Reform of the higher education demand driven system (revised)

Budget Review 2014–15 Index

Dr Coral Dow

The 2014–15 Budget introduces a number of measures that together radically overhaul the higher education sector. Whilst maintaining the demand-driven system introduced by the Gillard Government, the Coalition Government proposes to deregulate the provision of places. It intends to do this by:

  • allowing non-university providers (including private providers and Technical and Further Education colleges) access to Commonwealth supported places (previously called Higher Education Contribution Scheme or HECS places) and
  • allowing higher education providers to set their own uncapped prices for the student contribution component of those places.

This moves the sector to a greater user-pays and market-driven model. The model will be reinforced by the Government’s proposal to reduce the government component in the funding of Commonwealth supported places and removing any limit to the amount a student can borrow under the income-contingent Higher Education Loan Programme (HELP).

Commonwealth Grants Scheme

The Commonwealth Grants Scheme (CGS) provides the funding for student places. Prior to 2008 the number of places funded was capped.The Howard Government loosened the caps slightly from 2008, but this did not lead to a substantial increase in student numbers. In 2009 the Labor Government commenced removing the caps on public university places and provided a place for every domestic bachelor student admitted to university from 2012. The uptake in demand from this policy was significant with an increase from some 440,000 to 541,000 Commonwealth supported places between 2009 and 2013. The demand was accompanied by a significant increase in CGS expenditure from $4.6 billion in 2009–10 to an estimated (in the 2013–14 Budget) $7.2 billion in 2016–17.[1] Such growth has raised concerns about the financial sustainability of the system and underlies the government savings measures in this budget.

The Government proposes to cut CGS expenditure to $6.6 billion in 2016–17 and $6.7 billion in 2017–18.[2] Estimated savings of $1.1 billion over three years from 2015–16 will be made whilst still expanding the demand-driven system: from 2016 Commonwealth supported places will be funded for accredited courses at registered non-university institutions and extended to sub-bachelor courses.[3]

The only estimate of expansion is the Government’s general statement that ‘by 2018, over 80,000 additional students a year will be supported’.[4] Using the measure ‘students’ (rather than Commonwealth supported places or full time equivalent enrolments) makes comparisons with previous estimates difficult. There is no breakdown of where the Government expects the demand for places will be, except that the higher education overview suggests 48,000 students in sub bachelor places and 35,000 students in bachelor places. There is no estimate of uptake of places at non-university providers.[5]

The expansion in places whilst making savings of $1.1 billion will be achieved by cutting the Government contribution per place by approximately 20 per cent. Government contributions vary by discipline. The existing eight funding clusters have been replaced by ‘five funding tiers with disciplines allocated to a particular tier based on private benefits for graduates, the standard teaching method and infrastructure required to deliver the course’.[6] Some disciplines, such as humanities and mathematics will receive an increase in government contribution, but most will be reduced.[7] Government contributions to places at non-university providers will not been known, other than that they will be lower than those at universities, until a review by the Minister for Education is undertaken.[8]

Student Contributions

The shortfall in the funding per place will largely be met by students. The Government proposes to remove the cap on student tuition costs and allow universities and providers to set their own fees. The Government expects this deregulation will ‘enable competition based on quality and innovation’ and ‘facilitate choice and opportunity for students’.[9] Universities will be faced with difficult decisions on how much they might expect students to meet the funding shortfall in courses such as nursing and agriculture which have received approximately 70 per cent of course costs from the Government contribution. Cross-subsidies from courses such as commerce and economics with existing high student contributions and low government contributions might be possible, but universities are likely to face price competition from private providers in these courses.

Widespread speculation has occurred on how high fees might rise. There seems little doubt that the elite universities in the Group of Eight which have advocated deregulation will increase their fees, possibly as high as the fees they charge international students. These are currently two to three times higher than domestic student fees. Academic Bruce Chapman suggests course costs of $120,000 are possible.[10] Co-author of the report to government on demand-driven funding, Andrew Norton, disputes this figure but provides modelling suggesting that course costs might be $50,000.[11]

The Government has anticipated increased fees and will amend the Higher Education Loan Programme (HELP) provisions to remove the cap on the amount a student may borrow. However, a number of budget measures relating to HELP will increase the cost of deferring a loan.

Deregulated fee provisions commence in 2016, but will apply to students accepting a place after 14 May 2014. Students intending to apply for courses in 2015 might be expected to need information from institutions before applying. Existing arrangements will remain for current students until they finish study, or until 31 December 2020 (whichever comes first).

The Higher Education Loan Programme

From 1 July 2016 the income threshold for repayment of HECS-HELP debt will be lowered to an estimated $50,638 (in 2014–15 the threshold is $53,345). Repayment will be set at two per cent of income up to the current threshold, which is estimated to be $56,264 for the 2016–17 year at which the existing repayment rates apply.[12]

From 2016, the annual interest rate applied to loans will be changed from the existing Consumer Price Index (CPI) (in 2014 CPI indexation will be 2.6 per cent) to the ten year Government Bond rate (currently around 4.0 per cent) capped at a maximum rate of 6.0 per cent. The increased indexation rate is a savings measure designed to overcome the additional implied loan subsidy in the existing rate. It aims to act also as an incentive for debtors, including those moving overseas, to repay debt more quickly.

These provisions will apply from 2016 to new and existing debt: at June 2012 there were 1.68 million HECS-HELP debtors with a combined debt of $26.3 billion.[13] These two measures are estimated to save $3.2 billion over four years from 2014–15.[14]

Despite these savings there are expenses to government in providing HELP which will increase in line with student fees and the number of loans. Program expenses for HELP are estimated to increase from $1.4 billion in 2014–15 (similar to estimates in the 2013–14 Budget) to $2.4 billion in 2017–18.[15]

In accounting terms, HELP loans are an asset. An indication of the estimated increase in loans is the Government’s estimate that total administered assets in the education portfolio will increase from $28.1 billion in 2013–14 to $54.4 billion in 2017–18. This increase will be ‘mainly attributable to HELP’.[16] Each year a proportion of new HELP debt is estimated not to be repaid. This ‘doubtful debt’ is estimated to increase from 17 per cent in 2013–14 to 23 per cent in 2017–18. Despite the reduced income threshold repayment, estimates of the average number of years to repay debt have increased from 8.6 years in 2013–14 to 9.8 years in 2017–18.[17] The higher indexation rates will likely result in the total debt and doubtful debt increasing more quickly.

An academic study undertaken before this budget predicts HELP doubtful debt will be $13 billion by 2017.[18] Suggested fiscal sustainability measures have included changing the loan indexation rate, reducing the repayment threshold to the minimum wage, recovering debt from deceased estates, collection of debt from debtors moving overseas, imposing a loan fee on all HELP borrowing and selling (or ‘securitising’) the HELP debt to the private sector.[19]

The changed indexation rate has been adopted in this budget and the threshold reduced (but still substantially above the minimum wage). However, existing loan fees on FEE-HELP and VET FEE-HELP loans have been abolished and there are no measures designed to recover overseas or deceased debtors’ debt. Public discussion of the best measures to recover debt will continue if the uptake of places, the number of loans and the amount of loans increase above the Government’s estimates and if the doubtful debt amount continues to rise.

Will the changes deter students from undertaking higher education?

This has been a continuing topic of research and debate which began with the introduction of HECS in 1989. The debate continued after differential student contributions and a lowered income repayment threshold were introduced in 1998 and when the Howard Government allowed universities to increase fees by 25 per cent in 2005. Particular emphasis has been on the effects on low socio-economic status (SES) students. The most recent detailed analysis of the research can be found in the Deloitte Access Economics report for the Higher Education Base Funding Review in 2011. The report has a section on low SES participation which includes the statement:

The focus of the literature on HECS has been on equity and the participation of students from lower socioeconomic backgrounds as HECS could potentially increase socioeconomic inequality. For example, people from lower socioeconomic backgrounds may be more debt averse and so be less likely to take on a loan to participate in higher education….However, there is little evidence in the literature to suggest that HECS has deterred participation in higher education among people from a lower socioeconomic background.[20]

There have been constants since 1989: the rate of indexation has remained at CPI and  governments have restricted Commonwealth funded places largely to public universities and capped the maximum student contribution. However, from 2016 the combined measures in this budget may have an effect on student behaviour.

Professor Chapman is reported as criticising the new indexation rate on loans as unfair. According to Chapman, students who drop out of university and start out in low-paying jobs and women who delay paying back their debts when they take time off work after having children will be hardest hit.[21] Similar views are held by academic Simon Marginson who describes the new system as ‘socially regressive’.[22]

Modelling undertaken by the Australian Greens provides the following examples:

A science graduate with a starting debt of $34,000 and a starting salary of $50,000 who gets annual pay rises of 2% above inflation would take 21 years to repay their loan, according to the modelling. This person's total interest payments would be $13,900 higher if the loan was indexed at 6% rather than at the consumer price index.

But a graduate with the same starting debt who managed to find a job with a starting salary of $75,000 and got annual pay rises of 2% above inflation would take just 10 years to repay their loan, with total extra interest payments of just $5,300, the modelling indicates.[23]

Such increasing debt may deter some students from undertaking a degree and override the incentive of higher graduate salaries that has seen students prepared to forgo income and take on debt in the HECS-HELP scheme.[24]

[2].           Australian Government, Portfolio budget statements 2014–15: budget related paper no. 1.5: Education portfolio, 2014, p. 68, accessed 15 May 2014.

[3].           Australian Government, Budget measures: budget paper no. 2: 2014–15, 2014, p. 84, accessed 15 May 2014.

[5].           Australian Government, Budget overview 2014–15: higher education, p. 8, accessed 20 May 2104.

[6].           Department of Education, ‘Public universities: revised funding rates’, Department of Education website, accessed 16 May 2014.

[7].           For 2014 funding rates see: Review of the demand driven funding system: report, Department of Education, Canberra, 2014, p. 79, accessed 20 May 2014.

[8].           Budget measures: budget paper no. 2: 2014–15, op. cit., p. 84, accessed 15 May 2014.

[9].           Portfolio budget statements 2014–15: budget related paper no. 1.5: Education portfolio, op. cit., p. 64, accessed 15 May 2014.

[10].         M Knott and H Gilmore, ‘Graduates could pay up to $120,000 in debt, HECS architect warns’, Sydney Morning Herald, 16 May 2014, accessed 20 May 2014.

[11].         D Hurst, ‘Massive uni fees: Coalition adviser says fears over degree costs are exaggerated’, The Guardian, 16 May 2014, accessed 20 May 2014.

[12].         Department of Education, ‘Higher education and research budget information: students’, Department of Education website, accessed 20 May 2014.

[13].         Australian Taxation Office, Tax stats 2011–12, table 18, accessed 20 May 2014; Department of Industry, Innovation, Science, Research and Tertiary Education, Annual report 2012–2013, p. 245, accessed 20 May 2014.

[14].        Budget measures: budget paper no. 2: 2014–15, op. cit., p. 77, accessed 15 May 2014..

[15].         Australian Government, Portfolio budget statements 2014–15: budget related paper no. 1.5: Education portfolio, op. cit., p. 75. 

[16].         Ibid., p. 91.

[17].         Ibid., p. 76.

[18].         A Norton, Doubtful debt: the rising cost of student loans, Grattan Institute, Melbourne, April 2013, accessed 20 May 2014.

[19].         B Chapman and T Higgins, ‘The cost of unpaid HECS debts of students working abroad’ Australian Economic Review 46 (3), 2013, accessed 20 May 2014; Review of the demand driven funding system: report, op. cit.,  p. 75,  National Commission of Audit, Towards responsible government: phase one, February 2014, pp. 153–157, accessed 20 May 2014 and Norton, op cit.

[20].         The impact of changes to student contribution levels and repayment thresholds on the demand for higher education, Department of Education, Employment and Workplace Relations, Canberra, August 2011, accessed 20 May 2014.

[21].         Knott and Gilmore, op cit. See also E Bexley, ‘Fee deregulation: what does it mean for Australian higher education?’, The Conversation, 14 May 2014, accessed 20 May 2014.

[22].         S Marginson, ‘Higher education, the age of Pyne the destroyer begins’, The Conversation, 16 May 2014, accessed 20 May 2014.

[23].         Hurst, op. cit.

[24].         For analysis of the returns to graduates see: A Norton, Graduate Winners: Assessing the public and private benefits of higher education, Grattan Institute, Melbourne, August 2012, accessed 20 May 2014.


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