Time to end cross-subsidy and increase number of domestic students

UNSW Business School economics professor Richard Holden.

The COVID-19 outbreak has made it clear that Australia’s ­universities depend on Chinese students for a significant proportion of their revenues.

This isn’t news to anyone in the sector, but it does highlight how events beyond the control of universities can cause serious ­disruption. And it has triggered renewed calls for Australian universities to diversify their revenue base — perhaps by targeting more students from countries such as India and Indonesia.

Of course, many universities have begun to diversify among international students, have contingency plans for the current events, and have used the boost in international student income during the past decade to invest heavily in teaching and research.

But the best thing Australian universities could do would be domestic diversification — enrolling larger numbers of Australian undergraduates.

With only 27.3 per cent of Australians holding a bachelor’s degree or above, compared with more than a third of the US population, there is plenty of room to do so.

And thanks to the so-called “baby bonus” scheme enacted by the Howard government in the early 2000s, it is estimated that by 2025 there will be 40,000 more Australians reaching university age every year. That number will rise to 60,000 by 2030.

The only thing standing in the way of increasing domestic student numbers is arithmetic. Universities get much lower fees from domestic students than from international students.

More to the point, the level of domestic fees simply doesn’t cover the cost of a world-class tertiary education. For all the talk about teaching revenues cross-subsidising research, the simple fact is that international students radically cross-subsidise the education of Australian undergraduates.

The numbers differ by type of degree, and funding formulas are complex. But a good approximation is that universities get about $12,000 to $15,000 a year for domestic undergraduates and $35,000 to $40,000 for international under­graduates. The hard truth is that it is not possible to provide a world-class education for $15,000 a year. We are in a global marketplace not only for students but for the best faculty members to teach those students.

And our competitors have the resources — through tuition and endowment income — to attract the best faculty members. This includes Australians who do their PhDs overseas and, more often than not, stay overseas because of the resources available to them there.

Domestic fees at Australian universities aren’t a little below those of our international competitors — they’re way below.

At world-leading universities such as Harvard, the Massachusetts Institute of Technology, Yale and Princeton, tuition is more than $US50,000 a year ($81,700).

Even US universities less well known to Australians, but with which our best universities are definitely direct competitors, charge more than $US50,000 a year. Think Boston University or the University of Michigan. Out-of-state ­tuition in the heavily subsidised University of California system is still about $US43,000 at UCLA, UC Berkeley, and UC San Diego. Trying to compete with these universities while charging one-fifth of the fees is like trying to eat soup with a fork.

That said, Australia is rightly proud of our egalitarian ethos and tradition of providing access to higher education regardless of a student’s socio-economic background.

Our HECS-HELP income-contingent loan system is important for economic efficiency — it leads to more young people getting better skills and human capital. It is also vital for economic equality — it provides access to that education and those skills ­irrespective of one’s background.

Eliminating the international-student cross-subsidy and maintaining access to higher education are entirely compatible.

We should allow universities to increase domestic fees (for students beginning their studies, not those who have already begun).

This might involve a cap at, say $35,000 a year — an amount adequate to educate international students on a fully costed basis. But it would be better to let market forces determine the level.

If a particular university ­charges fees that are too high then it will lose students, just like any other service provider. There are 40 universities in Australia. That’s plenty of competition.

But we must also ensure that HECS-HELP is maintained and not eroded in any way. This requires a commitment from the federal government, but it’s an easy one to provide.

Yes, the amount of student debt outstanding will rise, but the government can borrow for 10 years at less that 1 per cent.

That’s actually negative, adjusting for inflation. And the federal government isn’t giving up any revenue, it is just collecting it when students earn a certain income. Moreover, the additional skills students acquire will drive higher future incomes, and with it higher tax receipts.

In addition, some proportion — maybe 10 per cent — of undergraduate places should be tuition free, based on economic need. We owe it to students from lower socio-economic backgrounds to do all we can to provide access to higher education while maintaining a world-class system.

Australia has an outstanding university system. But it simply won’t remain that way if we try and compete in a global marketplace for students and faculty members without the appropriate resources.

The expansion in the international student market in recent years has made higher education one of our country’s largest exports. That’s a good thing. But we can no longer pretend that the level of domestic student fees is sufficient to provide world-class education to Australian undergraduates.

It’s time to end the cross-­subsidy and pave the way for ­domestic diversification of our student base.

Richard Holden is professor of economics at UNSW Business School. The opinions contained in this article are solely those of the author and do not reflect official UNSW views.