I was listening to the new Prime Minister speaking at the signing of the coalition agreement.
“Beyond 2025, the first year of fees free for tertiary study will be …”
A sudden surge of hope.
“…replaced by offering the final year of study fees free …”
Hope dashed.
One well-meaning, but poor, ill-conceived, misguided policy to be replaced by one just as ill-conceived, perhaps even more misguided.
Let’s look at why. Let’s look at the relationship between tuition fees and participation and performance in tertiary education and, from there, check out how this new coalition policy might be expected to play out from 2025 …
The relationship between the fee level and demand
In 2017, the incoming government positioned its fees free policy as a means of addressing skill shortages. The logic might have seemed obvious – reducing the price of study, wouldn’t that lift demand? And wouldn’t that – logically – provide extra skills to the labour market? In the lead-up to the election, Labour told institutions that they could expect a 15% increase in domestic enrolments in response to the fees-free policy. That is – fifteen percent!
Wrong. By about 15 percentage points. See the graph below: it looks at the official forecasts of enrolments for 2018 and 2019 – forecasts made without reference to the fees free policy. And it compares those forecasts with actual enrolments in those years. Well … actual enrolments turned out to be within the 95% confidence interval for the forecast – that is, within the margin of error. In other words, the fees free policy had no statistically measurable effect on enrolments. None at all. The size of the enrolment increase – zero percent!
Figure 1 shows that the 2017 fees free policy was pure deadweight – a large expense for exactly zero effect[1].
It illustrates, yet again, the well-known fact: the elasticity of demand for tertiary education is very low; fee changes don’t affect demand very much. In part that’s because the process of forming decisions on whether to study and what to study are complex, with preferences and decision forming and evolving over a long time, subject to a range of influences. Price is only one factor[2]. And it’s a minor factor.
Another reason, in the New Zealand context, is that virtually all domestic tertiary students qualify for interest free income-contingent loans. This means that the cash cost to a student of enrolling in tertiary education is close to zero. We see a similar phenomenon in nearly all developed countries: the presence of fees doesn’t necessarily deter participation, especially if students can access loans that provide them with the liquidity they need to pay the fees. As is the case in NZ, Australia, the UK, the US, the Netherlands and Canada.
The experience of the Australian government’s Jobs Ready Graduates scheme shows just how unresponsive tertiary education demand is to relative price changes. In 2021, under Job Ready Graduates, the Australian government set out to increase enrolments in its favoured fields (such as science, teaching and nursing) by large reductions in fees, while unfancied fields (like humanities) saw their fees more than double[3]. An econometric analysis[4] of the effects of these changes in relative fees on enrolments showed only slight changes in student preferences – there was a shift in field of study preferences by just 1.5%. Modelling showed that a 1% increase in fees for a field reduced demand by less than 0.04% while in order to increase demand for favoured programmes by 1%, a government would have needed to reduce fees for that programme by around 25%.
What did fees-free do for student performance?
Ministry of Education data on study loads[5], course completion rates and qualification completion rates found no difference between the performance and study characteristics of fees free students and other comparable students. Fees free didn’t lead students to be more likely to study full time. It didn’t improve pass rates ….
Of course, those who qualified for fees free couldn’t borrow their fees from the loan scheme – so they will eventually graduate with less debt. Data from the latest Student Loan Scheme annual report[6] suggests that a student who qualifies for fees free in the first year of three years full time study and doesn’t qualify for a student allowance would graduate with a loan balance of around 80% – 85% of the debt that he/she would have built up in the absence of the fees free policy[7]. Meaning that around six years after graduation – around a year earlier than otherwise – the lucky graduate will have discharged the loan and so would have a small increase in after-tax take home pay.
In other words, most students will receive the financial benefit of fees free years after completing study, when their earnings are rising, at exactly the point in their lives when they have lower need for it[8]!
Further confirmation that fees free was an expensive way of achieving not very much.
And how much did the government pay for this no-effect measure?
In the 2022 calendar year, the government paid around $171 million to the eight universities for fees free[9].
Let’s assume that the great majority (say 97%) of those students would have paid their fees via the interest free loan scheme. In that case, in the absence of fees free, the government would have paid out around $165 million for tuition fee loans on behalf of university students.
The cost of that lending would have been around $64 million[10], meaning the net government outlay for fees free in universities was around $107 million – that is, 171 million minus 64 million.
Money that might have been better spent elsewhere in the system. Such as in funding institutions. Had the government spent the net cost of fees free in universities on tuition funding, it would have seen university tuition funding rates rise by 7.5%[11]. Across all 12 public tertiary institutions, the funding rate increase would amount to 5.8%[12].
And, sadly, it’s young people from upper income families[13] who capture a disproportionate share of the benefit of tertiary education funding, including fees free funding …
How does this relate to the new fees free policy?
Now fees-free first year is about to be replaced by fees-free final year. Yes, there’s lots of policy design still to take place, so we can’t yet know exactly how this will work. It may end up costing a little less than fees-free first year, maybe a little more.
But there is one thing we can be certain of. It won’t change student behaviour. Students entering their final year of study have a high propensity to pass. They have a powerful incentive to complete. They don’t need a carrot or a stick. This new incentive will encourage them to do exactly what they were aiming to do in the absence of this measure.
This is purest form of deadweight government expenditure.
Of course, it is in the nature of MMP and coalition formation that party leaders have to swallow dead rats. We should sympathise with the two leaders who were obliged to swallow this particular rat. But the fact that this measure is now in formal signed coalition deals means that it can’t be quietly dropped or forgotten.
So much waste. Such a shame.
References
Aziz O, Gibbons M, Ball C, Gorman E (2012) The effect on household income of government taxation and expenditure in 1988, 1998, 2007 and 2010 Policy Quarterly Vol 8 No 1
de Gendre A, Kabátek J (2021) From subsidies to loans: the effects of a national student finance reform on the choices of secondary school students IZA Institute of Labour Economics
Hofer A-R, Zhivkovikj A, Smyth R (2020) The role of labour market information in guiding educational and occupational choices OECD Education Working Papers No 229, Paris, OECD Publishing
Ministry of Education (2023) Fees free tertiary education Education Counts, Ministry of Education
Ministry of Education (2022) Student loan scheme annual report 2022 Education Counts, Ministry of Education
Ministry of Education (2019) NZ tertiary education demand forecast 2019 Ministry of Education
Ministry of Education (2018) NZ tertiary education demand forecast 2018 Ministry of Education
Norton A (2023a) Free higher education as income and consumption smoothing Higher Education Commentary from Carlton
Norton A (2023b) Why do Australian university students pay fees? Higher Education Commentary from Carlton
Norton A (2022) Inflation and student places under Job-ready Graduates Higher Education Commentary from Carlton
Sotardi V, Thompson E, Maguire J (2020) What a difference a year makes: fees-free policy and university students in Aotearoa New Zealand NZ Journal of Educational Studies 55, pp 207–214
Sotardi V, Thompson E, Brogt E (2019). Early influences of the fees-free policy on university students in Aotearoa New Zealand. NZ Journal of Educational Studies, 54(1), 139–156
Smyth R (2019a) Cutting fees will not improve access Times Higher Education
Smyth R (2019b) Hit or miss: a quick look at the fees-free policy Strategy Policy Analysis Tertiary Education
TEC (2023) TEI financial performance by year Tertiary Education Commission
Yong M, Coelli M, Kabátek J (2023) University fees, subsidies and field of study Working Paper 11/23 Melbourne Institute Applied Economic and Social Research
End notes
[1] See also Smyth R (2019a) Cutting fees will not improve access and Smyth R (2019b) Hit or miss: a quick look at the fees-free policy. Note that Sotardi, Thompson and Maguire (2020) reports on a survey of students entering the University of Canterbury in 2019, many of whom claimed that fees-free was influential in the decision to enrol. That self-report however is questionable; respondents may be unable to disentangle the range of factors they faced.
[2] Refer to Hofer, Zhivkovikj and Smyth (2020) The role of labour market information in guiding educational and occupational choices OECD
[3] Refer to this article for an explanation of rationale. See also Norton (2022) Inflation and student places under Job-ready graduates
[4] See Yong, Coelli and Kabátek (2023) University fees, subsidies and field of study Melbourne Institute Applied Economic and Social Research. See also
[5] See Ministry of Education (2023) Fees free tertiary education
[6] Ministry of Education (2022) Student Loan Scheme annual report 2022
[7] This estimate uses data from Table 4, page 16 and from Table 6 page 19 of the annual report. However, note that these are averages that capture a notional student taking a three-year bachelors degree on a full-time basis, passing everything and leaving study on completion. Every student will have a unique borrower and repayment profile.
[8] Note however, this is not true of students who go overseas before finishing paying off the loan; the repayment obligation for those overseas depends on the size of the loan, rather than the borrower’s earnings, so a lower loan balance reduces the repayment obligation of an expatriate borrower. It’s fair to say that those who travel overseas before repaying their loans are the principal beneficiaries of fees free.
[9] TEC (2023) TEI financial performance by year
[10] Using the cost of lending for the first half of the 2022 calendar year – 38.67 cents per dollar lent. See Figure 13 on page 29 of Ministry of Education (2022).
[11] The data here is drawn from TEC (2023).
[12] Including Te Pūkenga in the calculation means taking account of industry training funding also.
[13] Aziz et al (2012) The effect on household income of government taxation and expenditure in 1988, 1998, 2007 and 2010
Strategy, Policy, Analysis | Tertiary Education 