Tuesday, February 07, 2006

HECS fees should not impact much on education demands

I detest what John Dawkins did to the Australian Universities but some innovations that flowed from that period seem better than others or at least are less harmful than one might think. My daughter enrolled in Commerce-Law at University of Melbourne a few days ago and I had to read about HECs. The charges do not seem as bad as some have suggested, at least for the units she will do.

For first-year Comm/Law the all-inclusive cost of enrolling is $6328 as an accumulating HECs debt less a 20% discount if you pay the fees upfront. If you do pay upfront the cost falls to $5062. If you don't pay upfront the costs grow with inflation so that, over a 5 year program, the effective real annual interest rate charged, r, if payment was made at the bigging of the 6th year, would be the solution to (1+r)^5 = 1.2 or r=3.73%. Add on inflation of 2.5% and the nominal interest rate is 6.23% which doesn't look too bad when rates of return on human capital are considered.

The cost of this sort of university education is much cheaper than mid-range private schools. Others have noted that parents often feel a sense of financial relief when their kids go to university.

The full-fee cost of a full-fee Commerce Law degree is $24,150 annually or $133,450 for a typical degree (see here) so the cross-subsidies are very, very substantial.

The obvious question is whether the flows of international student income that mainly fund such cross subsidies are sustainable. The construction of vast universities in Shanghai and other parts of China, for example, raise reasonable doubts.

Update. Buly Cardak suggested to me that to focus on the level of the HECs charge alone is misleading since it excludes the opportunity cost of income foregone during a degree. This sounds reasonable. Incremental changes in cost that come on top of high existing costs might have quite an impact.

3 comments:

Anonymous said...

The point about paying university fees is that our tax rates never went down to compsensate for fee payment. So the government bagged the money through fees and then keeps the money that was once collected out of out taxes to pay for free university. This is a shitty deal all round. At the very least full fee paying ought to be placed against taxable incme.

I'm surprised you never brought this up in your piece.

Mark Upcher said...

Anonymous

The government did not "keep" the money that did not have to be spent to pay for free university. It was used to pay for something else - for example, to subsidise the rising costs of public health provision.

Since the income prospects of most university students are raised by attendance at university, it is not unreasonable that they be made to meet at least part of the costs of their tertiary education.

Chui Tey said...

My gutfeel is for more spending on training and education.

For an inflation free retirement, we need to have barely sufficient financial resources to buy the excess production of what the workforce produces.

If we have too much financial ability, or there isn't enough workforce, inflation will rise until we barely have enough purchasing power.

Hence, it is advantageous for us to create an oversupply of capable workers so that we can enjoy a comfortable retirement.