The first part of a three part series:
The two important tertiary education problems you won’t hear about this election year
Election year is hotting up. We all know what that means. A campaign dominated by tax, housing, the state of the economy. Employment and unemployment. Health. Poverty. Infrastructure … When education surfaces in the debate, it will start with schooling – the teaching workforce and educational standards. The post-secondary part of the education system usually gets lost in the melee.
When tertiary education does raise its head above the parapet, it will likely be because one of the parties decides to attack/defend Te Pūkenga. Or else, raises the matter of whether it’s better to create a new medical school or expand training in the existing medical schools. Even, promises to end fees free first year enrolment. Or questions higher education finances – though that issue has been conveniently shelved by the review of the HE funding system.
But what if … what if an election presented an opportunity for a clean sheet look at what is really going wrong in our tertiary education system? What if this was an opportunity to address a really difficult issue, a wicked problem, to change the aspects of the system that are failing – the opportunity to really make a substantial change for the better?
This is the first of three posts. This article and the next one in the series review an important aspect of our tertiary education landscape and explains why it’s failing, why it represents a difficult problem. The third article in the series asks how a new government might take some steps to make a real, step-change improvement in the system.
Student allowances
Let me start by declaring my hand. The student allowances scheme is failing. It doesn’t achieve what it sets out to do. It needs to be rethought, phased out and replaced by a system that actually works.
Let’s start by looking at the student allowances scheme, its role in the wider student financial support system, what it is designed to achieve and how it is supposed to work. Then we ask what the evidence tells us about why the scheme, as currently set up, is doomed not to achieve its goals.
This piece is not designed to improve my popularity. I know full well that there is no cow as sacred in the world of student politics as student allowances. But bear with me …
Allowances complements the loans scheme …
Subsidised student loans are the core of the New Zealand student financial support system. We all know how the loan scheme works. Launched in 1992, the NZ loan scheme, provides money to give students the liquidity to meet the costs of study. It provides a subsidised loan that covers a student’s tuition fees, contributes to course-related costs and provides a living allowance. Almost all students can borrow from the loan scheme; there is no credit-worthiness check. It is an income-contingent scheme, meaning repayments are not required until a borrower’s income reaches a threshold. Repayments are made through the tax system[1].
Loans provide finance that ensures that young people can access cash that enables them to enrol, but then requires those who benefit financially from their tertiary education to make a retrospective contribution to the cost. It’s a generous scheme, more so than comparable schemes in the UK, Australia and North America. The level of subsidy varies with financial market conditions but is usually around 40 cents for each dollar borrowed.
Student allowances complement the living costs loan entitlement of the loan scheme; people who meet certain targeting criteria – for instance, young people whose parents’ income is low – receive their living costs support as a non-repayable grant, rather than a loan. And the loan living costs entitlement is reduced, dollar for dollar, so that having an allowance doesn’t increase anyone’s cash entitlement – just the status of part of the loan. Allowances effectively cash up part of the loan.
The allowances scheme is intended to mitigate the risk that borrowing may deter participation by people with straightened financial circumstances. So the allowances scheme is designed to support access to and persistence in tertiary education for certain groups, especially young students from low-income families.
Access and persistence. Let’s look at what drives access and persistence. Let’s check out how the student financial support system plays out in the mind of a young person; let’s investigate if and to what extent, that package of supports acts as a mechanism to support enrolment in tertiary education.
The access decision: to enrol or not to enrol … that is the question
A recent OECD paper reviews and summarises the literature on education and careers decision-making[2]. The paper notes that choices learners make about higher education are decisions taken under uncertainty; when making the choice, neither the costs nor the benefits can be known with certainty by the decision-maker – the prospective student. Also, while the costs of study – foregone earnings, tuition fees and the cost of living will occur in the immediate future, the benefits of tertiary education (such as a better-paid, more satisfying career and a lower risk of unemployment) could occur only in the future. And they are unknown, unknowable. And they might not occur at all. So, the decision to enrol in higher education presents a trade-off between certain immediate costs and possible but uncertain future benefits.
When confronted with intertemporal decisions, decision-makers tend to base their decisions on underlying beliefs about future events, and to assume that their future preferences will be similar to their current preferences.
Families provide reference points and models that influence a young person’s decision-making on education, but this varies by culture and SES. Those who are first in their family to enrol in tertiary education are less likely to recognise the benefits. And schools also play an important role – again because they provide role models but also because educational attainment is an important factor in driving choice.
Those who lack social capital are less likely to access and understand information about the costs and benefits of higher education. Family finances may be part of the mix that constrains the choice, but the social factors, the role modelling and educational attainment are the drivers.
Let’s follow the money
Canadian economist Ross Finnie finds that what he calls “cultural factors” are more important than family income in determining whether a young person will undertake tertiary education. When he controls for the level of education of young people’s parents, the effect of family income on the decision to attend is much reduced. Adding factors such as the “cultural communication” the child experienced, and “… the level of family help with school-work, participation in cultural activities, the amount … and the diversity of reading activities…” further reduced the importance of family income in the decision to participate in tertiary education.
In the US, economists Flavio Cunha and James Heckman synthesise a vast amount of research (to conclude that “…family income … plays only a minor role in determining child college participation, although much public policy is predicated on precisely the opposite point of view.” Instead, their research suggests that targeted interventions that begin in early childhood and are sustained throughout childhood are the most effective in increasing the probability of tertiary education enrolment and in reducing the likelihood of an individual ending up on a benefit.
In New Zealand, researcher David Earle tested dozens of variables for their influence on participation decisions, concluding that the most important factors in influencing participation in tertiary education were school achievement, followed by parental education qualifications and ethnic group. Collectively, those factors explained nearly 60% of the variance in participation. Socio-economic status (SES) was also a statistically significant factor, but it had a very small impact; when SES was tested alone for its impact (ie, without taking account of any other factors at all) across an entire birth cohort, it accounted for around 11% of the variance. So 89% of the variance is not related to deprivation[3].
One key point is that Earle’s statistical models draw on data on education, health, demography, crime and justice, employment, earnings, location … Yet even so, these models account for only part of the variance in participation. Part of the differences in the rate of participation derive from unobserved variables – factors that are invisible to government administrative systems. Unmeasured factors, factors like attitudes, motivation, parenting approach, cultural practices … these other non-financial factors play a significant role.
The research – that cited above, but also the overwhelming consensus – is clear.
Access issues are not the result of a family’s wealth or income. Money, income, wealth are only minor barriers to access. Governments cannot simply spend or buy their way out of access problems. Yet the student allowances scheme is a purely financial intervention.
Not a promising start for the design of the allowances scheme.
… how do financial circumstances affect enrolment …
That’s not to say that finances play no part at all in access. So, let’s look at how financial considerations affect decision-making and line up the allowances scheme against that.
Back to Canada. Higher education expert Alex Usher synthesises a vast body of research from North America and Europe to develop a model of how people assess the financial commitment required for enrolment[4]. Usher identifies three types of financial constraints on participation in tertiary education:
- the overall price constraint – is the student’s assessment of the overall cost of study, the immediate financial costs, the foregone earnings, the challenges of student life, offset by expected family financial help, as well as by the anticipated benefits, both the social advantages and benefits of a student life, and also the possible (or probable) career/earnings benefits from gaining a qualification.
- the liquidity constraint – the availability of cash that enables a student to meet the immediate financial costs – to pay for the enrolment.
- debt aversion – some people who assess the overall price favourably but can access liquidity only by borrowing may be deterred if they have an aversion to borrowing – either through cultural or religious concerns or through fears.
This is a hierarchy of constraints. If someone considers that the overall cost is simply too high – that the benefits of enrolment are unlikely or too uncertain to forego several years of earnings – then the person won’t enrol. The second constraint becomes irrelevant. So does the third. If someone thinks that the price is acceptable, only then does the availability of the cash, the liquidity to meet the costs of study come into play.
And if the student sees the overall cost as acceptable but if liquidity is available only through borrowing, then some students will be deterred from enrolment (in particular, those who follow the precepts of the world’s most famed student advice expert, the great Dane Polonius, who – in Hamlet I-5 – is quoted as criticising student loans on the grounds that “.. loan oft loses both itself and friend and borrowing dulls the edge of husbandry”).
Come back to our situation in NZ. Our overall participation rate for young people is above the OECD average[5]. So, for many of our young people, the combination of parental modelling, school achievement and anticipated benefits, in combination with government policies that subsidise enrolment and make subsidised loans available, mean that the overall price is acceptable. Liquidity is available on a near-universal basis via the loan scheme. So, debt aversion would eliminate a prospective student at the second stage – whether the person qualifies for a student allowance or not. The fact that one of the three components of borrowing is made as a grant to allowances-eligible students counts for little. In fact, the sole benefit of qualifying for an allowance is to make a marginal, truly very marginal, difference to the perceived total cost of study.
Alex Usher shows that debt aversity is also associated with SES but that for grants to be effective in shifting the access dial, they need both to move total cost and also deal to debt aversity. Our student allowances design does neither in a meaningful way. Leading to the second point:
The design of NZ’s student allowances scheme is unlikely to remove financial constraints in ways that would make a difference to access to tertiary education. The allowances system isn’t generous enough to ease access to tertiary education.
That implies the NZ allowances scheme is not generous enough to strengthen access.
And as for targeting ….
How much does eligibility for allowances benefit a student?
Eligibility for allowances is supposedly designed to help those thought to be at risk of being deterred from study (though we have seen that the use of income criteria as one of the main eligibility criteria is misplaced if the goal is actually to address access problems).
For undergraduate students under the age of 24, the main criterion is the student’s parents’ incomes. Take a 23-year-old student and one parent who works[6] …. if the working parent receives $65k a year or less (meaning around 80% or less of the national median earnings for a full-time, full-year worker) then the student is entitled to a full (ie unabated) allowance. As the working parent’s income rises, the allowance abates, so that the allowance disappears entirely once the working parent’s income rises to $127k (1.6 times the median full-time, full-year earnings).
Of course, it’s much more complicated than that, depending on whether the student lives with his/her parents, whether there are others in the family who are studying … But you get the idea.
But, as we noted earlier, the total amount the government provides doesn’t vary according to the family’s income, since every dollar received as an allowance reduces the entitlement to borrow by a dollar. So the cash net benefit to the student of the government’s financial support for study is pretty much the same, irrespective of the student’s circumstances.
This makes the targeting as close to useless as makes no difference.
And what about deadweight?
One of the interesting facts – but an obvious result if you follow the line of reasoning above – is that much of the expenditure on allowances is likely to be deadweight, meaning it does not change behaviours in ways that advance the outcome (in this case, access to tertiary education) being sought.
- Between 2005 and 2009, when the targeting of allowances eligibility was eased each year[7], there was no noticeable effect on participation in tertiary education.
- From 2012, the indexation of parental income limits was abandoned – but there were no adverse effects on participation.
- Then, from 2013, postgraduate students became ineligible for student allowances and instead, had to rely on the loan scheme living costs entitlement. Independent statistical analysis by Motu Economic and Public Policy Research[8] established that there was zero effect on the propensity of students to undertake postgraduate study. Zero. Which is what the government expected when it made this change. After all, by definition, all those eligible for postgraduate study had already completed a qualification and therefore had demonstrated that none of the three price constraints discussed above applied to them.
So, easing the restrictions on eligibility had no measurable effect on access or participation and nor did tightening the eligibility. That isn’t to say that eliminating allowances entirely would have no affect on participation or access. But it sure implies that there is a fair amount of deadweight expenditure in the scheme.
In fact, much of the lobbying for easing the restrictions on student allowances is that it leads to (marginally) lower student debt on graduation. Which may be nice for those who benefit from it, but which has no bearing on access to tertiary education.
Leading to point three:
The student allowances scheme is far too generous – it provides a slightly higher government subsidy for some students, students who would have had the same net cash support from the government in the absence of allowances, students who achieved the same attainment in the absence of student allowances. It doesn’t move the dial at all on access to or persistence in tertiary education.
Allowances are not generous enough, but the scheme is, at the same time, too generous? That is not a contradiction. The scheme supports people who would participate anyway in the absence of allowances – meaning it is too generous. But the structure of the support it provides is almost guaranteed to be inadequate for those who really do need it.
In summary …
Equity of access to tertiary education should be an underpinning value of our tertiary education system. A large part of the rationale for the student allowances scheme is to facilitate access. This article shows that a purely financial intervention like the allowances scheme will not address the drivers of inequity of access, that the design of the system does not take account of the way that cost constraints work in the decision to enrol, that the allowances scheme provides insufficient help to those whose access is constrained.
It’s a wicked problem, but we can’t shy away from it. The next article in this series takes another wicked problem and looks at why it needs attention.
What would a far-sighted party contesting the 2023 election do about these two problems? Read part 3 in this series, coming up.
References
This comment drew on the following …
Carneiro P, Cunha F and Heckman J (2003) Interpreting the evidence of family influence on child development
Cunha F and Heckman J (2007) The technology of skill formation NBER Working Paper No 12840 National Bureau of Economic Research
Earle D (2018)Going on to, and achieving in, higher-level tertiary education Ministry of Education
Exeter D, Browne M, Chiang A, Crengle S, Zhao J and Lee A (2019) The 2018 New Zealand Index of Multiple Deprivation (IMD18) University of Auckland
Finnie R (2014) Does culture affect post-secondary education choices? Journal of Higher Education Management and Policy Volume 24/3, OECD Publishing
Finnie R (2012) Access to post-secondary education: the importance of culture Education Policy Research Initiative Working Paper 2012/02, University of Ottawa
Heckman J (2011) The economics of inequality: the value of early childhood education American Educator, Spring 2011
Hofer A-R, Zhivkovikj A and Smyth R (2020) The role of labour market information in guiding educational and occupational choicesOECD Education Working Papers No 229, OECD Publishing
Ministry of Education (2022a) Student Loan Scheme Annual Report 2021/22 Ministry of Education
Ministry of Education (2022b) Changes to the student support system Ministry of Education
OECD (2022) Education at a glance OECD indicators OECD Publishing
Sin I, Apatov E and Maré D (2018) How did removing student allowances for postgraduate study affect students’ choices Motu Economic and Public Policy Research
Usher A (2006) Grants for students: what they do, why they work. Educational Policy Institute
[1] See Ministry of Education (2022) Changes to the student support system. That note summarises the policy parameters and changes in those parameters between 1989 (when the allowances system was introduced) and 2022.
[2] This analysis draws from Hofer A-R, Zhivkovikj A and Smyth R (2020) The role of labour market information in guiding educational and occupational choicesOECD Education Working Papers No 229, OECD Publishing. This paper draws in particular on the literature of behavioural economics.
[3] The determination of a family’s SES takes account of income, but it is only one variable in the mix. The Index of Multiple Deprivation developed by University of Auckland researchers comprises 29 indicators. Among the 29 are indicators related to housing, crime, health and access to services, as well as income and employment. Refer to Exeter et al (2019).
[4] This analysis is drawn from a comprehensive review of the literature on this topic in Usher A (2006) Grants for students: what they do, why they work. Educational Policy Institute
[5] Refer to OECD (2022) Education at a glance OECD Publishing. Refer to Table B1.3.
[6] See this page on the StudyLink website
[7] In 2005, there was a substantial increase in the parental income limits for student allowances eligibility and those limits were indexed to inflation. In 2009, the age of exemption from parental income testing was reduced from 25 to 24 years and there were further increases in the parental income limits. These moves made more students eligible for allowances. However, it is difficult to separate the effects of allowances changes from other policy changes that took effect at the same time and also from participation and eligibility changes that occurred as a result of labour market changes. See Ministry of Education (2022) Changes to the student support system.
[8] Sin, Apatov and Maré (2018) How did removing student allowances from postgraduate study affect students’ choices? Motu Economic and Public Policy Research
Strategy, Policy, Analysis | Tertiary Education 