The true cost of Abbott's higher education reforms

The changes to the Higher Education Loan Program were among the most significant reforms contained in the federal budget. These reforms, if implemented, will have a notable impact on the Australian economy over a number of decades.

At first glance, these reforms appear likely to drive students towards commerce, economics and law degrees -- disciplines that offer high returns on investment -- and away from degrees such as education and science.

Education is arguably the most important personal investment any of us will ever make. But as with most investments, education is associated with considerable costs. Prospective students looking to undertake higher education must weigh the benefits (higher salary, greater career progression) against the costs (university loans, loss of leisure, foregone earnings). The government, on the other hand, should also consider issues such as social externalities and opportunity costs.

The cost side of the ledger is set to rise significantly based on recently announced budget measures. Students currently pay the inflation rate on their income contingent student loans, which over the past decade has tracked at around 2.7 per cent annually. From 2016, students will be charged the 10-year government bond rate up to a maximum of 6 per cent annually (currently around 3.8 per cent).

Student fees will also be uncapped, with demand and supply determining the university fees offered to students. It marks a significant change from the more highly regulated university system that I and many readers experienced. 

It is important to note that there are no studies that contemplate the changes made in the budget. Every study I looked at considered the return to education based on a regulated HELP or HECS system.

A study from the Centre for Labour Market Research at the Australian National University finds that there are significant returns to bachelor degrees, particularly if you also study part-time. The returns on masters degrees are less impressive but significant for several disciplines.

It probably won’t come as a shock but the returns differed significantly from degree to degree.

The research showed that returns for a standard-length bachelor degree were highest in dentistry, medicine, commerce, law, economics and information technology. Typically these results held even if students did an additional year at university.

Bad news for people completing visual and performing arts degrees -- your lifetime income is likely to be higher if you didn’t go to university. Male students undertaking humanities degrees didn’t fare much better, though women benefit quite nicely.

It is, however, worth noting that the return on education improves significantly if a student also undertakes part-time work while studying. In that scenario, students undertaking visual and performing arts and humanities degrees receive a positive return on their investment.

Assessing these results in light of the changes contained in the budget is difficult and by necessity requires some speculation. However, I can arrive at some conclusions based on how sensitive the return on a bachelor degree is to a change in the discount rate applied to a student’s future earnings and HELP repayments.

Increasing the annual discount rate from 2 per cent to 3 per cent reduces the net present value of a standard-length bachelor degree for men by around $90,000 over the course of their lifetime. By comparison, women experience a decline in net present earnings of just under $50,000.

Based on that sensitivity, a discount rate of 4 per cent or 5 per cent would significantly reduce the return on an average bachelor degree, possibly by another $150,000 for men and $80,000 for women over the course of their lifetime. That assessment ignores the possibility that university fees could also double or triple under the budget recommendations.

In the absence of part-time work, it is likely that the net present value to several degrees will decline to such an extent that students should consider other options. The susceptible degrees include the likes of science and education, as well as humanities, architecture and mathematics. By comparison, graduates in commerce, economics, law, medicine and dentistry courses should still do very well.

The reforms pose a significant opportunity for Australian universities but we cannot ignore the considerable risk they pose for Australian students. For the forward-thinking student, these reforms are set to have a significant effect on the types of degrees undertaken and, by extension, the composition of the Australian economy.

By placing a greater cost on education, some university degrees that deliver lower returns on investment may become untenable unless prices decline. Partially offsetting this, higher university fees could be associated with an improvement in teaching and curriculum, while the HELP system will also bring a number of other non-university disciplines under its umbrella, making those disciplines more financially accessible.

With commerce, economics and law set to benefit, the reforms appear likely to create an increasingly large number of investment bankers and lawyers. Though in time, the benefits to these courses could decline as excessive demand for these degrees drives fees up and an oversupply of graduates pushes post-university earnings down.

By comparison, the reforms are likely to dampen demand for education and science degrees -- roles with considerable social importance but limited return on investment. These degrees may require a decline in university fees in order to make the investment worthwhile for students.

That might be what the market determines, but is that necessarily the direction that we want Australia to take?