Graduate Winners

By Andrew Norton

Who should pay for higher education? It’s a question that inflames passions, as I was reminded following the release of my new Grattan Institute report, Graduate Winners: Assessing the public and private benefits of higher education. It was denounced by vice-chancellors, student groups, the university staff union, and assorted tweets.

The report argues that with an income-contingent loan such as Australia’s HELP system “market failures” are likely to be the exception rather than the norm in higher education. Typically, the private benefits from higher education are considerable, providing a strong incentive for young people with academic ability to acquire a degree. An additional incentive in the form of tuition subsidies – which in Australia range from $1,900 a year for business degrees to more than $20,000 a year for medicine – is unlikely to make much difference to the ‘yes’ or ‘no’ decision to go to university.

Tuition subsidies are therefore largely paying people to do what they would do anyway. These subsidies could be reduced, freeing up scarce government resources. These could be used for tax cuts or programs that would make a more positive difference to Australian society than slightly increasing the affluence of students and graduates.

Graduate Winners improves on previous studies of graduate earnings by using the census to divide up bachelor-degree graduates in each discipline by lifetime income deciles (we extrapolated across the different census age categories to create a lifetime income estimate). This enables us to create a “breakeven point” – where in the earnings distribution a graduate of that discipline needs to be before they come out ahead of the median person of the same sex who finished school at year 12, after deducting educational costs and the opportunity cost of time spent out of the workforce.

For example, for male graduates in economics at the time of the 2006 census the breakeven point was in the third decile. For women, the breakeven point is in the fourth decile. However, most of those who are below the breakeven point are so because they are not working full-time. It we only look at people working full-time, at least 85% of economics graduates are financially ahead of the median year 12 completer.

At least for school leavers, the risk of not coming out ahead on higher education is therefore quite low. Indeed, these figures are likely to be “worst case scenarios”, wrongly assuming people who were temporarily out of work or in low-paying jobs at the time of the 2006 census would be in a similar situation across their careers.

Graduate Winners also examines how higher tuition charges would affect the personal lifetime economics of higher education. We looked at a range of possibilities, from free education to international student fees, which are often twice or more than the charges now paid by domestic undergraduates. We found that the initial level of tuition charges makes only a small difference – because they are only ever a small percentage of lifetime earnings. Obviously if students can get a better financial deal from a cheaper university they may as well take it. But different fee levels should not greatly affect the ‘yes’ or ‘no’ decision to go to university.

Some critics of Graduate Winners have rightly pointed out that most prospective students have only impressionistic ideas of how much they might earn in future. Tuition charges may therefore loom larger in their thinking that good salaries many years in the future, and tuition subsidies have more of an impact on behaviour than careful analysis of the real economics of higher education would suggest.

One way of looking into this issue is to see how applications for university places have responded to previous increases in student charges. What we see is that there is usually a small decrease, before demand recovers again (though our analysis is complicated by the last two increases occurring in a time when demand was trending down anyway). One possible reason is that with politicised setting of student contributions the claims by opposition politicians and student unions of “unaffordable” higher education frighten off some young people. However as the controversy dies down these cost claims are forgotten, and demand returns to previous levels.

Another complicating factor is that Australian universities have not historically marketed the benefits of higher education in general, rather than their institution in particular. This is because the Federal Government has capped total supply of undergraduate university places below existing demand for higher education. Now that supply has been largely uncapped for public universities, this might change and we would see corrective marketing responding to political claims about unaffordable prices.

Higher education policy has assumed that prospective students are short-sighted and unable to assess costs and benefits. We don’t need to assume that prospective students are perfectly rational to think that this sells them short. History suggests that they make pretty good judgments, and that they will continue to do so even if tuition charges increase.

Andrew Norton is the higher education program director at the Grattan Institute, and author of Graduate Winners: Assessing the public and private benefits of higher education. It and two technical papers are available here.