The United States Model for Higher Education in Australia

I’ve just had an article published in the conversation, which is the short-form version of a longer piece that I wrote. It’s about the proposed changes to the Australian system of Higher Education, why this looks a lot like the model used in the US and the research into likely impacts from the proposed changes.

Here’s the long form version:
The Conversation

This article was originally published on The Conversation.
Read the original article.

Students protest the “American Model” for higher education

If you wondered why a few thousand students were marching around Melbourne and Sydney yesterday, it’s because of the government’s plans to emulate the United States in the way that our university system runs. Education Minister Christopher Pyne makes no secret of his admiration for the American higher education model, saying three weeks ago to a London audience that “we have much to learn about universities competing for students and focussing on our students. Not least, we have much to learn about this from our friends in the United States.”

Yesterday’s marches were organised by the National Union of Students using the tag line “say no to deregulation and the American model”. They are a response to last week’s budget which proposes a move towards students taking on more debt and universities competing directly for students on the basis of price as well as quality – the hallmarks of the American model. What does this mean for the future of Australia’s higher education, why are students up in arms, and why would the government want to do this?

What are the changes that have got students into the streets?

The government has proposed three big changes to higher education that have got students onto their feet and out on the streets: deregulating fees, lowering government subsidies for student places and charging real interest on HELP loans.

As has been written about extensively, deregulating fees means universities can charge what students are willing to pay. This means that they will go up on average (even the government forecast is 14% although nobody really knows by quite how much), especially in elite universities where they will go up significantly more than this. Lowering the government subsidy to university places by 20% makes sure that the rise is fees will be at least this much.

Finally, the government is raising the interest on student loans (which, remember, will be larger than in the past). Previously loans were indexed to inflation meaning that there was no real interest. The proposed change is to use the government 10-year Treasury rate (currently at 3.76% but which has an average of 5.54% over the past 16 years). This means that loans (which often take decades to pay back) will be growing through the effects of compound interest, multiplying the effect of any rises to university fees.

What is the “American Model” and will these changes really take us there?

Looking at Australian and US universities in 2014, the clear differences that can be summarised by two words: diversity and debt.

In Australia, all of our universities are funded under a single model and student fees are capped through regulation. As a result there are only modest differences between our institutions.

In contrast, the American model has been deregulated to allow vast differences between universities. To give an idea of the disparity, annual tuition fees at elite universities can be enormous (e.g. $44,000 at Harvard) whilst the lower tier of regional universities charge significantly less (e.g. $4,500 at New Mexico Highlands University).

Mr Pyne continues to tout the American model to his London audience on the basis of exactly this diversity: “they have developed a diverse array of institutions encouraging prospective students to pick and choose their futures and where they are going to study, immerse themselves in enriching extra-curricular activities, and make life-long friends.” This desire for “more diversity” is Pyne’s way of saying that he wants our top universities to be better and compete with the Harvard’s of the world, even if the cost is that our other universities are worse off.

The government has made it clear that one of its main priorities for higher education is “not getting left behind” by having more of our universities in the top 50 in the world (indeed, Pyne litters many of his speeches with commentary on our status within the university world rankings, despite significant criticisms of how meaningful they are). Deregulating fees is designed to create the disparity that will enable this, creating the virtuous cycles that will allow universities with a strong reputation to charge higher fees and increase quality – and the less-discussed vicious cycles that will see other universities have to compete on price rather than quality. The clearly stated goal is to bring about the kind of ‘diversity’ seen in the US system.

The second part of the US model is in regard to student debt. In Australia in 2014, students are given loans by the government through the HECS-HELP scheme. Students pay the loan back at a compulsory rate that varies from 4-8% of income, rising along with salary – however these payments only kick in once loan holders are earning over a certain threshold (currently $53,345). The public purse contributes significantly to the cost of higher education in the form of this below-market rate of interest as well as debts that do not get paid back.

In 2014 students in the US are eligible for a “federal loan”, mostly through the Stafford loan scheme that has an interest rate linked to the US Federal 10-year Treasury rate plus a small margin. This is currently at 3.86%, although students who have financial need have this interest subsidised by the government. In addition, all students taking out loans pay a 1% loan fee and government subsidies have strict conditions on them.

The 2014-15 budget proposal to link student debt to government 10-year Treasury bonds would bring Australia directly in line with interest in the US model. Pyne’s claim that profits used from the loans will subsidize students with financial need is yet to be fully described, but also appears to be in line with the US model of subsidies for students in need. Like the US system the changes move towards a “user pays” model, in which the combination of higher fees and the introduction of real interest on debts will move the cost of studying onto individual students.

Taken with Pyne’s comments, it seems clear that the changes being proposed to Australia’s higher education system are aimed at making the Australian system more like the US system. If that’s the case, what can we learn from the US system before we start to go down this path?

The American student debt problem

Whilst the government’s main concern is raising the quality of our top universities, the priorities of the students marching yesterday was a concern about the social and economic problems that the US model has been seen to cause.

There is much evidence from around the world that higher fees disproportionately affect students from a low SES background. Firstly the prospect of high levels of debt discourages these students from attending university. Put simply, the idea of taking on a $100,000 dollar debt for a law degree looks very different depending on whether your parents are earning twice that or half that. Secondly, students from a low SES background end up paying more fees overall (e.g. not having parents helping leads to longer time to pay off the debt which with real interest means that they simply pay more). Professor Bruce Chapman, who designed the current HECS system to combat exactly these factors, is one of the many critics of the shift towards a US model on the basis that it will hit women and students from low SES backgrounds the hardest.

Shifting the burden of paying for education away from the public purse (coming from taxes on those with a higher income, generally the previous generation) and onto individual students (the next generation) is something that a nation can only do once. The government that implements such a change can claim many ‘savings’ but it has many hidden negative consequences.

Student debt in the US is causing what some academics have called a “crisis of justice”, affecting the everyday lives of students who for years after graduating are required to use their disposable income to service their student debt. One group that suffers most from higher fees are those students that for a range of reasons drop out of university before completing their degree.

The level of debt in the US has not just led to social inequality but also widespread economic problems. For example, high levels of student debt directly correlate with the decreasing number of loans for homes and cars being taken out by young adults. High levels of personal debt are having a negative impact upon the national economy as a whole.

And in case there is any doubt that fees will rise, the US example shows that fees have risen at a rate that far outstrips inflation. In the ten years to August 2013 the CPI (inflation) was 26.1% whilst the cost of tuition rose 79.5%. In other words, opening fees up to unregulated competition has led to everyone paying more.

One reason for higher fees is that deregulating universities opens them up to market forces, obliging them to do what it takes to stay competitive. For example, based on the US model we can expect to see our universities vastly increase the amount of their budget used for marketing. A US senate committee into for-profit universities found that on average 23% of the budget was being spent on marketing.

The reason why students were out marching in the streets yesterday should not simply be seen as a knee-jerk reaction to being asked to pay more. Rather it should be taken as a response to having heard the words and seen the actions of the current government in their desire to emulate the American model. The students protesting, supported by a host of academics similarly critical, are saying that embracing the US system is not what they want for the future of higher education in Australia.

 

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