Are university students paying too much for their education in Australia?
Stokes, Anthony ; Wright, Sarah
The Review of Australian Higher Education, released in December
2008, saw a need to 'provide sufficient funds to support the
numbers [of students] we agree should be participating; [and to] ensure
that the benefits of higher education are genuinely available to
all' (Bradley Review 2008: xiii). The Minister for Education, Julia
Gillard, subsequently announced that the Australian government wanted to
boost participation in higher education by supporting people from
disadvantaged backgrounds. The government aims to lift low socioeconomic
status (SES) enrolments by 55,000 in 2020 (2009-10 Budget).
This article examines the current Higher Education Contribution
Scheme (HECS) in Australia and its impact on higher education. It
suggests that Australia's current higher education funding model
does not sufficiently encourage students to pursue higher education. In
many cases students' payments are greater than the real costs of
their courses or benefits they are likely to receive. We propose a
different structure in the levels of contributions to higher education
funding that may be more successful at achieving the goals identified by
the Bradley Review and Gillard, thereby creating a more equitable system
that would provide more opportunities to access higher education in
Australia.
Background
The Higher Education Contribution Scheme (HECS) was conceived by
the Wran Committee, set up by the Federal government in 1988. The
government of the time--an ALP government led by Bob Hawke--followed its
recommendation of abolishing the policy of 'free education'
and, in 1989, implementing the Higher Education Funding Act 1988. The
objects outlined in Sect 2A of this Act were to:
a. support a higher education system that:
* is characterised by quality, diversity and equity of access;
* contributes to the development of Australia's cultural and
intellectual life;
* is appropriate to meet Australia's social and economic needs
for a more highly educated and skilled population;
b. strengthen Australia's knowledge base and enhance the
contribution of its research capabilities to national economic
development, international competitiveness and attaining social goals.
The movement away from 'free education' and introduction
of HECS saw a reduction in the proportion of higher education funding
provided by the Commonwealth Government and shift to a greater
contribution by students. Table 1 shows that, in 1981, during the period
of 'free' higher education, the contribution made by the
Commonwealth Government towards the funding of universities was 82.9
percent of total university income. After HECS was introduced in 1989
the Commonwealth Government's contribution fell to 66.7 percent of
total university income. Meanwhile, the contributions made by students
as a proportion of total university income rose from 2.3 percent in 1981
to 16.3 percent in 1989.
In 1989 the government introduced an income contingency scheme as
part of the higher education funding model. The income contingency
scheme provided students with the capacity to defer their payment of
university fees until they were earning income, usually on completion of
their degree. The students were required to pay their fees through the
taxation system when their incomes reached a certain threshold. The
introduction of the income contingency scheme in the form of HECS
provided students with the options of either paying 'full
up-front', or deferring all or part of their HECS with the option
of 'partial up-front' payment.
Students deferring part or all of their HECS liability were
required to 'take out a loan' with the Commonwealth
Government. Students who paid 'full up-front' received a 25
percent discount, as did students with a 'partial up-front
payment' of $500 or more. Only when the income of HECS debtors
reached the compulsory repayment threshold were they required to repay
the loan. The initial threshold was $27,000 and the graduates were
required to pay two percent of their taxable income each year until the
debt was repaid. Graduates earning higher levels of income were charged
up to four percent of their annual income. While this may have seemed
modest at first, the level of HECS fees and the repayment levels have
risen substantially since then. The minimum repayment charge had risen
to four percent of annual income by 2010, with some graduates required
to pay up to eight percent per annum.
The movement towards a user pays higher education system was
accelerated by the Coalition government's 1996-97 budgetary
changes. The establishment of a three tier HECS system consequently
increased the average cost of higher education for students by
approximately 40 percent. Despite this shifting of the cost of higher
education to students, the government's Higher Education Review
2002 found a 'broad consensus that the current arrangements for
funding universities were not sustainable' (DEST 2004: 3). In
response to the Higher Education Review 2002, the Australian government
announced in Our Universities: Backing Australia's Future Package
2003-04 that it would continue the partial deregulation of
Australia's higher education system. The first part of this package
was establishing Student Learning Entitlements. This limited student
access to Commonwealth supported places to only seven years of full-time
study. After the seven years of full-time study was completed, the
student had to pay full fees for any further tertiary study. This
returned higher education to a situation where a person's available
income or funds would influence their opportunity to gain tertiary
qualifications.
The second part of the package was the introduction of
institutional price autonomy. This allowed universities to set their own
fees up to a ceiling that would be 25 percent higher than the standard
HECS fees in 2005. This was designed to give universities greater
freedom to set their fees and to increase competition in the marketplace
for educational services. However, the generally under-funded
universities responded in the next two years by universally charging an
extra 25 percent across the range of courses. The exceptions were
Nursing and Education which the government had identified as national
priorities and for which it had set lower fee limits. The drive for
competition therefore produced a general increase in HECS that added to
the debt burden to be faced by students. This created a disincentive to
pursue higher education, especially by those from lower socio-economics
backgrounds, and acted to reduce the financial burden on the government
for providing tertiary education. While this was financially beneficial
for the government, it did not encourage access and equity to higher
education.
Impact of HECS on higher education in Australia
Although the income contingent system was the preferred policy at
the time, the way that it has been implemented and changed over the
years has reduced its effectiveness in meeting the goals of quality,
diversity and equity of access. The Bradley Review (2008:9) stated that
'the drop in Australia's performance on attainment of
undergraduate or higher qualifications compared with other OECD
countries is cause for concern. Australia has slipped from 7th in 1996
to 9th in 2008 in terms of attainment among 25 to 34 year olds'.
While HECS has raised the contribution from students towards the
cost of higher education, it has not ensured greater access and equity.
Between 2001 and 2005 the number of commencing domestic students from
low socio-economic backgrounds actually declined from 41,457 to 39,379,
despite an increase in the overall number of commencing students (DEEWR
2009). The proportion of commencing domestic students from low
socio-economic backgrounds fell from 16.2 percent of the student
population in 2001 to 15.3 percent in 2005. The decline was especially
noticeable in 2005 following the 25 percent increase in HECS fees. The
2005-06 DEST Annual Report further emphasised the financial pressures
facing students, with the number of students receiving youth allowance
falling from 458,053 in 2003-04 to 435,661 in 2005-06.
A study by Wright (2005), measuring the effects of HECS increases
in the period 1996 to 2001, showed that higher HECS fees led to a
decline in the proportion of students from low socio-economic
backgrounds in the Sydney region who attended university. Wright showed
that, despite the overall increase in the number of students attending
university, the increased participation of students from higher
socio-economic areas (with annual incomes in the top 25 percent of
households) between 1996 and 2001 was nearly three times the increase in
the participation of students from lower socio-economic areas (with
annual incomes in the bottom 25 percent of households).
These results are supported by James (2002: Ch.5) who found
appreciable social stratification in the values and attitudes of
students towards higher education, concluding that the socio-economic
background of students was a decisive factor influencing student
participation in higher education. The main findings of James's
(2002: 33-34) study were that 39 percent of students from low
socio-economic backgrounds believed that the costs of university may
stop them from attending university, compared to 23 percent of students
from high socio-economic backgrounds. In addition, 41 percent of
students from low socio-economic backgrounds stated that their family
could not support them at university, with 36 percent stating they would
have to support themselves.
The situation for Indigenous students also continues to be deeply
problematic, there being no improvement in terms of access to higher
education in the period from 2001 to 2005. Indeed, the number of
commencing domestic Indigenous students declined from 4128 to 3748. The
overall percentage of students who are Indigenous fell from 1.61 percent
in 2001 to 1.46 percent in 2005.
Another weakness of the HECS system relates to the level of
contribution that students make. It is argued (e.g. by Chapman 2001)
that the level of HECS students pay is according to the cost of the
course and the future income they will receive. Table 2 shows that this
claim is flawed, as there are only a small number of courses where the
student contributions accurately reflect both the cost of the course and
the future income the graduate receives.
The Bradley Review (2008) found that the range of maximum student
contributions has no strong policy or empirical basis. As Table 2 shows,
students becoming dentists or lawyers pay band three level of HECS. The
dental student receives $15,332 in government funding annually to study
the course and, as a graduate, earns one of the highest average salaries
at $97,365 per year. Students studying law pay the same level of HECS as
students becoming dentists, yet the cost to the government of funding
law courses is one tenth of the cost of providing dentistry courses (ie.
they receive one tenth of the level of government funding), while the
average income lawyers receive is $27,768 per year less than the average
income dentists receive. The Bradley Review (2008) argues that the
effect of this is a distortion of the graduate labour market, with
universities providing places in areas of relatively higher funding and
students selecting courses with relatively lower costs.
Table 2 shows that some university students, such as law students,
were paying fees equivalent to 84 percent of the total course costs,
while students becoming doctors and dentists were paying fees equivalent
to 35 percent of the total course costs. The Bradley Review (2008:162)
recognised this problem and recommended 'that the Australian
Government commission work on options for achieving a more rational and
consistent sharing of costs between students and across discipline
clusters in the context of triennial reviews of base funding for
learning and teaching'.
The evidence suggests that the current system of HECS is not
achieving the goals of equity and access to higher education either.
Those with least capacity to pay for their higher education are being
most disadvantaged. The increased fees and higher debt burdens act as
disincentives to pursue higher education. Students from low
socio-economic backgrounds and the Indigenous population are the ones
who have been most affected by these changes. Students who do attempt to
pursue higher education are discouraged from choosing some courses
because of the high fee levels associated with those courses. However,
the fee levels do not reflect the true costs of the courses. If they
did, there would be the possibility of greater access to many courses,
especially in the disciplines of law, accounting, business and
economics. Greater access to higher education would increase income and
employment levels for the disadvantaged groups and overall increase
living standards in the community.
Methodology for measuring the value of higher education
There are undoubted benefits to both individuals and society from
undertaking higher education. Estimating the value of such benefits can
be a guide to the relative contribution that individuals and the
government should make in the provision of higher education. This study
attempts this estimation, using an orthodox measure of the Private Rate
of Return (PRR) and Social Rate of Return (SRR) to higher education.
This allows a comparison of the return on higher education between
different categories of university graduates in Australia and overseas.
The base rates of return in this study are calculated following the
OECD approach shown in Table 3. The Private Rate of Return (also known
as the Private Internal Rate of Return) is the financial rate of return
on an individual's investment in higher education, expressed as an
interest rate. The Private Rate of Return to a university degree is the
annual percentage return the graduate receives over their working
career. An individual could invest their money in government bonds and
potentially earn around six percent: so, if the PRR is above this level,
then it could be considered that the graduate has made a worthwhile
decision, from a purely financial point of view, to undertake higher
education.
The Social Rate of Return (also known as the Public Internal Rate
of Return) measures the return to society as a whole from both private
and public investment in higher education, also expressed as an interest
rate. The monetary return is the extra income earned by a university
graduate compared to someone who has no qualifications beyond school
year 12, but added to this are the costs to society that include both
the opportunity cost to the individual and the net cost to the
government. The net cost to the government is calculated by comparing
the costs to the government of financing educational provision and the
tax revenue foregone while students are studying with the extra tax
revenues generated because graduates usually have higher taxable
incomes.
This study compares the average income of a year 12 graduate with
that of a university graduate, drawing from data in the ABS Household
Expenditure Survey (HES) and Survey of Income and Housing (SIH) 2003-04
Confidentialised Unit Record Files (CURF) at person level. The study
uses person level, rather than income unit level, data as it considers
the employment participation of university graduates and year 12 leavers
with no non-school qualifications. The ABS Household Expenditure Survey
(HES) and Survey of Income and Housing (SIH) 2003-04 CURF contains a
sample of dwellings surveyed throughout Australia from July 2003 to June
2004. The sample includes male and female wage and salary earners aged
18-60 and working part time and full time.
The findings show considerable variation in the Private Rates of
Return to a university degree for different groups of university
graduates. These results are shown in Table 4. In a number of cases the
benefits to society (SRR) outweigh the benefit received by the
individual (PRR). This is especially so in the disciplines with the
highest HECS fees (such as economics) and in professions with higher
incomes (such as economists/financiers). It can also be seen that the
increase in HECS fees by 25 percent in 2005 reduced both the PRR and SRR
in most occupations, except for nursing where the increase in fees did
not occur.
Determining the relative contributions in higher educational
funding
It is important to consider the relative benefits that occur as a
result of undertaking higher education for the individual and society as
a whole. The Private Rate of Return is the individual's reward for
pursuing their higher education. This is the individual's financial
gains from higher education and does not consider the non-financial
benefits of their education. For example, university students may enjoy
both classes and the social activities available on the campus, but this
is not reflected in the PRR.
The Social Rate of Return shows the net benefits that society as a
whole gains from higher education. Like the PRR, the SRR reflects only
the financial outcomes, not the more indirect benefits from cultural
enrichment or value-transformation that higher education is commonly
said to foster. The key variables that are taken into account are the
extra tax revenues generated by university graduates and the costs to
the public purse of providing for their education.
It is generally considered that the individual should bear some of
the cost for their education but the benefits society receives also need
to be considered in determining the appropriate balance of higher
education funding between students and the government. According to
Topel (2005), if the SRR is greater than the PRR, then there is an
under-investment of government funding. Another way of looking at this
is that the contributions made by the students may be too high relative
to the contribution made by the government.
Table 5 compares the PRR and SRR for degrees in Australia, on
average, to other comparable countries for 2004. It shows that the gap
between the PRR and SRR for an average degree in Australia for 2004 is
0.4 percentage points for males and 1.5 percentage points for females.
This pattern is similar in other countries in that the PRR exceeds the
SRR in all the cases shown. On the basis of this evidence, it is
reasonable to conclude that individuals personally benefit more from
higher education than society as a whole, so that personal contributions
to meeting the costs are appropriate.
However, it is also important to note that the gap between the PRR
and SRR for an average degree in Australia is smaller than the gap found
in other countries. For example, the gap between the PRR and SRR for
males and females for the OECD is 1.1 percent and 2.3 percent
respectively. In some countries the gaps are considerably higher, with
the Czech Republic being the highest at 11.4 percent and 10.5 percent
for males and females respectively. This suggests that higher education
is being underfunded in Australia compared to many other countries. OECD
(2008) data shows that this is mainly a result of the much higher direct
costs (tuition fees) of tertiary education in Australia compared to
other countries.
Other net benefits of higher education to society
This study shows that the SRR to higher education in Australia is
both positive and sizeable. However, as previously noted, these social
returns only represent the financial returns to society from higher
education. Account also needs to be taken of the considerable
non-monetary benefits that accrue to society from having a more educated
population.
De Villiers and Nieuwoudt (2005) suggest that the non-pecuniary
benefits to individuals with university degrees include better
communication, more law abiding behaviour and a greater contribution to
the intellectual and cultural well-being of the community. ABS data
shows that there are other non-pecuniary benefits that accrue to
Australian society from graduates with university degrees. These
include:
* Lower levels of unemployment and greater job security: Through
the two decades to 2003, the average unemployment rates for people with
higher education qualifications were lower than those of people without
such qualifications (3 percent and 6 percent respectively in 2003).
During the economic downturn in the early 1990s people with higher
education qualifications had greater job security and were less affected
than those without post-school qualifications. In addition those with
post-school qualifications had shorter periods of unemployment. The
median duration of unemployment for people with higher education
qualifications was 13 weeks compared to 18 weeks for those without such
qualifications in 2003. Those with higher education qualifications were
also more likely to be working full time (78 percent), compared to those
without post-school qualifications (73 percent) (ABS 2004).
Graduates also have longer periods in employment. Australian Census
data for 2001 shows that females with no post-school qualifications
worked, on average, for a total of 27 years, while males with no
post-school qualifications worked, on average, a total of 35 years.
Females with a university degree were working, on average, for 39 years
and males with a university degree, on average, for 43 years (ABS 2001).
* Lower levels of poverty and a reduced dependence on welfare and
social programs: The higher income levels of those with higher
educational qualifications and the improved employment opportunities
result in lower levels of poverty among this group than among those
without higher education qualifications. Welfare dependency is
correspondingly less likely.
* Lower levels of obesity: In 2004-05, the overall adult obesity
rate in Australia was calculated by the ABS at 18 percent. Adults with a
degree, diploma or higher qualification were less likely to be obese
than those with other or no post school qualifications. Around 20
percent of those without a non-school qualification and 19 percent with
trade certificates were classified as obese, compared to only 13 percent
of those with a degree, diploma or higher qualification (ABS 2009).
* Greater health literacy: Health literacy is defined as the
fundamental skill to make informed decisions and assist in the provision
of basic health. Improved health literacy not only reduces costs in the
health system but also illness, chronic diseases and the rates of
accidents and death. ABS data shows that, in 2006, people who had higher
levels of educational attainment had higher rates of health literacy.
Around 75 percent of people with a bachelors degree or above had health
literacy rated as adequate or better, compared to only 50 percent who
finished their formal education at year 12 and 16 percent with year 10
or below (ABS 2009).
Furthermore, studies measuring the effects of increased levels of
education on economic growth suggest there are additional positive
benefits of higher education that are generally ignored in measuring the
SRR to higher education. According to the study by Mingat and Tan
(1996), increasing investment in higher education in high income
countries by an additional one percentage point of GDP delivers a Social
Rate of Return of around 20 percent. This return is twice as great as
conventional estimates, implying that conventional measurements of SRR
measure only the lower bound of the returns to society. The true value
of the Social Rate of Return is important in arguing the case for the
level of higher education funding provided by the government and the
relative contribution that should be expected from the student. In
recent decades neoclassical economic theorists influencing many
government decision makers are requiring financial justification for
decisions on spending. The studies reviewed in this article provide
evidence to justify making changes in the balance of higher education
funding in Australia.
While most economists agree that there are public benefits from
higher education, they disagree on the size of these benefits.
Researchers have attempted to measure some non-market effects of
education, but only McMahon (2004) has attempted comprehensive
measurement of the total value of benefits from education. The total
Social Rates of Return to education in McMahon's study (shown in
Table 6) are based on cross-country data from 78 countries over 40
years.
Table 6 shows these total Social Rates of Return to higher
education, grouped according to different regions of the world. The
total Social Rate of Return is calculated as the sum of the monetary
Social Rate of Return, non-market private returns and non-market
education externalities. It is the inclusion of the non-market returns,
omitted from the Australian measures described earlier in this article,
that is distinctive. The non-market private returns are the benefits
that both the individual and their family receive from higher education;
including better individual and family health, longevity, cognitive
development of children and higher consumption levels. The non-market
education externalities refer to effects such as lower population
growth, improved human rights, lower crimes rates and reductions in
poverty.
The results show that monetary or conventional Social Rates of
Return underestimate the benefits society receives from higher
education. For example, the monetary Social Rate of Return is less than
half the total Social Rate of Return for OECD nations. The gap is even
wider in less developed regions, suggesting an even greater benefit of
education to society in these regions.
The research results of Mingat and Tan (1996) and McMahon (2004)
indicate that conventional monetary measurements of Social Rates of
Return show only about half the real level of return that is received by
society. This suggests that, in measuring the relative benefits of
higher education to the individual and society, this higher rate should
be considered when making decisions about higher education funding. In
light of the measurements of PRR and SRR received here, it can be
concluded that the return to society is much higher than the return to
the individual. The relative contributions made by the student and the
government should be altered to reflect this result.
Australian educational funding policies have been moving in the
other direction. OECD (2006) data shows that Australia was the only
country to experience a decrease in public expenditure on higher
education as a proportion of GDP between the years 1995 and 2003. This
shortfall has been met to some degree by the government increasing the
level of contributions made by students. The evidence reviewed in this
article provides a case for that trend to be reversed and a more
equitable higher education contribution formula devised.
A new formula for higher education funding in Australia
Not only is society receiving a relatively high rate of return on
individuals investing in a university degree, but the government gains
net benefit in some areas of higher education, such as commerce, where
the additional tax receipts exceed the costs of educational provision.
These findings suggest that the contribution made by students should be
set at a lower percentage of course costs.
If the full benefits of higher education are acknowledged, as shown
in McMahon's estimates in Table 6, then a general case can be made
for free tuition because the Social Rates of Return would exceed all
private benefits of higher education even with a zero fee structure. To
demonstrate this, we have included a calculation of the PRR in an
environment of no HECS fees. Table 7 shows the PRR for both males and
females for 2005 with HECS and no HECS charges (i.e. free tuition). The
PRR with no HECS fees is still significantly lower than the benefits to
society as measured by McMahon.
The results in Table 7 show that the PRR to higher education is
highest when there are no HECS fees--at 11.45 percent for males and
16.81 percent for females in 2005. Supplementary calculations also show
that, as the level of student contributions increase, the PRR to a
university degree falls. If there were no HECS fees, the PRR to a
university degree would increase 32 percent for females and 26 percent
for males. This finding--that the PRR to a university degree increases
when there are no HECS fees--is supported by both the studies by Miller
(1982) and Borland (2002). Miller (1982), who measured the PRR to a
university degree under a system of 'free education',
calculated the PRR to be significantly higher at 21.10 for males and
21.20 for females.
Meanwhile, Borland (2002) calculated the PRR to a university degree
for males in 2001 to be 18.50 percent if there were no HECS fees.
Combining this current study with those of Miller and Borland suggests
that there has been a decline in the personal rate of return to a
university degree in the last two decades. This has reduced the
incentive for students to pursue higher education. So it is important to
consider policy recommendations that might attempt to reverse this
trend.
Reducing student contributions and making course costs reflect
actual costs
This article recommends a reduction in the level of student
contributions. This reduction should reflect the relative cost of the
course and benefits the graduates receive relative to the gains for
society as a whole. If the findings of Mingat and Tan (1996) and McMahon
(2004) are supported and applied to the measurements in this study of
PRR and SRR, then there is a case for total removal of tuition fees. As
a minimum, student contributions should be reduced significantly,
perhaps to a level of 10 percent of the students' course costs. A
10 percent contribution rate for students would return the level of
their educational costs to the average level that existed during the
1980s, as shown in Table 1. Having a set percentage of course costs
would encourage decision making by students that would more accurately
reflect the actual cost of their courses.
A policy of reducing student fees to 10 percent of the total course
cost would be more likely to encourage students to enter university and
a greater proportion of students from low socio-economic and Indigenous
backgrounds to pursue higher education. This would reverse the recent
trend whereby the policy of increasing HECS fees has led to a decline in
the percentage of students from low socio-economic backgrounds and
Indigenous backgrounds attending university. These problems arising from
increased student fees have also been recognised by James (2002) and
Wright (2005). James (2002) showed that the cost of education was a
major factor in students' decisions to attend university,
especially those from low socio-economic backgrounds. The introduction
of a standard fee of 10 percent of the costs to courses would make some
of the higher band courses more affordable to all students, thereby
increasing opportunities for a wider range of students to pursue areas
such as law, medicine, accounting, business and economics.
Conclusion
This article has shown that there are serious political economic
concerns relating to Australia's higher education system. One is
the participation of students from low socio-economic and Indigenous
backgrounds. According to DEEWR (2008), the participation rate of
students from low socio-economic backgrounds has remained around 15
percent throughout the past decade, despite representing 25 percent of
Australia's population. This should be a concern for the Australian
government which is targeting 55,000 places for students otherwise
facing disadvantage in 2020. This study shows that increases in HECS
charges over time have led to a decline in the proportion of students
from low socio-economic areas and Indigenous backgrounds attending
university. An improvement in equity of access to higher education in
Australia requires a reduction in the cost of higher education to the
student.
Measures of the costs and benefits that both individuals (PRR) and
society (SRR) gain from higher education should be used in determining
the level of student contributions. The government is under-funding
university education overall in most fields of study. Mingat and Tan
(1996) and McMahon (2004) estimate that the additional benefits to
society of higher education are more than double the conventional
measurements when all the benefits accruing to society are included.
This further emphasises the public under-funding of universities in
Australia relative to the benefits that higher education brings to
society.
The relative contributions of students and the government need
rebalancing. Higher education students should make a financial
contribution to their studies based on a set proportion of the cost of
running the course. While there may be some justification for having no
fees at all for higher education, there is also a case for students
making some contribution, as they obviously gain a benefit from their
education. The suggestion made in this article is that this should be 10
percent of the course costs, reflecting the average level of
contribution that occurred in the 1980s. The government should make a
substantially greater contribution than it currently does because of the
overall benefit that is received by society as a result of the outcomes
of higher education. The student should make a correspondingly smaller
contribution. This policy shift would be likely to increase both equity
and access to higher education in Australia.
Appendix: Methodology for calculating the Rates of Return to higher
education
The specific rates of return in this study are calculated using the
following formula (Borland 2002: 2).
P[V.sub.C] = [n.summation over (t=1)][C.sup.t]/[(1+r).sup.t]
P[V.sub.B] = [m.summation over (t=n+1)][B.sub.t]/[(1+r).sup.t]
(A.1)
P[V.sub.B] - P[V.sub.C] = 0 and solve for r
Where: [C.sub.t] = opportunity costs for university degree in year
t; [B.sub.t] = benefit of university degree in year t; n = length of
education; m - n = years in workforce; and r = rate of return.
The base rates of return in this study are calculated following the
OECD approach in Table 3. The Private Rate of Return (also known as the
Private Internal Rate of Return) is the rate of return on the
individual's investment expressed as an interest rate. The Social
Rate of Return (also known as the Public Internal Rate of Return)
measures the return to society from both private and public investment
in higher education as an interest rate. The monetary return is the
gross wage premium, while the costs to society include both the
opportunity cost to the individual and the cost to the government.
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Anthony Stokes is senior lecturer in economics and Sarah Wright is
lecturer in economics at the Australian Catholic University in Sydney
Tony.Stokes@acu.edu.au; Sarah. Wright@acu.edu.au
Table 1: Sources of university income before
and after the introduction of HECS
Source of income 1981 (%) 1989 (%)
Student contributions 2.3 16.3
Commonwealth 82.9 66.7
government
State government 1.0 4.6
Other income sources 13.7 12.4
Source: Modified from Jackson (2001: 2-3).
Table 2: Student contribution, government contribution, salary
and unemployment rate for various university graduates for 2006
HECS Student Cth govt. Median
contribution contribution starting
(HECS) ($) salary
($) ($) (a)
Band three
Dentistry 8170 15,332 68,000
Law 8170 1499 42,000
Medicine 8170 15,332 48,000
Veterinary science 8170 15,332 38,000
Band two
Accounting 6979 2466 37,000
Agriculture 6979 16,299 38,700
Business studies
Human resources 6979 2466 40,000
Marketing 6979 2466 40,000
Computing 6979 7349 42,000
Economics 6979 2466 40,000
Engineering
Mining 6979 12,232 46,000
Electrical 6979 12,232 46,000
Civil 6979 12,232 46,000
Maths 6979 4908 42,500
Physical science 6979 12,232 40,000
Surveying 6979 12,232 45,000
Band one
Humanities
Journalist 4899 4156 37,000
Librarian 4899 4156 37,000
Urban and regional 4899 4156 37,000
planner
Social studies 4899 6598 42,000
Visual and 4899 9037 33,200
performing arts
National priorities
Education 3920 7251 43,400
Nursing (registered) 3920 9692 41,000
HECS Avg Unemp.
annual rate
cash (c)
earnings
($) (b)
Band three
Dentistry 97,365 0.7
Law 69,597 4.0
Medicine 111,634 1.0
Veterinary science 57,762 0.6
Band two
Accounting 61,490 5.9
Agriculture 64,854 7.9
Business studies
Human resources 61,672 5.9
Marketing 59,904 5.9
Computing 74,308 8.8
Economics 65,057 3.8
Engineering
Mining 104,794 0.0
Electrical 79,123 8.0
Civil 76,024 4.6
Maths 66,284 6.2
Physical science 79,274 13.6
Surveying 62,816 1.7
Band one
Humanities
Journalist 64,532 8.6
Librarian 59,675 8.6
Urban and regional 55,879 8.6
planner
Social studies 54,865 5.3
Visual and 44,195 12.0
performing arts
National priorities
Education 62,088 2.6-2.9
Nursing (registered) 64,740 0.7
Notes:
(a) The median starting salary for full-time graduates aged less
than 25 (Graduate Careers, 2006).
(b) Average annual cash earnings for full-time non managerial
employees for persons (ABS, 2006 cat. No. 6306.0)
(c) The percentage of graduates seeking full-time employment who
are not working aged less than 25 (Graduate Careers, 2006).
Sources: Commonwealth Government (2003), ABS (2006), Graduate
Careers (2006) and Macken (2006). The income data in this table
are derived from a combination of sources because no single source
covers all occupations.
Table 3: The OECD method of calculating the private and social
costs and benefits of education
Private Forgone earnings + direct private expenditures +
costs = increased future taxes
Public Lost tax receipts during the training + public
costs = expenditures
Social Private costs + public costs
costs =
Private Increases in earnings + higher probability of
benefits = being employed
Public Additional tax receipts
benefits =
Social Private benefits + public benefits
benefits =
Source: Modified from OECD (2008)
Table 4: The estimated Private Rate of Return
and Social Rate of Return for males in different
occupations, 2004 and 2005
PRR SRR
2004
Economist/financier 14.50 15.69
Nurse 8.58 7.68
Secondary teacher- 6.79 7.13
humanities
Secondary teacher- 6.49 7.13
economics
Secondary teacher- 6.49 5.80
science
2005
Economist/financier 14.20 15.13
Nurse 8.62 7.58
Secondary teacher- 6.75 6.95
humanities
Secondary teacher- 6.37 6.89
economics
Secondary teacher- 6.37 5.61
science
Table 5: Private and Social Rates of Return to tertiary
education (2004)
Country Private Rate Social Rate
of Return of Return
Male Female Male Female
Australia (a) 9.4 13.4 9.0 11.9
Canada 9.4 9.1 7.9 7.3
Czech 29.1 23.8 17.7 13.3
Republic
Poland 22.8 18.6 17 12.8
Portugal 23.9 21.5 16.5 14.5
United 14.3 14.5 12.6 12.9
Kingdom
OECD 12.2 11.4 11.1 9.1
Average (b)
Source: OECD (2008, Tables A 10.2, A 10.5)
Notes:
(a) The data for Australia is calculated by this study
(b) From the countries reported in the OECD tables
Table 6: The total Social Rates of Return to higher education
Region Monetary Non- Non-market Total
of the Social Rate market education Social
world of Return private externalities Rate of
returns Return
Africa 11.3 9.0 4.0 24.3
Latin 12.3 9.8 4.0 26.1
America
Asia 11.0 8.8 3.4 23.2
OECD 8.5 6.8 2.5 17.8
Source: Modified from McMahon (2004)
Table 7: The Private Rate of Return to a
three year degree for males and females
for 2005 HECS and no HECS fees
Private Rate of Return (PRR)
HECS No HECS
Male 9.08 11.45
Female 12.69 16.81
