia

The Value of Don Bradman: Additional Revenue in Australian Ashes Tests

One way to understand the value of sporting ‘superstars’ is to examine the effect they have on match attendances and revenue. Arguably, the most famous sports star in Australia was Sir Donald Bradman, whose batting average has far exceeded that of any cricket players. This paper examines the value of Don Bradman by estimating an empirical model of the effect of Bradman on cricket match attendances for Ashes Test matches in Australia. The attendance effect – of over 7,000 additional people each day on which he batted – is then used to derive an estimate of the effect on revenue. We find that Bradman generated considerable additional revenue, though the range of the estimates is very large. The Australian Cricket Board, as the monopoly supplier of cricket, was able to obtain all the extra proceeds.Consumer economics, Monopoly, Wages and compensation, Professional labour markets and occupations

Repayment Burdens with US College Loans

There is a significant and on-going unease with, and debate concerning, the state of US college loans. One of the most important questions relates to so-called “repayment burdens”, the financial difficulties associated with repayments. This paper examines the issue from both theoretical and empirical perspectives, the major goal being to understand the interaction between loan design and occupational choices. We find compelling original evidence that the design of US loans imposes severe expected hardships for many borrowers, especially those with very high debts, such as lawyers. The case for policy reform towards graduates’ capacity to repay seems incontestable.

Human Capital Accumulation: Education and Immigration

Education and immigration are examined and affirmed as drivers of sustainable productivity growth. In education, individuals see continuing benefits to educational investment, a view supported by individual rates of return from education. Private sector expenditure on education has increased substantially, Australia's public/private funding mix conforming to the OECD average. An expansion of migration is possible without unacceptable reduction in skill composition and may enhance Australian human resources development. The migration program should be set to underpin a 1.25 per cent population growth path and be focussed on 'smart' growth and not just growth in numbers.

Do Very High Tax Rates Induce Bunching? Implications for the Design of Income-Contingent Loan Schemes

We test whether very high marginal tax rates affect taxpayer behaviour, using a unique policy. Under the Higher Education Contribution Scheme – an income-related university loans scheme in Australia – former students with a debt face a sharp discontinuity. At the first repayment threshold they are required to repay a percentage of their entire income, resulting in an effective marginal tax rate that could be regarded as being as high as 76,000 percent. We formally model the taxpayer decision, and then use a sample of taxpayer returns provided to us by the tax office to investigate whether taxpayers bunch below the repayment threshold. We find a statistically significant degree of bunching below the threshold, but the effect is economically small. On net, we estimate that both the deadweight cost and the budgetary loss are less than A$1 million per year, a small fraction of the amount annually repaid through the Higher Education Contribution Scheme. The result has an important implication for the design of income contingent loans for higher education, such as those being introduced in the UK for tuition in September 2006. This is that it is possible to design arrangements in which the first income threshold of repayment is apparently high, but which are still able to deliver relatively high revenue streams in the early stages of income contingent policy reform without important tax payment avoidance consequences. Our findings also reinforce earlier research suggesting only minimal bunching around kink points in taxation schedules.bunching, marginal tax rates, responses to taxation, income-related loans

Reforming Youth Allowance: The “Independent-at- Home” Category

Several of the Youth Allowance eligibility criteria for independent status were subject to severe criticism in the recent Review of Australian Higher Education (2008). Specifically, it seems to be the case that many students are able to qualify for socalled “independent-at-home” financial support even though they may be living in circumstances of relative economic advantage. The paper examines the policy and statistical basis for these claims with the use of data from the HILDA survey and reports apparently strong support for the notion that the rules result in important inequities; the evidence was important to the deliberations of the Review Committee. The Commonwealth Government has recently announced changes to YA consistent with these findings.Youth Allowance; student income support; grants; “independent-athome”’ HILDA.

Student Loan Reforms for German Higher Education: Financing Tuition Fees

Due to the unknown future economic situation of students, private banks are unwilling to provide student loans in the absence of collateral. This market failure requires government intervention to prevent socially sub-optimal and regressive outcomes. Income contingent loans, whose repayment depends on the borrowers' future capacity to pay, can offer a possible solution to this problem. In this paper, we compare alternative income contingent loans for financing tuition fees at German universities. Several German states have introduced tuition fees at their universities since summer 2007 and publicly owned banks have started to offer student loans to cover these fees. Our empirical findings highlight the benefits of income contingent loans and demonstrate that tuition fees at German universities could increase considerably if an income contingent loan system would be implemented to provide students with the financial resources they need to pay these fees.Educational Finance; Student Financial Aid; State and Federal Aid; Government Expenditures on Education

Feasibility and design of a tertiary education entitlement in Australia

Overview: This report to the Mitchell Institute presents the outcomes of modelling the potential costs of an income contingent loan (ICL) that would form a core element of a tertiary education entitlement, as proposed in the February 2015 Mitchell Institute paper Financing tertiary education in Australia – the reform imperative and rethinking student entitlements by Mitchell Professorial Fellow Peter Noonan and Mitchell Policy Analyst Sarah Pilcher. This report, Feasibility and design of a tertiary education entitlement in Australia: Modelling and costing a universal income contingent loan, models the costs of a single income contingent loans scheme for higher education and vocational education and training (VET) students. It seeks to quantify the largely hidden subsidies involved in income contingent loans through unpaid debt and the difference between the rate at which debt is indexed and the costs to government of borrowing to finance student debt.  Feasibility and design of a tertiary education entitlement in Australia: Modelling and costing a universal income contingent loan has been prepared by Dr Timothy Higgins and Professor Bruce Chapman, two of Australia’s leading experts on the design of income contingent loans. Background Feasibility and design of a tertiary education entitlement in Australia presents the outcomes of various financial modelling of the potential costs of applying an income contingent loan scheme to include all tertiary education students in Australia. The modelling maps students’ projected incomes by qualification level, finding significant variation in lifetime incomes across VET and higher education qualifications. At present, there are a range of different income contingent loan schemes operating in Australia’s higher education and VET sectors. Under such schemes, students are not required to pay the upfront cost of their course. Instead, they are able to take out a loan with the government and repay the loan through the taxation system once they enter the workforce and their incomes reach a certain threshold. But these loans are not available to all students. In the VET system, those studying for Certificate III and most Certificate IV VET courses, for example, early childhood education, aged care, and hospitality, do not have access to an income contingent loan. These students must pay the cost of their course upfront – a potential barrier as fees for many of these courses are increasing.   The Mitchell Institute will draw on the Higgins and Chapman report to finalise its proposal for an integrated tertiary education funding system in Australia