Tuesday, 19 August 2014

A Policy A Day: Free Tertiary Education

In the lead-up to the election, we are going to examine one policy per (working) day. We've selected policies to be as balanced as possible across a range of policy areas and across the political parties. The idea is to explain the background, analyse the policy to investigate the pros and cons, and give a verdict on the policy at the end. Inevitably, some opinion will make its way in and we make no apology for that - after all, we're voters too. Also, I say 'we' because this series will feature some guest posts from other young people, to share their thoughts and ideas as well. A list of all the articles is available hereEnjoy!

Today's policy comes from the Internet Party. While the policy is yet to be fully fleshed out on their website, it has been touted as a flagship policy for a few months now as part of their "socially just and inclusive" policy package. A few other parties such as the Green Party and the Mana Party have expressed similar sentiments, although usually stopping short of moving to a completely government-paid model of:
- Free tertiary education and student loans

More recently, the policy has been repeated again and again at the Internet MANA roadshow throughout the country. The Internet Party's Palmerston North candidate (who actually teaches at AUT in Auckland), Dr Pani Farvid, says:
"This means that all New Zealanders who want to better their education can do so for free, as we all know knowledge is power ... We are doing a massive disservice to our young people who have the desire and the urge to better themselves by learning more, by slapping them with a massive debt as they turn 18, 19, 20. They're starting their lives on the back foot as soon as they want to study."

A student loan is now an expectation of tertiary education in New Zealand. By the time I graduate, I will have accrued roughly $40,000 of debt in course fees alone (I've never taken living costs). As is often stated, this was not always the case. Tertiary education used to be free! Journalist Sarah Robson wrote quite a good piece in Salient back in 2009, drawing on anecdotal evidence of her mum who "is always right", and explaining how Phil Goff (yes, that's right, Phil Goff), the Education Minister in 1989, introduced the user-pays system for tertiary education to reduce the government's fiscal obligations, and introduced the student loan scheme to help ease the pain for young people.

Tertiary education is often conflated with university education, but it is important to note that there are a significant number of polytechnics, institutes of technology, colleges of education, and wānanga that are also included in this group. Funding is currently through a combination of student fees and government subsidies. The government funds tertiary institutions based on the number of enrolled students and the study time of each course to calculate an equivalent full-time student (EFTS) number. However, this funding has not been increasing at the rate of inflation, and tertiary institutions are struggling to meet their costs, forcing them to pass those costs onto students. The rate at which tertiary institutions can increase student tuition fees is capped at 4% per year, except that institutions can apply to the Tertiary Education Commission to exceed that cap if necessary.

Students eventually have to pay student loans back to the government, although this has been interest-free since 2005. After they graduate, the IRD starts to take 12% off all pay over a threshold. Students can also claim a student allowance to help pay for their living expenses as well (around $170 a week, which will not rise with CPI inflation until at least 2017 as part of a govt cost saving measure), which they do not have to pay back. However, the student allowance is means-tested, and most commonly students may not be able to claim a student allowance if their parents' income is too high. There is also a limit on how long you can claim a student allowance for (roughly four years), which can be limiting for some students (such as those studying conjoint degrees that take five or more years).

Analysis of the Policy
In general, it has become harder and less affordable for individuals to be students in New Zealand. While enrolments at most tertiary institutions have been rising, and competition for limited entry programmes such as law and medicine is increasing, more and more individuals are being priced out of tertiary education, and forced to seek employment that may not be in their long-term interests. The Ministry of Social Development reports that individuals with a Bachelor's degree have hourly earnings 64% higher than those with no qualifications, and 29% higher for those with other tertiary qualifications.

For current and future students, this policy would be a godsend in making their tertiary education much more financially viable and feasible. It becomes far easier for students to take on the risk of education, investing multiple years of their life for a potential future income pay-off. That risk is not a certain risk; we all know of stories of students who have dropped out of university or students who have studied one thing and ended up in a completely different industry. Students are also forgoing several years of potential income that they could be earning if they were working. Lowering the barrier to entry for students opens up more opportunities for young people to upskill and not only improve their own long-term benefit, but also their ability to contribute to the economy and society as a whole. University may not be for everyone, but if we remember the many other types of tertiary education available then chances are there is a programme somewhere in New Zealand that suits any given school leaver. Tertiary education is in general a good thing - that's something that most people accept.

However, the biggest stumbling block for the policy is the cost of such a policy to the government. The Internet Party is yet to provide an estimate. To figure the cost out, we should first look at the existing budget for tertiary education. Vote Tertiary includes funding research, some rebuild of the University of Canterbury, and a few other projects, but the main cost is the "Student Achievement Component" which is budgeted for $2.06 billion in 2014/15. This is the funding given to tertiary institutions to provide teaching and learning services for enrolled students. In 2014, this is expected to be roughly 230,000 EFTS. But this is only part of the cost - sitting in Vote Social Development is the real kicker - $531 million for student allowances and $1.68 billion for student loans budgeted in 2014/2015. This cost totals to $4.27 billion - about $200 million less than in 2010.

This report from the Institute of Governance and Policy Studies at the Victoria University of Wellington paints an interesting picture about the existing perceptions of the public-private split of tertiary education costs. It reports that student loans are not so much loans as they are subsidies for students - in fact, the Ministry of Education says that 44.7% of the value of student loans was written down in 2011; about 20% is due to the interest-free nature of the loans (cost of lending), while graduates who leave the country also account (low collectability) for a sizable chunk of the write-down. In 2013, the total value of student loans held was $13.56 billion. The Ministry of Education estimates that government funding accounts for 70% of the cost of tertiary education, with the other 30% borne by students and their families. If we look at the University of Auckland as an example, the split between "government grants" and "tuition fees" in their income is roughly 62% and 37%, although this includes international students.

So from this information, we should be able to figure out what the cost of the policy is, which is not the total public and private cost of tertiary education in New Zealand, but the difference between that total and the status quo. Firstly, if tertiary education is entirely paid for by the government, then there is no need for a student loan scheme; while the government bears the full cost of "tuition fees" (presumably for domestic students), there are some potential cost savings from reduced administrative costs (no need for StudyLink!) (the management of student loans costs $15 million a year), as well as less interest being paid by the government to maintain that level of debt. The number that we are thus really interested in is the total price paid to tertiary institutions for their education services; we should remove student allowances from the equation too, as they are provided to (means-tested) students but not part of the costs for tertiary institutions and would thus be the same even with the policy (if not lower). Additionally, when we look at the "costs" of the student loan programme, we should only look at the write-down, i.e. the part of the money that the government doesn't get back in repayments, around $756 million. If we work from this point, we can determine that without the policy, the total cost of government funding and student loans is around $2.82 billion a year. With the policy, assuming that existing government funding account for (conservatively) roughly 65% of the tuition-related income of tertiary institutions, the total cost of government funding all tertiary education is $3.16 billion a year.

Current government funding + government costs of student loans = $2.82 billion
If the government fully funded tertiary education (covering the tuition fees, abolishing the student loan scheme) = $3.16 billion

So it costs roughly $340 million a year more for the government to pay entirely for tertiary education (assuming that the government continues to fund the same number of positions). This is not an insignificant amount, but it's also not extortionate, and probably a lot less than people expect. It works out to be about 0.37% of total government expenditure (which is $92.7 billion). I should put lots of disclaimers here that the number is very roughly calculated and with incomplete information, but it should be in the right ballpark (or at least playing the right sport). There are definitely other gains (such as cutting the $15 million on management of student loans) and losses that are not accounted for, and I would expect a proper analysis to be done before this policy is funded. But then the question becomes where we get the $340 million from - whether we pay for it with some new tax (or other revenue source), or we cut funding from elsewhere. That perhaps is beyond the scope of this analysis. Farvid says that it is "doable if we reshuffle govt spending", while the Auckland Central candidate Miriam Pierard suggested to me that it might come from a fairer tax regime, but it's always easy for an outside political party to propose an expensive policy without having to justify where the money comes from.

In terms of getting the costs of the existing student loan scheme down, the main issue with the status quo is that the write-down of student loans is simply costing too much - introducing a 2% interest rate to student loans (as suggested by Treasury) or more aggressively chasing down expat graduates would alleviate a lot of that burden, and thus reduce the annual cost of the student loan scheme. In fact, it turns out that the write-down on student loans in 2005 was only 11%, and has risen due to the increase in individuals making low or no repayments. In response to this the National government increased the repayment rate from 10% to 12% and limited eligibility for part-time and older students in 2011, but it doesn't seem to be enough.

Verdict: Is $340 million dollars a year worth making the lives of students significantly easier and providing tangible benefits to the economy in the long term? I don't know - I think there are probably very important things we could spend the $340 million on. But if a government can find the funding, then this is a reasonably worthwhile policy. It would produce wins for students, wins for tertiary institutions, wins for the economy, wins for the government, and wins for society as a whole. It just depends on whether we are willing to invest the money.


  1. A couple of things that you haven't considered though:
    (1) the cost would end up increasing (possibly quite substantially) as more people take advantage of the easier entry into tertiary education (not to mention other harder-to-predict outcomes such as a rise in the average level of education causing a rise in the entry expectations for jobs, and then a further rise in education level, as people struggle to stay relevant to the job market).

    (2) If students don't have to pay, then will they work as hard? Generally human behaviour is to work harder for something which has cost us than for something we got for free.

    It is interesting that it's "only" $340 million though - I would have guessed that as higher.

  2. Hi Bevan,
    I definitely agree with you. In response to 1) though, cheaper uni doesn't necessarily mean easier to get in; the analysis assumes the same number of students are funded as the status quo. The government can still make it just as hard to actually get into tertiary by limiting those spaces (thus limiting their costs), but make life easier for those who have gotten in.

    In response to 2), that's a fair point and then it becomes a question of whether we are providing the right sets of incentives for students. Perhaps students are feeling too entitled at the moment, perhaps students need more of a kick to learn properly so that they can contribute to the workforce. This is a more subjective argument that I guess I preferred to avoid.

  3. Great article Andrew. On the more subjective arguments, it's important to consider if our society should think of tertiary education as a right or a privilege. Personally I think it's dangerous to go down the track of seeing it as a privilege, because education isn't (and shouldn't be treated as) a commercial good or service. But hey, we have political leaders saying that schools should be run more like supermarkets so...

    On another point it might be worth looking at whether it's fair that students very often have to go into debt to survive, and that we're the only sector of society that has to do that. In the current economic climate I don't think the argument that graduates earn more so can eventually pay it off necessarily holds that much sway.