By Leith van Onselen

Jonathan Pincus, visiting professor of economics at Adelaide University and former principal adviser of research at the Productivity Commission, has written a curious piece in The Australian today arguing that deregulating university fees and raising the interest rate on loan repayments is justified on both equity and efficiency grounds:

…even applying the bond rate, higher education loans provide large subsidies to university students. And none of the subsidy comes from those who pay loans off quickly — it comes from taxpayers, many of whom earn much less than university students. Loans at zero real interest for every student, even those on high incomes — how fair is that?… Most graduates who earn relatively low incomes (for graduates) have chosen courses and made employment decisions they know lead to lower incomes… It is a strange notion of fairness that requires taxpayers not only to subsidise tuition that gives the option of earning higher incomes but also to provide larger subsidies to those who choose lower earning jobs and lifestyles. …such loans subsidise those who choose courses with costs that are high relative to future income. This creates perverse incentives for students. And universities… In reality, charging the bond rate on student loans is a long overdue reform that enhances equity and efficiency.

I have two major issues with Pincus’ arguments.

First, he has conveniently ignored the OECD’s Education at a Glance Report, which revealed that the public rate of return from higher education in Australia is around twice that of the individual, and that students in Australia already contribute far more towards the cost of their education – and receive far less individual benefit – than students across the OECD.

So rather than viewing university funding as being a “cost” to the taxpayer, it should be viewed as providing net benefits to society and a good taxpayer investment.

Second, his argument that taxpayers should pull back subsidies to “lower earning jobs and lifestyles” does not take account of the fact that the courses that would be most affected are also the ones that provide the greatest social value (and smallest private benefits), such as teaching, nursing, or science.

In June, the National Centre for Social and Economic Modelling (NATSEM), which is attached to the University of Canberra, released estimates of how the May Budget’s changes to university fees are likely to impact on various courses, and found that the impact would “be felt most strongly for low-pay occupations such as nursing or education, and across the board the impacts are larger for females”. The modelling “assumed that students will face a repayment interest rate of 5% which is around twice that of the CPI (the existing indexation) but lower than the typical 10 year Treasury bond rate (the proposed loan interest rate) of 6% over the past decade” (see below table).

Viewed in this light, it is hard to conclude that the Coalition’s university reforms would improve equity, as argued by Pincus. Rather, the reforms would be particularly hard on women, who tend to repay their student loans over a longer period, along with lower-income earners. Either way, it would increase inequality.

University deregulation would also encourage students to shift from socially beneficial degrees to higher-earning programs such as commerce and law. How is such an outcome “good” outcome for society? Do we really want more bankers and lawyers and fewer teachers, nurses and scientists?

A broader concern is that the barriers facing Australia’s youth are already becoming increasingly prohibitive, and the Coalition’s university reforms will only add to the pain. Not only will most graduate with sky-high debts under the Coalition’s plan, but they are also likely to face poor job prospects following the hollowing-out of the economy over the past decade, as well as increasing automation.

Add to this Australia’s sky high housing costs, a tax system that will increasingly punish income earners while largely ignoring wealth, and the proposed stricter eligibility requirements for under-30s seeking unemployment benefits, and the future facing many younger Australians is looking increasingly downbeat.

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