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Fee free-for-all a risky strategy

Swinburne University News    |     10  September 2014

Cap needed to take the idea of $100,000 degrees off the table!

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Andrew Dempster(Swinburne University) argues that a cap on fees needs to be considered to avoid universities competing solely on price, which would see all universities move to or near the price set by first movers, in order to maintain reputational value.  He suggest it’s no accident that the current fee for an Australian student to study a Bachelor of Business at Bond University is $95,568, which is almost identical to the maximum HELP borrowing limit of $96,000 for such a degree.

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Long-time watchers of Australian higher education know that only one thing really gets the public excited – how much students pay to go to university. It’s where public policy meets the hip pocket. So far as universities are concerned, it’s the only barbeque stopper we’ve got.

Kicking off this debate is not for the faint-hearted. It’s made Christopher Pyne the most politically courageous education minister Australia has seen since John Dawkins.

Twenty-five years ago, Dawkins took on the yoke of reform when he introduced the user-pays principle, creating a system of financing Australian higher education which has delivered stable, long-term growth.

Pyne’s ambition is an order of magnitude bigger than this. What the government is proposing is bold but it is also fraught with risk. It’s a bit like attempting a high dive at a degree of difficulty of 9.0 with smoke obscuring the water below.

The decision to move rapidly to a position of full fee deregulation, rather than setting new maximum limits on fees, is allowing opponents to fan public sentiment against the proposed changes. Nobody likes the idea of $100,000 degrees and it’s this contention which, if unanswered, may be enough to sink the reforms or to seriously delay them.

Underpinning the government’s narrative is a strong belief that the market will produce downward pressure on fees and that over time there will emerge clear differences between what Australian universities are prepared to charge their students for an undergraduate degree.

If the government has this right, there is little for people to worry about. If the government has this wrong, the country can buckle down for a period of rapid fee inflation.

A lot of faith is being placed in the ability of a new insurgent band of private colleges to offer higher education cheaper and better than incumbent universities – threatening to erode universities’ market share unless they respond by competing with the private colleges on price.

This is a big ask, both of the private colleges and universities themselves.

Private education and premium pricing

Most private providers in the Australian market today offer their products to domestic students at premium prices – not undercutting the HECS fees payable at universities but actually charging more.

Many set their fees with an eye to the maximum amount that students are permitted to borrow under the current HELP scheme – currently $96,000 for students not studying medicine, dentistry or veterinary science.

For example, the current fee for an Australian student to study a Bachelor of Business at Bond University is $95,568. That the fee is almost identical to the maximum borrowing limit is no accident.

The government has announced that from 2016, this maximum lifetime borrowing limit will be abolished. It’s causing some private providers to consider whether there is further upside to the fees that they can charge.

It is surprising that the government intends to abolish this ‘soft cap’ at a time that there needs to be some mechanism, more reliable than faith in the ability of an untested new market, to exert downward price pressure.

In the short term, unless we see a breakout new strategy from one or more large private providers to create a new mass market for no-frills degrees, private providers are unlikely to exert the sort of price restraint which will be necessary to bring university prices down.

Universities, brand and reputation

In universities across Australia, smart people right now are also thinking about how to set their fees in a deregulated environment.

A brace of financial advisers has rushed in to helpfully offer their services to model how universities might strike their fees. Most of this advice centres on strategies for maximising revenue.

Ultimately, the single biggest factor in any university’s pricing strategy will not be its cost of delivery but what its competitors are charging.

If fee deregulation passes the Senate, there will begin a national game of chicken in which each university holds off setting its fees as long as possible until it sees how nearby universities intend to price their degrees.

Eventually one university will crack – probably one of the Group of Eight – and then the rest of the sector will follow in close succession, with fees at or near the levels charged by the first movers.

Any university that sets their fees too low in the new deregulated market risks immediate and self-inflicted reputational damage.

Few universities will want to concede that their degrees are less worthy or less valuable than those of their competitors through adopting a strategy of price cutting.

Doing so will potentially not just devalue those universities in the eyes of prospective students but it also diminishes the value of the qualification of the tens of thousands of students who’ve already graduated.

It’s why a number of Vice-Chancellors are calling for the government to consider some form of fee cap, whether that’s through a maximum price or a maximum loan limit, and the government would be wise to consider this.

To secure university reform, we need both to take the idea of $100,000 degrees off the table and ensure that competition between universities is not based solely on price.

This opinion piece was published in The Australian on 10 September 2014.
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