EMPLOYMENT, WORKPLACE RELATIONS AND EDUCATION REFERENCES COMMITTEE : 10/10/2003 : Higher education funding and regulatory legislation (2024)

CHAIR—Welcome. Is there anything you would like to add about the capacity in which you appear?

Prof. Chapman—I am a Professor of Economics at the Research School of Social Sciences at the Australian National University. I wrote a submission focusing on the financing issues raised in the budget. That is an area I have been interested in and done a lot of work in over about the last 15 years.

CHAIR—The committee has before it submission No. 403. Are there any changes you would like to make to that?

Prof. Chapman—There is a change to one of the net present value calculations in table 3. It is too precise to take up any time now, and I will fix it later. It is just that one of the figures is incorrect. I did some recalculations. I do not think it is material to the major part of it.

CHAIR—You will give us a supplementary—

Prof. Chapman—I will do that, yes.

CHAIR—Thank you. The committee prefers all evidence to be given in public, although the committee will also consider any request for all or part of your evidence to be given in camera. However, I point out that such evidence may subsequently be made public by order of the Senate. I now invite you to make a brief opening statement.

Prof. Chapman—Thank you very much, and thank you for inviting me into this process. Apart from the technical issues which I am particularly interested in, I thought that the Crossroads process was a productive one. It was carried out in a very inclusive way. I think the minister and the department have done their best in an open-minded way to seek consultation in a way that I think is a template for government inquiry. The second point I would like to make is that my submission is mine only and does not represent the views of the Australian National University—or of anybody else, as far as I know. Thirdly, I want to keep my remarks and observations focused on the financing issues—that is, the changes to HECS, the nature of indexation, the potential introduction of fee help and the questions of what price flexibility means for student debt and student access.

There are a couple of broad issues which lie behind my concerns and interests in financing of higher education in Australia over the last 15 years or so. The first major point relates to indexation. The indexation arrangements introduced in 1995 are essentially about adjusting public sector funding for assumptions about cost increases. In the context of enterprise bargaining, this is very unlikely to mean there will be the maintenance of public sector financial support to facilitate the nature of wage and salary adjustments that will happen in an enterprise bargaining system. I think you only need to understand the indexation changes from 1995 to 2003 to have a good sense of why universities feel like they have been in trouble. They have been in trouble essentially because the wage bargains have exceeded the cost adjustments by roughly 1½ or two per cent a year. If you do that over nine years then you get a shortfall—which we have currently—of the order of $600 million to $700 million compared with what there would be if the adjustment process was in accordance with percentage changes in average weekly earnings, which it has not been.

The second point is that I have thought for a while that some price flexibility is appropriate. In general, I would support the thrust and the directions of HECS help. In particular, I think it is a useful thing in the context of price flexibility that the resources go directly to the universities rather than straight into the Treasury, which is where HECS revenue has always gone. There are no resource allocation implications from that; it is basically the government switching pricing responsibility or resource responsibility away from taxpayers and towards students. There is a case for that, but things can be done better in terms of allocation efficiency—and that is part of the budget proposals, and I think that is a productive step.

I think extending income-contingent loans to full fee-paying students is a positive thing. However, that only moves the policy from very poor to poor. I believe that the case for having full fee-paying arrangements is a weak case. I will discuss, if invited—perhaps even if not invited—why price capping is and should be a fundamental way of thinking about higher education financing. That leads me to believe that fee help arrangements are fundamentally in error. I think they are in error for several other reasons as well. A real interest rate on the fee help debt is unnecessary and administratively very clumsy. All the fee help arrangements could be moved straight back into the HECS system without any cost at all. It would be a fairer and more progressive system.

There are a couple of things missing from this document and missing, in my view, from the nature of the debate. I sound a bit like a broken record; I must have said this a thousand times before and I will keep on saying it: I think the TAFE funding arrangements are very, very poor. If we think that there is a capital market failure which promotes for policy the idea that an income-contingent payment scheme is entirely appropriate for tertiary education, it is very unfortunate that this has not happened in TAFE. People say, ‘Oh, but TAFE is a states issue’. But capital market problems are exactly the same with TAFE funding, so to have up-front fees with scholarships and exemptions for TAFE when you actually have a mechanism to allow income-contingent to full protected loans I think is very unfortunate. I also think there is capacity to extend HECS loans for income support across the board, particularly for regional students. The idea that somebody in the country or in a rural town faces similar costs to somebody in the city is not accurate. You can actually extend HECS type loans, in my view, in the long run without cost, and I will explain that when asked. Thank you.

CHAIR—I might begin, Professor Chapman, with an article that you wrote for the Sydney Morning Herald of Monday, 18 August. That concerned the controversy that emerged around the research that was produced by Tom Karmel. The government cited your research to counter Dr Karmel’s research. Have I understood the proposition you are putting to us—that there was no inconsistency between the findings of your research and Dr Karmel’s research?

Prof. Chapman—They were asking empirically different questions. The research that I have been involved in looked at the socioeconomic mix of higher education students over time in terms of enrolments. There was some analysis of that done by Tom Karmel and his colleagues, but much of the attention was focused on the issue of applications. None of the work that I have been involved in looked at applications. You have to understand that in a supply-constrained system there are two steps to getting in: one is to apply and two, if considered qualified, is to accept or not accept a place and to become enrolled. The work that I have done, particularly with Chris Ryan, really focused on the enrolment issue, and we found overall that there had not been a change in the socioeconomic mix of higher education students from 1988 to 2000.

The Karmel work looked at applications. I think that you are more likely to find a price sensitivity in applications than in enrolments. For one group, males from relatively poor backgrounds applying to band 3 courses—which are the more expensive ones; bands 1, 2 and 3 were introduced in 1997—there was a decrease. I have had quite a close look at that work. I think it was competent work, I think it was carried out with intellectual curiosity as its basis and I wanted to make that statement in the Sydney Morning Herald that I thought it was a good thing it was made public, that it was worthy of serious attention and that the issues to do with data and the alleged inconsistency between the work I had been doing and the work of Karmel and his colleagues was not real, because we were looking at different issues.

CHAIR—You have commented on how good the consultation process was in the run-up to this package, yet that critical research, prepared by government officers, showing that there was an effect in terms of demand for certain courses—which is not unreasonable; if you increase the price by 132 per cent, you may well affect people’s capacity to pay—was suppressed. Why do you think that was? Was it methodologically flawed, in your judgment?

Prof. Chapman—No, it was not methodologically flawed, in my judgment. In terms of consultation, I cannot comment on what goes on within government, as I am not within government. My comment about the process was in terms of the inclusion of people outside of government interested in this process, of whom I was one. I was very happy with the way it went.

CHAIR—But if we are to have a proper consultative process and a policy that is evidence based, or evidence driven, surely the withholding of basic information such as that, available to the government and prepared for publication—the authors of the report believed it was prepared for publication—casts some doubt on our capacity to have confidence in the genuine nature of the consultation?

Prof. Chapman—I was just pleased that it finally did get released. It is an important contribution.

CHAIR—I note that you have suggested—and so has David Phillips—that the proposals for FEE-HELP and full fee-paying arrangements may have quite serious implications in equity terms. Do you think the $50,000 cap on FEE-HELP loans could lead to people having to pay top-up up-front fees?

Prof. Chapman—I think that is quite possible. I do not know how this might work in practice, but I am trying to imagine a scenario where you would like to put a cap on loans of this kind. One possible scenario is that you believe that the cap will influence the pricing policy, such that a particular course within a particular institution will say, ‘We’re going to get a lot of students who have already got a FEE-HELP debt of $40,000, so if they are going to do our graduate diploma or our public policy master’s then we’ll limit it to $10,000 so it doesn’t go over.’ But I actually think that is not the way this would work. I think the economics of that would mean you would actually have rough guesses about the level of total debt of the students applying but you would not know.

I think as an instrument to encourage restrictions in terms of price levels this will be ineffective. One of the consequences of it being ineffective is that students who drop out for some reason—they may have a medical condition or some other problem—who have to repeat or who take on an extra course might be faced with a cap of a debt of $50,000. What is the story then? It takes you straight back to the capital market failure which characterises all higher education investments. Banks will not lend because they have no collateral to sell. It is the most critical reason to have an income contingent loan, because, in the absence of some financing mechanism which means you do not have to find the resources at the point of entry, you will stop poor people coming. In this case, there is the potential for some individuals with a debt already of $50,000 needing to find $6,000 or $7,000. Where do they get it? I have no idea. This is basically going back to the original debate which encourages and strongly justifies the use of an income contingent loan mechanism. So I think it is an error—potentially an important error.

CHAIR—The committee has heard evidence that there are some difficulties with the administrative arrangements that accompany these proposed loans. Is that your view? How do you see the administration of such a scheme working?

Prof. Chapman—Apart from the cap, which we have just discussed, there is an interest rate regime on FEE-HELP, which is not true for HECS. I will explain briefly for the record how I understand if. If I incur a HECS debt of $20,000 and then incur a FEE-HELP debt in year 1, there will be two debt streams being adjusted in the Australian Taxation Office. The HECS debt will be adjusted for the rate of inflation, while the FEE-HELP debt will be adjusted for the rate of inflation plus 3.5 per cent per annum for 10 years.

Let us say that after the first year I incur another FEE-HELP debt. The adjustment process for stream 1, which is HECS, has inflation all the way along and nothing on top. For FEE-HELP stage 1, I get adjustments of 3.5 per cent on top of inflation for 10 years, and then in the 11th year it goes back to being like a HECS debt. But meanwhile I have incurred FEE-HELP for year 2, so that adjustment process still goes on at 3.5 per cent of that clump of debt in year 11. So already in this fairly simple scenario, I have three adjustment processes going on.

Simplicity is really important in public policy. Often economic textbooks do not do it very well, because they do not understand simplicity. If I am trying to sell or facilitate the adoption of a scheme with at least potentially three, four or five regimes of interest rate adjustments and I say to a student, ‘How much do you think you owe?’ do you imagine they will have any idea of how much they owe? With HECS it is very simple. To put this adjustment process on top of a system which works okay seems unnecessary to me. It is also regressive.

One of the reasons that we want relatively small adjustments in a HECS debt in the future is to minimise risk and uncertainty. The basic problem with undertaking a human capital investment is that we do not know where we will end up in the future. So a system like HECS says, ‘We do not want you to worry about that too much, because if you are not over the threshold there is no adjustment. If you are over the threshold, we are only going to adjust it for inflation.’ So things are fairly straightforward. In a world where you potentially have three, four or five—I am exaggerating a little on this, but it could easily be two or three—debt adjustment processes going on, students will not have easy access to their economic circ*mstances in that context.

Senator STOTT DESPOJA—I want to follow that up. You may have pre-empted or answered this, but you talked about the system being regressive. I can understand the complications and you have outlined the difficulties with administration, the adjustments et cetera. What about the equity implications of students having to pay back their HECS debt first? This presumably inevitably delays them repaying their FEE-HELP, which as you have said could be one or two lots. What impact does having to pay the non-interest bearing loan back first have?

Prof. Chapman—It is designed to be financially efficient for a government. Once the debt is incurred, there is a subsidy going on to students who do not pay it. An interest rate on top of it fixes it for the government and for the budget but not for the student. That is why I thought it was financially prudent but not good policy to have the HECS paid first and the FEE-HELP paid later. This can all be fixed absolutely trivially. HECS, as currently designed and as has been operating since 1989, has a real interest rate on it—a very blunt form of real interest rate. It takes the form that if you, I or anybody pays HECS up-front they get a 25 per cent discount. In other words, anyone who incurs the debt is going to be incurring about a third more on paper in real terms. It is progressive in the sense that if they do very poorly in the labour market, are unemployed or in a part-time job, it takes them a relatively long time. Because the adjustment process is not the real rate of interest, you have an ongoing subsidy which says, ‘We want means testing but we want means testing over your life cycle.’ That is what HECS does and does effectively, because it has no real rate of interest on top of the debt. FEE-HELP does not do that; it does away with it.

If you took a FEE-HELP debt, you could say for somebody—let me just make up some figures here—the charge is $1,000. It is more likely to be $10,000—let us agree it is $10,000. You can pay the $10,000 now or we are going to get put it straight back into your HECS account—they will all have HECS accounts probably. You have to incur a debt in real terms on paper of $12,500. So it goes in there. After that, there is no further adjustment—no nasty shocks, because you are under the threshold for five years and your debt is accumulating at 3.5 per cent plus inflation, which will be probably in the order of six or seven per cent. People find this difficult to deal with, and it happened in New Zealand. With a real rate of interest on the debt in New Zealand, after six or seven years $20,000 debts suddenly became $40,000 for students without jobs, who were rearing children or were unemployed. This was a shock, and they had not taken it into account.

Under the HECS system the real rate of interest is there in terms of the up-front discount. That makes it completely simple. It does away with the regressivity of the people who are doing poorly in the labour market incurring the 3.5 per cent ongoing in circ*mstances over which they typically have no control.

CHAIR—This bill, when examined in detail, does not, according to the evidence we have received, do what the government says it intends to do. For instance, the question of the 30 per cent surcharge is confined for one year only. Would you agree?

Prof. Chapman—I do not know. My understanding of the bill is that that would be introduced in 2005. I just presumed that that would continue.

CHAIR—That is not what the bill actually says.

Prof. Chapman—I was not aware of that. If it does mean that, and that is a really serious issue, are you implying that in 2005 if all this goes through you have a one-off potential to increase a HECS charge by 30 and after that it all goes to FEE-HELP?

CHAIR—I could point you to that matter. I could point you, for instance, to clause 36-35, which states that there may be:

... a course of study that the agreement provides is a course in which the provider must not enrol persons in units of study as Commonwealth supported students ...

There could be 100 per cent full fee-paying students—100 per cent—and there could in other clauses be a variation on the surcharge. Given that we do not have this sort of detail nailed down, how do you think that affects the operation of this particular program?

Prof. Chapman—You are implying that HECS-HELP can become FEE-HELP. In other words, the 30 per cent cap can become price discretionary for an institution. I can address that not with respect to your interpretation of the clause, which I have no reason to doubt and I will take on notice and look at closely myself, but if you do turn a situation more into FEE-HELP then the poorer is the policy. The arguments for price capping are very strong. In a world in which the best placed universities do not pay rent and they have a major advantage in geography, and in a world where many institutions have had a hundred or more years of public sector subsidies to establish their reputation, then when you restrict supply—and by the way, not just restricting supply—and say, ‘You can charge whatever you like,’ you deliver very substantial rents to those institutions in ways that are inconsistent with good economic policy. That is a fundamental point. That is why I have always been in favour of a price-capping regime, including for PELS, instead of unfettered price discretion. The unfettered price discretion is part of FEE-HELP and in my view this would radically alter the balance between the provision of subsidies or financial support from taxpayers towards students.

I put that back in the initial context in which I made the observations about indexation. The lack of full indexation, which started in 1995, was always going to create a tension in the institutions until there was a price instrument. There has been a price instrument, which is overseas students, and that was an important way to alleviate that problem. But that stops at some point. What the government is doing now is introducing a further price instrument, which is flexibility on HECS-HELP, which I think is good policy, but it is totally discretionary on FEE-HELP. The system with its current arrangements must inevitably mean that if there is no change to the indexation then this price instrument will cause a radical change in the burden of financial resources. No institution will be able to survive down the track without increasing the HECS charges. That is because for every year that they do not do it you have potentially a two per cent shortfall coming from the lack of full supplementation. All the institutions down the track will, in my view, have higher HECS arrangements. The better placed ones, the Universities of Melbourne, Queensland, New South Wales and perhaps Western Australia, will go very quickly to situations in which the number of students paying full fees will increase. Melbourne has already announced that and I think Sydney will.

CHAIR—Monash has; a number of them have. You are saying that that is inevitably spreading throughout the system.

Prof. Chapman—If institutions have in an ongoing sense basically less than full supplementation from taxpayer resources and they want to stay where they are or improve their level of financial resources, they have got to use instruments. There is now a price instrument and, as I said, it is complicated. Some part of the price instrument is a good idea; another part is not. I think some institutions will very rapidly fill up their quota, which now stands at 25 per cent, to the 50 per cent of full fee-paying students—no surprises at all; we could pick them now—and that will happen. The reason it will be more radical than has been supposed in media statements or perhaps even by the government is that there is now an income-contingent loan available.

There should be no surprises that allowing the institutions to charge whatever they wanted to up-front had almost no take-up—6,000 full-time places since 1997 out of a total student undergraduate population of 600,000. There is no surprise there, because you have got to find the money: you have got to find the $15,000 or the $20,000. This is a capital market which will not work without government intervention. You might even be surprised that there are as many as 6,000 or 7,000 students. Once you have got an income related loan, you do not have to find the money. So the idea that the number of places would approximately double because the quota has gone from 25 per cent to 50 per cent misses that fundamental financing point. I think the potential for that being big is significant.

CHAIR—You are arguing that it is inequitable, that the situation will arise where people with the same or similar TER scores may well have different financial relationships to the university. For instance, there may be persons who have a similar entry score but some are paying on a HECS place and some are paying for a full fee place and so will have considerably different financial obligations to the university. Have I read your submission correctly?

Prof. Chapman—I think I come at this pretty much where David Phillips comes at this. We have worked together over the years on these issues. His notion of the appropriate way to go in pricing has several dimensions: (1), to treat all the students identically in terms of debt; (2), to have price discretion—he suggests up to 40; I think that is a little high, but I could live with 30, and that is what HECS-HELP is about; and (3) not to put quota restrictions on it. The government could still supply the same amount of subsidies across the board, but then to say to the universities, ‘Above and beyond that, if you want more students, we will let you decide.’ Who has got the information here? I think David’s plan is basically correct. It will give a lot of price flexibility. He would focus, maybe even more than I would, on the inequity of individuals doing identical courses but paying very different charges.

CHAIR—My question goes to the issue of discrimination. How will you determine which student pays the full fee and which has the HECS place, if we are acknowledging that similar TER scores will no longer be an automatic entry? This is accentuated because there are no demographic growth funded places in the system to 2007 and very few thereafter, on my reading of it. Won’t that lead to a discrimination?

Prof. Chapman—I do not know that I would use the word ‘discrimination’. It certainly would lead to a very differential treatment of students who look roughly the same. There has got to be a cut-off point. I imagine that the University of Melbourne Law School will quite quickly fill its quota, and that means 50 per cent of the students will be incurring debts of maybe $15,000 or more compared to people sitting next to them who look approximately the same in terms of entry qualifications but who will be incurring debts of about $6,000.

I also do not know what will happen after year 1. I have spoken to several vice-chancellors who have different views about this. View No. 1 is: as a vice-chancellor, is the university going to allow students to continue to come in under full fee-paying HECS covered debts? You cannot then transfer it to a HECS scholarship in year 2. That looks a little strange. For instance, let us imagine I did not do as well as I potentially could have in high school and then I did brilliantly at university but I am still incurring and will continue to incur a full fee-paying charge, even if I finish top of the class. You are making these critical points at the point of entry, which will have four- or five-year implications.

The other issue associated with that, not just inequity but matters of scholarship, is that it has to be seen in the context of the price capping. If I undertake a four-year degree and I am paying full fees—let me just make up a figure of $15,000 a year, which is approximately what law at Melbourne would be—when I get to year 4, if I have not been allowed to move to a HECS place suddenly I am up to $60,000. Where is the other $10,000 coming from? It goes back to price capping. I can see lots of problems with that. Similarly, there might be other issues of equity associated with people who do move onto a HECS scholarship. These are matters which seem to me to be important details that are not that clear at this point.

CHAIR—There is also the question of the legal implications. Will it not expose universities to serious legal challenge? I would have thought that every entry could be judiciable. If two students with similar markings and similar TER scores are being treated differently in financial terms and may move between the two streams—fee paying or HECS places—could it not lead to serious legal implications for universities?

Prof. Chapman—It could very well do that, but this issue has been around since 1997. Institutions have had the capacity to charge full fees—and, indeed, without recourse to an income related loan—since that time. So there are still 6,000 students in the system who are facing extremely different financial arrangements than HECS students. This would make it more widespread.

CHAIR—But the difference is their TER scores. We have heard evidence of up to 20 and 25 points difference. That is a substantially different situation from what we are facing today, where students with the same TER score may be treated differently, in financial terms, by the university.

Prof. Chapman—I guess that David Phillips and I are making that point differently. The inequities do seem to be strange. I approach this more as the neoclassical economist and then ask myself the question: what sort of reasoning will justify full fee-paying discretion at the institutions? I think the case is very weak.

CHAIR—You have proposed to government that there should be a surcharge up-front. That is the policy position you put to government through the Crossroads review, isn’t it?

Prof. Chapman—What do you mean ‘surcharge’?

CHAIR—For full fee-paying students, instead of having an interest rate contingent loan, you proposed that a student be charged a surcharge at the commencement of their program. Is that correct?

Prof. Chapman—I have always been strongly against any up-front charge of any kind—

CHAIR—Did you not propose a surcharge arrangement rather than an interest rate—

Prof. Chapman—Oh yes, that is certainly true. That gets us back to the nature of the interest rate adjustment on FEE-HELP compared with HECS or HECS-HELP.

CHAIR—I misunderstood you. It was not an up-front charge but a surcharge built into the repayment.

Prof. Chapman—Yes. If I am going to enrol in a course and I have the money—or my parents or my partner have the money and they are prepared to take the risk that I am going to do so well in the future that they are better off paying now with a discount—that is the right way of organising a blunt form of real interest rate. If you have got the money and you want to pay it, as has been true since 1989, just pay the money and we will leave you alone. If not, you incur debt which is higher in real terms.

CHAIR—Why was that proposal rejected? Were you ever given an explanation?

Prof. Chapman—Which proposal?

CHAIR—The proposal to have the surcharge built into the repayment schedule.

Prof. Chapman—It was not rejected in 1989. It was part of policy.

CHAIR—I am talking about the current arrangements. You put this position to government within the last year, did you not?

Prof. Chapman—Yes, I put that position to government. Lots of positions that I have put to government do not get taken up—the vast majority, I would say. People do not actually say, ‘Bruce, you and 500 other people have made submissions—

CHAIR—It was my understanding that this was a matter of some substantive debate within the department in the run-up to the announcements. I was wondering whether or not you were ever given any indication as to why that particular argument—your side of the argument—was lost within the policy framework process.

Prof. Chapman—I am just guessing, but it might be that this concept of the up-front payment getting a discount as an interest rate is a very hard concept. Most people do not think of that up-front payment as a 25 per cent discount. It is actually the other side of the coin, being an implicit real interest rate on the incurred debt. These are financial matters of some complexity. To my shame, I do not think I really understood that until a few years ago. That is a useful way of thinking about that. It just may be that the matters of detail and the financial sophistication has meant that, in the absence of it being explained with total clarity—and perhaps I have not done that—it has not been fully understood.

Senator TIERNEY—I would like to start with some international comparisons. In the United States of course there is a much more extensive private system of universities with fee systems for undergraduates. Could you explain in a nutshell how students in America undertaking such courses and paying fees actually pay those back?

Prof. Chapman—I should say first of all that the extent of debt and the extent of fee obligations in the United States is very diverse—public sector state universities are quite different from private institutions.

Senator TIERNEY—There is a much higher proportion of private institutions, isn’t there?

Prof. Chapman—Yes, certainly compared to Australia. At the best institutions, particularly the best private institutions, in the United States the charges are significantly higher than they are in Australia. There are loan mechanisms. There is actually an income-contingent loan mechanism in US legislation, but I defy anyone to understand it. The complications in the way it is written and presented suggest to me that there were commercial bodies dedicated to having this system not work—and they have done that extremely successfully because the take-up of the Clinton administration’s income-contingent loan is trivial. Something like 94 per cent of students questioned in surveys have never heard of it.

Most of the loans are operated in a means-tested environment—that is, means-tested on the basis of family income—and are mortgage type loans. The financial resources come from a bank and are guaranteed by government. The government guarantees have several implications, or at least reasons for being. One is that, in the absence of a government guarantee, a bank will not provide the money because the default risk is too high. What that does is to promote higher defaults because banks do not want to chase individuals when the government is going to pay the debt for them. So they turn out to be fairly expensive for taxpayers. I will give you an example. In US proprietary colleges, which are roughly equivalent to our TAFEs, the default levels of debt are around 50 per cent. A rough rule of thumb for the Sallie Mae debts, or the other mortgage type bank debts, would be somewhere between 15 and 30 per cent.

Most importantly, the debts show no sensitivity to future income, and this is the main reason to have an income related loans system because it takes away all default risk if it is designed properly. I actually think it is too generous at the moment. I think the first income threshold is too low; and I think one productive thing out of this whole debate has been that the government wanted to lift it to $30,000, and the ALP supported it going to $35,000. I think that is progress. In the United States of course if you incur one of these debts and you have a really bad year—you lose your job, you are crook or you are in only part-time work because of some reason which you have no control over—the bank is still knocking on your door asking for that money. That is a major credit risk for individuals because once you default on the payment of a student loan it effects you access to whole lot of other loans potentially bigger than that one; for example, a loan for a house. This is the problem with bank loan arrangements. You can fix up the default problem for the lender—that is, the bank—by having the government offer a guarantee but you can never fix up the default problem, the credit risk, for the borrower unless you have a system which shows sensitivity to future circ*mstances, which are typically hard to know.

One of implications of the US arrangements, particularly with respect to lawyers, is that, given that the debts are so high and the sensitivity to income is nonexistent, there is a major issue in terms of job choice. These days in the United States people come out of the top law schools with debts of $US120,000—and that is not unusual; $80,000 would be fairly typical. Those graduates are not going to work for the equivalent of legal aid anymore because they cannot afford it. They have to become corporate lawyers. There have been major implications for job choice because of their debt arrangements.

Some of the law schools—I will not keep on talking about US law schools much more; in fact I only know about another 30 seconds worth in total on this topic—now have schemes to encourage public sector law job choice. We do not have to do that, and neither do other countries with income related loans, because if you choose a low-paying job in this country you are faced with a debt which shows sensitivity to the repayment obligations. In a nutshell, I really do not like the way the US does it. I think it is fundamentally flawed.

Senator TIERNEY—You have not mentioned their interest rates. You have mentioned banks being involved and knocking on your door. What sort of interest rates are they?

Prof. Chapman—I do not know the details but I imagine they would be something like the real long-term government bond rates, so roughly add four per cent to inflation. In Australian current circ*mstances, it may be seven per cent per year.

Senator TIERNEY—Before we got into government, I went over to New Zealand to have a look at their StudyRight scheme, which superficially at that stage looked reasonably attractive. People could borrow money for fees, books and living costs. It seemed to have a problem with the real interest rate, which I think was then running at about nine per cent. What are your views on that scheme, and how might they have varied that scheme or updated it?

Prof. Chapman—If they have understood the nature of the HECS real interest rate adjustment, then that would have been a more sensible way to go for the reasons that I alluded to before. In the New Zealand system, they put a real rate of interest on the debt, which I think is poor economics because it does not remove the uncertainty. The problem with a real interest rate, or an income related debt, is that this is practically the only loan you can take whereby you do not know how much you are going to pay if you have a real interest rate on the debt. So I might find myself in New Zealand with three years worth of debt. Let us imagine I did really badly in the labour market: for example, I did not finish my degree. As 25 to 30 per cent of students do not graduate, you want a system of repayment which is sensitive to that. So I am in New Zealand and did not finish and I have a pretty poor job because I did not graduate. I am incurring this really large debt because I am under the threshold—or just over the threshold—so the debt accumulation with the real rate of interest of four per cent or whatever it is is beyond my control. So I am sitting there, aged 24, and thinking, ‘Wait a minute. This debt is just cranking up here. I did not want this contract. I wanted a contract which gave me default protection.’ Default protection is much more likely to be the case when you have a situation where there is no real adjustment on the rate of interest after the initial point.

Getting back to the Australian debate, this is the problem with FEE-HELP; it is not a problem with HECS-HELP. Whoever designed FEE-HELP, if they were going to put a real rate of interest on it, they got it about right by having it stop after 10 years. It is not a huge issue; it is nowhere near as poor as it would be if it was ongoing, because it stops after 10 years.

Senator TIERNEY—The New Zealand one keeps compounding upwards.

Prof Chapman—The New Zealand one has gone through several stages. They had a real rate of interest independently of circ*mstance, as I understand it. For four or five years it was pretty unpopular. Most of the student complaints were about that, as far as I could tell. Adjustments were then put in place which meant that, under certain circ*mstances written in legislation, the real rate of interest would go to zero if you satisfied certain criteria, during the period in which you were studying or if you had a child. It is now administratively very expensive to run the New Zealand system because of the complexities associated with real interest rate adjustments. The other thing in New Zealand is that a lot of people leave, and the adjustment of their debt while they are overseas is ongoing and quite tough. I have spoken to New Zealand graduates who say, ‘Every second I sit here talking to you I am incurring another three bucks because of the debt over there.’ That is one of the reasons that people do not want to go back to that system.

We have that problem in Australia as well. Even though you have not asked me about this, I would like to make a policy suggestion. Some proportion of Australian graduates will leave the country. If you are from my era, you drive the Kombi around Europe until the engine falls out of it and then your mum flies you back home. You do return. But there will be a proportion of students who will not return, and they will have a HECS debt. There is no reason why we cannot fix that problem. I think the way to fix that problem is that, when people decide to agree to incur the repayment of an income-contingent loan like HECS, they also sign an agreement which says, ‘In the event of going overseas for more than six months, I will agree to pay the minimum HECS per year.’ Under the current arrangements, that would be something like $1,000. If I am overseas I can still have legally binding HECS debt. We cannot run it through the tax system because it is too complicated, but having a minimum can fix that problem. You got me off the track, but I really wanted to say that.

Senator TIERNEY—Going to the discounts in up-front fees, which is a system you support, you are saying that people pay it off and then it is out of the way. I wonder if it is realistic to look at it that way, given the circ*mstances of most people. If you have an enormous amount of discretionary money, that is true; but the vast majority of people have mortgages and car debts, which have a considerably higher rate of interest than any of these. If you have discretionary money, isn’t it more sensible to pay off the home loan or the car loan, which are at a much higher rate than that of the up-front payment, as you tend to advocate? There is another side to the economics of it that covers their full life circ*mstances, not just what happens at—

Prof. Chapman—At the point of entry or once they have incurred the debt?

Senator TIERNEY—At the point of entry.

Prof. Chapman—It may be sensible, if you have the money.

Senator TIERNEY—I would put it to you that probably 98 per cent do not.

Prof. Chapman—That is why we have an income related scheme: you do not need the money.

Senator TIERNEY—I understand that; but it is much more economical for the individual, who has a choice of paying back that or paying back the home or car loan, to pay off those other debts because the interest rates are far higher.

Prof. Chapman—That is right. If you have incurred the debt, then for every year you do not pay that stock of debt, you are implicitly getting the financial benefit of a real rate of interest on the debt. You will not see it like that, and no-one will ever talk about it like that, but that is what it means. It is always in the individual’s interest to pay off the higher rate debts as well. The system was designed so that individuals in difficult circ*mstances were not getting further penalised, and that is why the real rate of interest after you have incurred the debt was set at zero.

There is one other point I would like to make about this concept of debt. People talk about debt aversion, and you alluded a little bit to the stock of debt. I do not think it has been good public policy that this has not been explained properly. It is a stock, but the way HECS works financially is more as a flow of debt. You can say to somebody, ‘My God! Look at this terribly huge stock of debt you have—$30,000 in HECS! Aren’t you worried about that?’ I have said that to people and they say, ‘Yes, I wish I didn’t have that big stock of debt. I only have to pay it when I can afford to, so I try to ignore it.’ Most graduates have a stock of debt at age 25 that is about $1½ million. If you want to scare the clappers out of a young graduate, tell them, ‘Your stock of debt is not $25,000 in HECS; it is $1½ million, because that is what you are going to pay in income tax in the next 40 years.’ In administrative, practical terms—not in conceptual terms—HECS should not be considered a stock any differently than an income tax burden should be.

That is why there have been no major implications from this with respect to access. Even though the stock looks horrendous, in reality, because of the default protection it has not had important behavioural implications. You could make it have such implications by increasing the rates of repayment to make them very high or by bringing the income threshold back down, which would affect things. But your implication that this is kinder than a car debt or a house debt is completely accurate.

Senator TIERNEY—There has been a lot of concern expressed in terms of this bill about full fee-paying places, domestically, but of course the opportunities have been there for some time to do that. On your own figures, since 1996, it is running at about 6,000 students out of 600,000 students—about one per cent.

Prof. Chapman—I think that that is a cross-sectional empirical observation. Currently there are about 6,000. Since 1997 there would have been a stock which—

Senator TIERNEY—I assume you mean per year?

Prof. Chapman—Let us agree it is one per cent.

Senator TIERNEY—Yes, at one point in time there are maybe 6,000 students out of 600,000 students in the system. So what would your assessment be of a dramatic change in take-up rate under this bill? Surely it is always going to be fairly low?

Prof. Chapman—It will certainly be much higher than double. Let us just look at the legislation.

Senator TIERNEY—So you are talking about two per cent, then.

Prof. Chapman—No, I said ‘much higher’, not just double. The reason it will be much higher is that first of all, in legislative terms the quota goes from 25 to 50. By the way, it is not 25 or 50 on top of the current stock; it is 25 to 50 of the total number of places. So I would imagine that at the University of Melbourne in 2006, if this legislation passes, of the entry-level law class of 100, 50 will be paying full fees and 50 will be paying HECS.

Senator TIERNEY—That is on those high-demand courses.

Prof. Chapman—That is right.

Senator TIERNEY—If you go to your normal run of courses, you would not get anything like that. You would not get to fifty-fifty.

Prof. Chapman—Well, there will be some courses which will not do this at all, but there will be many courses which will do this, and do it with great enthusiasm. The reason the number will be far more than double is that there is now an income related borrowing facility.

CHAIR—Some will be 100 per cent, under this legislation.

Prof. Chapman—I would interpret that—

Senator TIERNEY—In very high-demand courses.

Prof. Chapman—The reason that that income related borrowing facility really matters to an assessment of take-up is that, currently, to get in a full fee-paying student, I have to have the money. In the future, I will not need the money. So the sensitivity of response to that particular institutional change has the potential to be very big. I think you are right: obviously it will only be in high-demand courses, but there are a lot of high-demand courses and a lot of very well-placed institutions with strong reputations sitting in the best part of town—and I have mentioned them before—that will be associated with big take-up here if this happens.

Senator TIERNEY—But as a percentage of the total 600,000, though.

Prof. Chapman—At the moment we are sitting at one per cent. The bottom line will be two per cent. I think that is not right. Who knows? It depends on the way the institutions react. Some of them will not want to do this in the short run but some of them will see over time, because of the lack of full indexation, that this is one way of supplementing that they did not have before. So I would say by the year 2007—and I hate to say things like, ‘Don’t quote me,’ because this is all being written down—it will be five or maybe 10 per cent. It will be much bigger than two.

Senator TIERNEY—But still, 90 or 95 per cent will not be. I am just reversing your figures.

Prof. Chapman—In some courses it will be very big.

Senator TIERNEY—I appreciate that, but I am talking about across the total student body. We are still not looking at a massive proportion. My point here is that, in the publicity from opponents, you get that impression, which is probably not accurate.

Prof. Chapman—I come at this full fee discretionary thing not just from the point of view that, ‘Well, in the long run, there won’t be that many students affected;’ I come at this more from an academic perspective. If I were to design a policy which was consistent with sound economic principles, it would not be one that allowed full price discretion for the reasons I have mentioned before. There is a geographical reason—rents are free, so the institutions have a huge capacity to charge that which is not reflective of economic scarcity—and they have had decades, at least 100 years in some cases, of public sector financing, which has resulted in significant reputations which have nothing to do with a capacity for price discretion with the current cohort of entering students.

Senator TIERNEY—Would you like to comment on this fairly rare thing—we actually have a Labor alternative policy?

Prof. Chapman—I do not want to comment on what you just said about that, no.

Senator TIERNEY—I am not asking you to comment on that specific point, but it is out there. It is called Aim Higher; it came out on 23 July this year. It sank without a trace within a day, but it does—

Prof. Chapman—Actually, I was reading it yesterday.

Senator TIERNEY—Terrific.

Prof. Chapman—It has not sunk completely.

Senator TIERNEY—Okay. It is put up as an alternative scheme if, obviously, there was a change of government. Do you have any comments on what that would do, in the long term, to the university sector if it was adopted?

Prof. Chapman—There are some things in that document that are consistent with my submission, and there are some things that are not. Point No. 1, the indexation rules are to be changed to be made more generous. As I said before, if you wanted to understand one thing that has led to a sense of burden in universities, particularly those without discretion for overseas students, it is the indexation arrangements. The Aim Higher document addresses that to some extent.

Senator TIERNEY—But it is only indexing from this point in time, so it would only be maintaining real value from this point in time.

Prof. Chapman—I thought there were increases in the number of places and some other financial implications. I am not an expert on the detail but even if it indexes from this point in time, or 2005, it has got to be an improved situation for universities compared to the past.

Senator TIERNEY—Why is it improved if it is not increasing the real value of that?

Prof. Chapman—But it is. The basic problem, as I understand it, is if you have an indexation arrangement which adds to price inflation in supplementation terms. It has got to take some of the stress away from the essential problem with an enterprise bargaining system wanting unions delivering—

Senator TIERNEY—Doesn’t it just maintain it though? Because if it is only maintaining the real value—

Prof. Chapman—What are we comparing this to? If we are comparing it to the current indexation rules, it has got to be a more generous arrangement for the universities.

Senator TIERNEY—But then it takes away a whole lot of other discretionary ways in which off-budget universities can raise money.

Prof. Chapman—Which are you referring to? I am not here as a defender of ALP policy, but an indexation arrangement which is more generous than the current one is an improved way of thinking about public sector obligations.

Senator TIERNEY—It is an assertion—they are not in government; it is just an assertion—that they would maintain full indexation. Given your experience in the sector, I do not think the history would give you a lot of confidence, would it? It is subject to budget year by year.

Prof. Chapman—I refer to the work by David Phillips and Gerald Burke—and it is in my background paper—which basically asked the question: what would funding arrangements be today if the indexation process had been equivalent to average weekly earnings, which is approximately what the unions will ask for and mostly get? The shortfall—they gave the data from 1995 to 2001-02—is over $½ billion. This is a big number.

Senator TIERNEY—But there has also been a massive change in the balance of private-public funding of universities, which has given a rise in the total moneys.

Prof. Chapman—I am talking about HECS plus taxpayer.

Senator TIERNEY—I am talking about the total funding of universities. It is significant in relation to what we are now discussing as the Aim Higher document takes away a lot of those or reduces the options for the universities on the private side of the private-public mix of funding for the total funding of the university. Wouldn’t you agree with that from what you have read so far?

Prof. Chapman—The only thing I feel qualified to comment on in terms of my research perspective concerning Aim Higher’s fee or debt regime is that I think there is a case for some price flexibility. In my submission to the Crossroads review, to the last Senate inquiry into higher education, and indeed it is also in the background paper here, I said that I thought there was a case for some limited price flexibility in the order of 25 per cent and Aim Higher does not have that. Because we have all written these things on paper, it would look very strange if I thought that that is correct. I do not. But at the same time, Aim Higher implicitly, and probably explicitly, rejects unfettered price discretion. As I have said, there are very strong reasons to support that, that the idea that there is a good economic case or a social case—or any case—for allowing price discretion, as is explicit in fee help, is not good policy.

Senator TIERNEY—So, broadly, the policy takes away a lot of this discretion and in terms of indexation it is a matter of faith as to whether, budget by budget, it would actually happen, which past experience would indicate—

Prof. Chapman—It does not really look to me like a matter of faith to say, ‘We want to change the indexation rule, and we will make it more consistent with a wage adjustment process which doesn’t come from the safety net like the current indexation does but is more generous.’ If you are saying that governments can change their minds from one year to the next—

Senator TIERNEY—Absolutely.

Prof. Chapman—Of course. That could happen, just as this government could change its mind about its current indexation rules.

Senator TIERNEY—I am just saying that you could not really rely on them saying, ‘We are going to index this from now on when we are in government,’ with faith that that would actually fully occur.

Prof. Chapman—Maybe I am a little bit more innocent than that, but I presume that if a political party says, ‘This is our policy’ then—

Senator TIERNEY—You would believe it.

Prof. Chapman—For a little while, yes.

Senator STOTT DESPOJA—Professor Chapman, I want to begin by asking whether, in your answers to Senator Tierney about education in the United States, particularly about up-front fees in relation to law, you were talking about private institutions. I am assuming you were not talking about not-for-profit so-called public universities in the United States.

Prof. Chapman—In a generic sense what I have been saying crosses both. In an empirical context, the private universities will charge more. But it is true that there are up-front fees through the US system through the state colleges, and it is also true that the loan mechanisms are very typically mortgage type loans—that is, you have to pay depending on time and not circ*mstance.

Senator STOTT DESPOJA—And they may be commercial loan arrangements? Is that what you were talking about in some aspects of you answer?

Prof. Chapman—Yes, as I said to Senator Tierney, I have basically already said everything I know about the US. I had one of these loans from graduate school, and the institution that I had it from did not have a full weight of interest on it. It was about seven per cent a year when the rate of inflation was about five per cent. I think there are interest rate subsidies. Some of the law schools in the US are actually trying to accommodate this issue of public sector job choice through law schools by actually forgiving the debt repayment for individuals who are in the equivalent of legal aid. It is not as severe as I may have implied, but it is pretty severe.

Senator STOTT DESPOJA—You mentioned the issue of behavioural implications as a consequence of fees or charges. Obviously, you have done a lot of research and you have included evidence to demonstrate things one way or the other. But my more general interest, as I asked the previous witnesses, is whether we have sufficient independent evidence in Australia and whether we have sufficient independent government funded evidence in Australia to monitor what is actually happening in our higher education system, particularly as a consequence of fees or changes to the fee structure.

Prof. Chapman—I think we know a lot in aggregate. I do not think we know a lot for particular specifically defined areas. One of the reasons we do not know a lot is that the nature of the data that you require to assess the implications, particularly on socioeconomic access, is quite sophisticated. If I were to run a cross-sectional survey today on 20-year-olds and I wanted to know how many poor people there were then I could not measure poverty that easily, because the definition of ‘household’ would probably not be what I really wanted. What I would really want was what was going on when they were 14, 15 or 16, not when they enrolled.

Senator STOTT DESPOJA—When you say ‘household’ do you mean postcodes in terms of the methodology that is often used?

Prof. Chapman—I can talk about the postcode issue. One way of measuring household wealth, and a very inaccurate one, is to take the average income of a postcode. The problem there is that the variants within the postcodes or, even more precisely, the census districts, are very high. When I was referring to households I meant it literally, in terms of family background, rather than in measurement terms.

The way to address that empirically is to survey people not at a point in time but over time. All of the work that I have been involved in uses the Australian Council for Educational Research’s longitudinal database. This is data for all the people identified who were born in a particular year but in different years. I do not mean they were individually born in different years—that is fairly creative. I mean that they took a group who were all born in 1965 and then a group who were all born in 1970. Then they started chasing them in survey terms. We knew, for example, what the family background of individuals aged 15 was and then what happened to those individuals four years later with respect to access to higher education. So we could do econometric work which says, ‘Let’s try and work out the relationship between your family income when you were 15 and the probability of your being enrolled in the sector aged 18 or 19.’ You can already see that, empirically and in survey terms, this is hard stuff. It is very expensive. It is very complicated, mainly because of attrition rates of young people, to trace people over time to actually test these models.

We do not want to imply that there is some problem going on with government data collection. The government has now instituted, through the Department of Family and Community Services, a survey which will help sort this out—in about 10 years, we will really know a huge amount—and this survey is called Household, Income and Labour Dynamics in Australia, HILDA, which is coming from the University of Melbourne. It is now in its second wave. It is exactly what labour economists in this country have wanted for a very long time. It is longitudinal. It involves 9,500 households, 14,000 individuals and a cross-section randomly selected. These people will be followed until they drop or until Family and Community Services decides not to fund the survey anymore. Then we will know.

The people who have been involved in this process—and I am one of them—have had input into the nature of the questioning and how it will work. There has certainly been a lot of attention focused on questions of family background and its implications for educational success and transition from school to work. They are fundamental to all this. We have not had it, so we have had to rely on other disparate data sources—for example, the Australian Council for Educational Research numbers—which have been tested by lots of people, not just me, and they all basically say the same thing. None of these data are very strong.

Senator STOTT DESPOJA—I acknowledge your point about disparate data and data being out there, and we are aware of the ACER research, but would you consider the reconstituting of a body like the AUC, as the last witness said? We have talked about NBEET or, more specifically, groups like the Higher Education Council. Is that something that you see the government having a role to provide or is that essentially satisfied by the HILDA project in the Department of Family and Community Services?

Prof. Chapman—You would take away my employment opportunities! We have to get the data ourselves. We chase the stuff. I would think that there is a case for a more organised clearing house of information and of statistics, motivated just by this issue. Ever since this debate started—and I have been interested in this debate since about 1998; that is how long it has been going on—the most fundamental question that has come up is: what is the implication of introducing a charge or HECS or changing the parameters for repayment and interests rates and what does that mean for poor people? This is a really big issue. It is not just a big issue because we care about the success of people who are just unlucky enough to have poor backgrounds; it is a big issue because, if you invent systems and put into place policies that stop poor but talented students, we all lose. The society does not actually deliver the educational outcomes which are best for the society. That is what motivates things like income related loans. For 15 years, hardly a week has gone by without people talking about the potential for a change in the financing policy or Austudy or asking age of independence questions. All of these issues come down to this question which we have not been able to address in as full a way as we could because the data requirements were too much.

Senator STOTT DESPOJA—Obviously I am aware of your interest, because I have been following it since about the same time. I still find it interesting to look at the evidence that you provide in your submission, particularly evidence from Marks and Evans, in relation to post-1997 HECS rates not necessarily having an adverse impact in terms of participation of any particular wealth group. However, in the same submission you provide us with a figure that talks about participation rates for the lowest quartile up to the top quartile and you see a disparity between those two groups, I think in the late 1980s, of around seven per cent. The figure you give us here is that there is a 25 per cent differential in terms of the participation rates at the lowest and the top quartiles. Is that of concern? Is that something that in a roundabout way could suggest that there is, if not an adverse impact on any particular wealth group, a different level of participation among those quartiles?

Prof. Chapman—It has always been true in this country—and in any other country that I know anything about—that participation in higher education is systematically much more likely to be by people from relatively privileged backgrounds. Indeed, that was a major motivation for the introduction of a charging system: the apparent regressivity of a no-charge system. That has always been true. It is as true today as it was in 1988. So I think that one thing you can say with some confidence is that the Higher Education Contribution Scheme did nothing about that. Indeed, I could not understand how it could do anything about that, because you were basically imposing a charge.

The other, more complex, point is: have these arrangements hurt the poor more than they have hurt the rich? You can respond to that in several ways. One way of responding to it is to say that the proportion of relatively poor prospective students enrolled in the system today is higher than before. Roughly, the increase and the proportions between the lowest quartile and the top quartile are about the same. In absolute numbers, they are more for the relatively advantaged because their group was bigger. If there is one group that has actually expanded relative to the bottom quartile and the top quartile, obviously it is going to be the middle. The middle has expanded in ways that I do not really understand that well. That has particularly been the case for young women.

The other point I would make about these data is that, because we needed evidence that was particularly focused on targeted groups or groups much more likely to be part of the system, the focus was on young people. So I really cannot tell you with much confidence what is happening to people who are mature age. The work from the department implies that there was some decrease in applications after 1997. But, overall, there was not that big a change. I am now into territory where I wish to acknowledge that I agree that the data are not strong, for reasons that include some you have not mentioned.

CHAIR—At the time the government chose to move against NBEET, the department of education gave a commitment to this parliament that they would take responsibility for monitoring the equity effects of the HECS changes. Tom Karmel appears to have tried to continue that with his research, but the government itself has now moved to suppress that material. So how can we say that the Commonwealth is actually fulfilling the undertaking it has given to the parliament to monitor the equity effects?

Prof. Chapman—I cannot comment on the internal processes. I really have no expertise in that. I did say before that I am pleased that that report is out. I have acknowledged in the Sydney Morning Herald that it is methodologically professional. I am pleased that it is there, but I cannot really say anything about the internal politics of that process. I would say that when HECS was introduced the Senate—mainly, I think, through the influence of the Democrats—insisted that there be an independent monitoring process, and I thought that that was productive. That happened, at least in the periods I followed it closely.

There were surveys done in the early nineties, not just of students who were in the system but also of people who qualified for places and then chose not to turn up. They were asked why not, and empirical work was done to see the extent to which it was a problem of income support, geography, parental attitude and/or HECS. That happened from groups that I think were motivated purely by professional curiosity and wanted to get it right. I thought that the legislation, in the periods that I followed it, worked well. It was an entirely appropriate part of this process. But I am not sure where we are at with that. When NBEET was around—and the Higher Education Council, in particular—every year one of their briefs was to give us a report on access and equity, and that was motivated by the introduction of HECS.

Senator STOTT DESPOJA—Have you done any work or do you have views on the cost that students are contributing towards their courses? This goes to the issue of cost shifting. I note that Senator Tierney was talking to you about the overall increase in money in the higher education sector, yet I recognise that there is a higher proportion being paid by students. We have been told by government recently, particularly by the minister, that students are now paying around 25 per cent and a maximum of 27 per cent of their course costs. That does not ring true to me. That seems to take into account the up-front discount and research money. Do you have a view on the average amount students are contributing to their courses these days?

Prof. Chapman—Not precisely, but I think it is accurate for you to suggest that you do not want to take the total budget, because about one-third of that will be for research. One-third of it is research in base funding notions. The new lecturer will be assumed, roughly, to spend one-third or his or her time on research, so you do not want to charge students for that. I do not want to do the figures now, because I will muck them up, but you could probably take one-third off straightaway. On the other hand, you do not want to look at the HECS charge as a debt as the true cost, because of the interest rate subsidy. You really want to look at the up-front fee that is paid for people with a discount as the cost. I think 25 per cent does sound low. If on paper it looks to be 35 per cent, as the HECS debt rather than the up-front charge, then in present value terms that is probably closer to 25 per cent. But the big mover and shaker in terms of the empirical importance of what you said would be to take the research funding off that. So I think it has to be more than 25 per cent, but I do not know how much.

Senator STOTT DESPOJA—You have talked, now and in the past, about designing a system which is based on a combination of income-earning potential and the costs of actually running a course. Am I right in thinking you described the introduction of the new, three-tier fee arrangement in 1997 as a distortion of the original HECS structure?

Prof. Chapman—I think I used the word ‘hybrid.’ See how uninteresting I am! ‘Distortion’ is much more powerful.

Senator STOTT DESPOJA—And value laden. I do not mean, therefore, to put words into your mouth. Do you have any views on the specific impact not of HECS overall—obviously you have done a lot of research on that and included it in your submission—but of the three-tier system that has been operating since 1997? We were talking earlier with the scientists about the perceived or actual impact of science courses being in the second band.

Prof. Chapman—When the Wran committee released its report, which led to HECS, three tiers were suggested. It was a cost recovery model. You could design this to be partly motivated by an attempt to get more financial resources from people who are presumably likely to be successful in the future—people doing law, medicine or accounting, for example. But I do not think that is the way to design a policy like that. I think you need it to be thought of essentially as a cost recovery policy. The reason you do not want to think about it in terms of anticipation of future success is that the most important variable to understand in the labour market is not the average but the variance. Many people will do law, for example, who (a) will not graduate, (b) will get an arts degree instead of a law degree or (c) will not work as corporate lawyers. The major distinction between what happened in 1997 and what was recommended by the Wran committee in 1989—but not adopted—was that the differential charges reflected in two instances a presumption about future circ*mstance. Law was put in the top band and nursing, which is expensive, was put in the bottom band. I can understand the politics of that, but the economics of these processes would be more accurately understood as being those of cost recovery.

You can actually target future circ*mstances a little bit by designing a system which does not have a real rate of interest on it—and that is the current one. In other words you could say: if you do really well in the labour market, we want you to pay more in the present value terms. You do that by having a system whereby the people who do best early pay quickly—and it would take about four years for a very successful young lawyer to pay off their debt. That means that compared to someone who takes 10 years a person in the former example loses six years of an interest rate subsidy. So, in present value terms, the person who does very well pays more in HECS. That is an important design feature of it, I think, because if you believe that means testing is an appropriate way to organise social policy—and I do—then the next question is: on what basis do you means test?

We means test most of our social security at point of entry and with respect to family income. An income related loan with no real rate of interest means tests in the future because, if you do really badly, we give you a bonus: for every year that you do not pay in present value terms, you are paying less than the real rate of interest. So you can do both. I did not think there was a strong case for charging more for law, but I could see the politics of it, particularly when it came to nursing. There is a cynical way of looking at this with respect to mainstream economics: the right way to organise financial relationships with respect to government subsidies is for government to allocate scarce resources to the extent that the spill-over—the social benefit—is financed. So you now have a situation where people studying law are paying probably as much as courses cost in full.

Senator STOTT DESPOJA—They will be paying 81 per cent after this legislation goes through. It will potentially be 105 per cent if the changes go through and they take advantage of the 30 per cent increase.

Prof. Chapman—I think it is getting pretty hard to justify that unless you think the social value of lawyers is close to nothing.

Senator STOTT DESPOJA—I will not comment on that! In your comments you have mentioned the threshold at which graduates begin to repay their debts. Are you advocating an average weekly earnings threshold?

Prof. Chapman—I will take myself back one step. The conceptual basis of an income related loan is that you really want to get a contribution from individuals when they get a return on the investment which is high and private. With that as a rough rule of thumb we asked the question: what is a high private return? Let us define ‘private’ as individual income and ‘high’—these things will always be a bit ad hoc—as more than what average Australians working for pay earn. That was the original scheme. I think it was quite consistent with the conceptual basis and theoretical discussions motivating income related loans, which go back to 1955. When the first threshold for average weekly earnings on an annual basis was reduced from, in current terms, about $36,000 to, in current terms, about $24,000, in my view you were starting to undermine the conceptual basis that motivated the design of the system.

The other point to make about that threshold is that, if you really want to design a system which takes from individuals who have been successful in and derived a high private benefit from the system, you do not want a threshold which takes from individuals who did not finish, because the private rate of return to an incomplete university degree is pretty close to nothing. You get the benefit of being a graduate by being a graduate, not from being enrolled. When you have a first income threshold that is somewhere between $25,000 and $30,000, you are getting an awful lot of people who do not finish—as I said before, that is 25 per cent of the group.

I think that, in conceptual terms, you want to avoid as much as you can the presumption that you are going to penalise, or ask for contributions from, people who are unsuccessful in the system. That is the equity in this: you really want a contribution for people once they are getting the private benefit. You are on pretty safe ground at $36,000, which is where you would be today; $30,000 is obviously a lot better than the $26,000, which is where it will be in 2005. If I were asked to pick a number, it would be higher than $30,000 but lower than $36,000, and politics decides the rest.

Senator STOTT DESPOJA—Is that figure that the government has suggested based on 2005 prices?

Prof. Chapman—Yes.

Senator STOTT DESPOJA—So what does that mean as of next year? If you take that in 2004 dollar terms, what would that actually be as a threshold?

Prof. Chapman—It is about $36,500 now and you have to add two years on top of that. Let us assume wage inflation of 3½ per cent; so add seven per cent to $36,000, which is about $2,000. It may be about $38,000.

CHAIR—So it is a substantial amount.

Senator CROSSIN—Professor Chapman, most of what I was going to ask you has been covered by other people, but I would like to know whether or not you have looked at the impact of this package on Indigenous students and women.

Prof. Chapman—I have not specifically looked at the impact of this package on Indigenous students. The data is poor when it comes to specific groups. As we know, the participation of Indigenous students is low. So you are talking about quite demanding data needs to look at that appropriately, and I have not done that. I have looked at the impact of this package with respect to women. All the work that we have done with respect to access did it specific to gender. What we found—and this is a bit curious, and I do not really know why—is that female participation went up much more than male participation, and indeed slightly more than we would have expected from trends.

There has been an increasing number of women enrolled in higher education. This number has been going up consistently for about 35 years. I think that we were a little bit surprised to find that the extent of female participation, particularly women from the middle of the socioeconomic scale, went up more than it did for others, and certainly more than it did for males. Males in the middle of the income distribution, as measured by parental income, did not change too much in the first five years—and I think probably did not change much at all from lower end of the socioeconomic scale. We do not really know the reasons for that.

Senator CROSSIN—In your assessment—given your comments on the deregulation of the system and the likely impact of paying full fees—do you believe that this will cause greater disadvantage in terms of attracting more women into higher education than has previously been the case?

Prof. Chapman—I do not think you would see an effect with respect to sex. One reason for that is that, when these debts get really big, it is the individuals who participate less in the labour force or who over their lifetimes earn less who are less likely to repay them. That is another interesting point for the financing: if you want FEE-HELP to be uncapped—and, maybe, the debt to go up to very large levels—then at some point in time it is going to get so big that unless people start working through to about the age of 107 or something you are not going to get the money back. So I doubt whether it is going to impact markedly on people who expect to have a debt remaining at the end of their working lives. We know that the actual subsidies for females are slightly higher than they are for males. The reason for that is that women, on average, will earn less and it will take them longer to pay off any given HECS debt. Because of the nature of the interest rate subsidies, that would imply that the impost of an increased debt on women, on average, will be less than it will be for men.

Senator CROSSIN—Are you suggesting that over time we will see perhaps a greater number of women who are unable to repay this debt during their working lives?

Prof. Chapman—With the current arrangements that is unlikely to happen because there is a cap of $50,000. If the cap was not there and you had debts of $80,000 to $100,000 then not a majority but a significant minority of people would not pay that back in total. The proposed legislation caps the debt at $50,000. At $50,000 you will get the majority of that money back, but, for other reasons, I thought that it was a fairly poor idea to cap the total amount of debt from FEE-HELP. Indeed where I am coming from on this suggests that there is no strong case for price discretion. If you believe that that is the case then FEE-HELP should be moved back into HECS-HELP, or the current HECS arrangements, which means that the total level of debt would not get anywhere near that.

Senator CROSSIN—There is a lot of evidence that shows that there has been a market decline in Indigenous students accessing higher education, particularly since the changes to Abstudy some years back. In your research have you looked at the impact that student assistance has on people accessing higher education?

Prof. Chapman—Most of my research work on this issue has been pretty much focused on the impact of variations to HECS charges, HECS interest rates and HECS repayment parameters to access. It has been fairly broadly based. I cannot say anything that comes from my experience as a researcher on that issue, but I would say that HECS is less likely to diminish the access of individuals who do not expect to do particularly well in the labour force because of discrimination. The impost of the present value of the charge—the proportion which will have to be paid back—would be lower. That is one point about HECS that matters. The other point is that there are good reasons to believe that there will be price and income support instruments that can effectively change the participation of particular groups, but I would not want this debate to stop at the beginning of the process of the entry into higher education. Family background, family circ*mstances from age one or less are absolutely critical in determining access to higher education, so the question of student income support through Abstudy or through the old Austudy and believing that you can do major things at the point of entry exaggerates the importance of those instruments. This is an ongoing socioeconomic process which has to be addressed and considered in a life cycle context which is not really going to have a huge impact in year 12.

Senator CROSSIN—If this package gets through, is there a genuine capacity for regional universities to increase their fees—even if it is up to the 30 per cent limit? It has been put to me by some of my constituents that, if I was going to access higher education and the fees went through the roof, I may as well go to Melbourne or Sydney rather than stay in places like Townsville or Darwin. Do you think that there will be a view around this country that higher fees and access to those courses in capital cities as opposed to regional centres would mean better quality—in other words, the cheaper the course the poorer the quality? Will that be an outcome of this package?

Prof. Chapman—Down the track if these arrangements go through, as I understand them, there will be quite different implications for different institutions. Those located in the centres of large metropolitan areas such as Sydney, Melbourne, Brisbane and Perth will definitely have a greater capacity to increase their prices—several universities have already announced that they will do that. Regional universities will have less of a capacity, but at the same time their financial needs to attempt to increase their prices must be influenced by the ongoing indexation arrangements. So over time the institutions in less advantaged areas in terms of geography and taxpayer subsidies historically will have less capacity and fewer resources than other institutions. Whether or not you think that is a good or bad thing is a more complicated question, but empirically it is incontestable.

The other point I would make about regional students, as opposed to regional institutions, is that I think there is a case—and I have put this in the background paper to the submission—for getting rid of some of the up-front costs that might be associated with educational mobility, which neither this government nor parliament generally has considered. We still have the very strong likelihood that people who come from non-metropolitan areas and move into metropolitan areas to study face, at least initially, relatively high costs that are not true for their metropolitan sisters and brothers. There are also other barriers, which are more obvious than those associated with mobility, which impinge on access and are related to up-front costs which still exist. For example, union fees, textbook charges and administrative charges exist.

The thing that is interesting, if you like, about this complaint is that you can think about this in a way that costs government nothing. You could allow all students—and, perhaps, even particularly rural based students who have to move—access to financial resources which look a little bit like HECS; for example, $1,000 a year for somebody who has to move or $600 a year for anyone to pay a union fee or administration charge, to buy textbooks or to pay other associated costs. If you organised it in the same way that HECS is organised, you would have a surcharge on top of it as part of the debt. So it would be, ‘We are giving you $600; we want you to pay back $800. But we are just going to put that into your tax file box as part of your HECS debt. If you don’t want to take it, you don’t have to take it, but it is there.’ In budgetary terms, if you get the parameters approximately right the cost to the taxpayer will be nothing. The advantages to the individuals in some cases could be very high.

CHAIR—Professor Chapman, due to the great benefits of technology, I am getting advice here from the Philippines about the proceedings occurring today. I understand that the Philippines government has rejected the idea of interest rates on their proposed student loan scheme. Is that the experience around the world? Is it becoming increasingly common for governments to move away from real rates of interest on student loan schemes?

Prof. Chapman—When New Zealand adopted an income related loan they put a real interest rate on it. In conversations I had with the New Zealand economists, they said to me that we only got it half right here, because we did not put a real interest rate on it. As I said before, we had a form of interest rate because of the up-front payment discount. In the United Kingdom, which has recently moved towards this system, they have gone the way HECS has gone with respect to the adjustment of the debt, once it has been incurred, to be inflation only. In the South African model I understand that there is a real interest rate of zero as well. I find it so hard to read US legislation that I could not even work that bit of their model out. But, in general, I think it is accepted that there are important costs of having a real interest rate. I do not know about the Philippines debate, but if they have decided to promote an income related loan system for education and/or training without a real interest rate, I think that they can add to that in a more sophisticated way by providing a discount for an up-front payment, which allows more financial resources in the short run and accommodates the same purpose without uncertainties.

CHAIR—The advice I am getting here suggests that—for similar reasons, which I have outlined today—there is a view being taken that it is iniquitous. Is it your submission to this inquiry that the parliament should reject the provisions of this bill relating to FEE-HELP?

Prof. Chapman—I think that the real interest rate arrangements on FEE-HELP are unnecessary. They are administratively very complicated and they are more regressive than the current system. They can be made much simpler without any budgetary implications. Not for the full-fee-paying FEE-HELP but for the FEE-HELP arrangements, for example, in PELS you could move all that back into HECS and say, ‘If that’s your fee obligation and you choose to repay through the tax system, you have to pay a bit more.’ In other words, there is a discount for an up front payment. It is what we currently have. In administrative terms, and in economic and social terms, it just seems to me to be fairly straightforward.

CHAIR—So your straightforward advice to the committee is that that is what we should be recommending?

Prof. Chapman—Absolutely.

CHAIR—Thank you very much for coming today. I greatly appreciate your advice to the committee.

Proceedings suspended from 12.29 p.m. to 1.39 p.m.