How Australia's 'pay-later' policy raised revenue ... and morale

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The British university system is in financial trouble: decreased capital funding, increasing student/staff ratios, decaying buildings, and low teaching morale. This used to be the case in Australia in the late Eighties, but it isn't the big issue any more.

Just this month one of Australia's best-known vice-chancellors said: "We could not have a higher education system of the size and quality we have if the government were still funding all of its cost, as it was a few years ago."

So what's happened?

The Australian system now has a new revenue source. It has underpinned major increases in spending, providing about half of the additional expenditure in the Nineties.

It started in 1989 with the introduction of the Higher Education Contribution Scheme in which students pay, or are committed to pay, charges covering about 20 per cent of course costs about $A2400 [pounds 1,200] per full-time year.

The big innovation is that no student has to pay until their personal income exceeds the average income of Australian workers - currently about $A27,000. HECS is the world's first income-contingent university charge, with the revenue being collected through the tax system where the administrative problems have been shown to be negligible.

If students choose to pay up-front, they receive a 25 per cent discount and the debt obligation disappears. About 20 per cent have chosen this route.

For the other 80 per cent the amount paid is only about $A16 (pounds 8) a week at the lowest level, there is no real rate of interest on the debt and, clearly, no payments are required if a graduate earns low incomes - if unemployed, in a low-paying job, or spending time out of the workforce. It would seem hard to find a problem with these arrangements.

Nevertheless, when HECS were introduced, there was a cacophony of protest. The themes were familiar: education was a right and should be free; the policy would stop the poor entering university: female enrolments would fall: it would lead, eventually, to full up-front fees.

The first idea is very innocent. It doesn't recognise that a so-called "free" university education is one in reality paid for by all taxpayers - mostof whom have not had the privilege. As well, having all taxpayers pick up the whole tab is quite regressive because students typically come from advantaged backgrounds and usually do very well in the labour market as graduates. This is as true in Britain as it is in Australia.

On the other issues, only time and experience with HECS was needed.

The research shows that there have been no ill effects on the socio-economic mix of the university population. Indeed, in the first five years of the scheme the number of students from poor backgrounds increased by 30 per cent, essentially because the additional financial resources allowed such a big expansion in the system.

Female enrolments have increased substantially, and the proportion of students who are women followed its well-worn path of gradual growth, and now stands at more than half.

Regarding the final protest, that the policy would lead to full up-front fees, the opposite seems to have happened. The (conservative) Opposition has now endorsed the pay-later mechanism and for the forthcoming election has dropped its former support for full up front fees.

The biggest plus is that the revenue raised - upwards of $A1bn a year - has taken pressures off the budget and allowed more resources into the sector. Acceptance of the scheme has been helped a lot by having all the revenue raised going back to the universities.

The scheme has attracted worldwide interest, and variations have now been introduced in New Zealand, Ontario and New Brunswick (Canada), the United States and the Czech Republic. Botswana, Thailand, South Africa and Malaysia are showing a lot of interest.

British higher education has a funding problem, and the Australian scheme has at least a partial answer - one that works well, and is broadly seen to be fair.


The writer is adviser to the Australian Prime Minister on labour market issues whilst on leave from his post as Director for Economic Policy Research at the Australian National University.