Higher education policy is one of the biggest challenges facing the new federal government.

The budget forward estimates show substantial savings from a 20% cut in the government subsidy per student.

However, the original plan to achieve this through full deregulation of student fees is no longer an option. So, can the government realistically achieve its savings?

Reimposing caps on funded places

While reimposing caps on the number of funded places that universities can offer would help the government deal with budget pressures, it is very much contrary to the Coalition’s proposal. It also would not meet the need to increase the number of students graduating.

Recent analysis shows that capping the number of students at current levels would significantly reduce future participation in tertiary education.

Maintaining the demand-driven system

The other option, presumably, is to maintain the demand-driven system of higher education (or even expand it) but cut the per-student subsidy and increase fees.

That is unless the government decided not to look for budget savings, but rather to continue increasing public investment in higher education to avoid the need for reduced student subsidies.

Aside from needing Senate approval for any budget-saving reforms, this would be unlikely, given the Coalition’s positioning on budget issues. The government would have to find savings in other areas to fund such a policy, or increase taxes, or allow a higher budget deficit than planned.

Other options for allowing fees to increase

Full deregulation of student fees appears to be politically impossible for the government to pursue and has faced substantial critique. If the government is going to allow increased fees, it needs an alternative to full deregulation.

Cut per-student funding but raise the student contribution from an average of about 40% to 50%, by raising HECS caps

While this might help the government’s budget, a 20% cut in per-student subsidies would probably struggle to achieve political support.

If the cut was reduced from 20% to say 10%, this might be more palatable to the Senate and could result in higher per-student total funding (including the fees).

If caps were raised just enough to allow this, the expected result would be all universities charging at the caps.

This approach might get support from the university sector, where it is largely considered that current funding rates make providing the desirable quality of education difficult. However, this would add costs to the forward estimates and might not receive a positive reaction from a treasurer determined to avoid tax rises and struggling to rein in a deficit.

Limited fee flexibility through the taper model combined with taking advantage of claw-back for students needing additional support

During last year’s debate about full deregulation, senior research fellow Janine Dixon and I argued for flexibility, while avoiding excessive rises and allowing some price differentiation between providers. Bruce Chapman supported a similar approach.

The proposal involved a “taper model”, whereby government tuition subsidies would be reduced according to a progressive schedule, when fees are raised above a threshold.

At the same time, we argued that the savings would allow for an enhanced Higher Education Participation Program, incorporating scholarships for students from low socio-economic backgrounds across the system, and additional support to reduce attrition and improve success for “at risk” students.

Modelling on the likely effects on fees, university revenue and the government’s budget suggests this policy has a good chance of achieving its aims while still making some budget savings.

Fee deregulation while capping income-contingent loans

Capping income-contingent loans would likely have a similar effect to a fee cap, but carries a risk of higher fees where students could afford certain courses without a loan. This is arguably contrary to the equity and insurance aims of the HECS income-contingent loan system.

Flagship courses

A new idea in the Coalition’s discussion paper is to allow a limited number of flagship courses more flexibility to raise their fees.

A similar idea was floated during the Gillard government, but in that proposal flagship courses would receive higher government subsidies.

The latter idea can probably be ruled out in the current fiscal environment. The former idea has more legs as an experiment, to test the feasibility and benefits of some degree of deregulation.

If some courses are allowed greater fee flexibility than others, they might arguably need to offer a truly higher-value course.

This idea could be combined with the taper model, which might both promote its political acceptability and help fund an enhanced HEPP program and/or budget.

Remaining questions

It will take a very persuasive minister to convince the Senate to adopt even these more moderate policies than full fee deregulation, given the Coalition’s previous experience.

An increase in caps on HECS looks to be the simplest and arguably easiest policy to sell, especially if the per-student subsidy cut is around 10% rather than 20%, and total per-student funding increases.

However, a significant advantage of the taper model, introduced gradually, is its potential to enhance funding of equity strategies and improve the success rates of students who need additional support.

Even if some fee flexibility is introduced, while creating greater certainty for the higher education sector, this would leave critical questions about the broader tertiary sector unresolved, such as:

How to revitalise and reform vocational education?

How to achieve more coherence between vocational and higher education?

How to reconfigure income-contingent loans to support a more coherent tertiary system?

What is the appropriate structure of public subsidies for different types of tertiary education?

How should both higher and vocational education regulate and/or fund non-university and private providers?

Another important question is: do we need an independent entity to advise on these and other matters, and to oversee a managed market system?

Ideally, these questions should be resolved at the same time as the higher education funding issues.

It would be a remarkable achievement if the federal minister could pull that off in the current political environment, especially as it also brings into play major federal-state issues.

Perhaps we will have to accept a two-stage process, but all these issues need to be addressed in due course. Meanwhile, the case for establishing an independent entity to assist with a rational reform process is a strong one.

Professor Dawkins presented these proposals at the Australian Conference of Economists on July 13.