Recently, Derek Chang of the NZ Herald wrote an obituary for the first year fees free policy. He pointed out that first year fees free hadn’t improved access to tertiary education, quoting Ministry of Education data showing that participation didn’t rise with fees free and that fees free was accompanied by reduced participation at university by young people from deprived backgrounds.
Derek quoted me as noting that politicians had actually believed that fees were a barrier to access. But, I said, “… the drivers of tertiary education participation occur in early childhood. The expectations built up in children’s minds through their schooling, through parenting …”
I told Derek that because there is near-universal access to loans, because students can borrow their fees (at no interest), fees free actually made zero difference to students’ access to cash. So, in New Zealand, under the current policy, fees don’t create a barrier. As a result, the fees free policy turned out to be “a tremendous way to spend a lot of money to no effect”. It is purest deadweight, spending hundreds of millions on what was going to happen anyway.
First year fees free was a well-intentioned but wasteful, misguided policy, its foolishness matched only by its successor – final year fees free.
That much has been proved by Derek Chang’s analysis, by the Ministry of Education’s monitoring and by my several articles on the issue.
It’s easy to criticise fees free and to mock its advocates. But the tragedy is that the underlying problem, the challenge of creating equitable access to tertiary education, the problem that fees free was intended to solve – that remains untreated.
This is the first of two articles looks into that question: What should we do to enhance equitable access to tertiary education?
I focus, in particular, on young people approaching tertiary education for the first time. Obviously, access is broader than that; it includes the issues faced by career changers, and by people with parenting and family obligations. It relates also to those with physical or learning disabilities and to those who face linguistic, cultural or other social barriers at the point of access. Those are important aspects of the broader access story and are the subject of a broader discussion.
This article, the first of two, explores the student allowances policy and asks how that scheme influences access. Part 2 looks at the evidence on how people form a commitment to take post-secondary education, at the true barriers to access and at what might be done to address the problem.
Student allowances
One of the reasons for the high cost of the fees free schemes, first year or final year, is its universality. It is untargeted, it creates a benefit for everyone, rich and poor, those in need and those with plenty.
Targeting vs universality
Government’s tertiary education expenditure – funding for institutions and funding for students – is regressive; those who benefit from that spending are disproportionately from higher income groups[1]. That is always likely to be the case[2]. It is especially regressive for higher levels of tertiary education, but it applies across the system as a whole. Untargeted fees free exacerbates the problem of regressivity, so that, with fees free, with any new untargeted intervention, lower income groups pay a higher subsidy to higher income groups; the system becomes ever more regressive, more unfair.
But while fees free and the loan scheme are more or less universal, the student allowances scheme has an element of targeting; young students’ allowances entitlements depend on their families’ incomes. Students from high income families don’t qualify.
So it’s worth looking in detail at the allowances system to check out how well that scheme works in mitigating access problems.
Student allowances targeting?
The student allowances scheme pays a weekly living allowance to full-time students who meet a set of eligibility criteria – for younger students, their parents’ incomes; for older students, their partner’s income and whether they have dependents[3].
A single student aged 23, living away from the parental home qualifies for an allowance provided the earnings of the two parents added together come to less than 130% of the median household income[4]. In other words, only around a third of households in New Zealand are seen as “high income” for the purposes of the student allowances scheme.
But allowances are abated as parental income increases. If our young student is from a family where the parents together earn the median household income, he/she would qualify for a little more than half the full entitlement.
Targeting? Yes, young students from families on the lowest incomes do qualify for allowances – perhaps even the full entitlement of $323 a week. But young students from middle and upper middle incomes can also get an allowance, even if that is abated. And both may get an accommodation benefit, (typically $60 a week). And students whose families are in the top third of household incomes are shut out of the allowances system and need to rely on loans (and, possibly, family support). That is targeting … sort of.
But there is a sting in this tale …
The allowances scheme and the loans scheme work together. A young full-time student on allowances can use the loan scheme to pay tuition fees and can borrow for course-related costs. Plus … that student can borrow for living costs, up to $323 a week less any student allowances.
Meaning … the entitlement to state financial support for the young full-time student from a family on $170,000 a year is identical to the entitlement to state support for a young full-time student from a family on $30,000 a year. And the only monetary advantage they have over the student from a family earning $1,700,000 a year is the accommodation benefit – something like $2,400 a year[5].
That is not true targeting … The entitlement to state-funded student financial support is all but identical, irrespective of family background.
Yes, in the case of the student from a wealthy or middle-income background, part of that state support is repayable. But that loan incurs no interest, so in real terms, the value of the debt reduces every year, even before repayments. And the way repayment works in an income-contingent loan, there is no repayment obligation unless and until the borrower’s income gets to the level where repayments can be made without undue hardship. And, at that stage, the repayment obligation – a surcharge on the marginal tax rate – is proportionate to the borrower’s income[6]. In other words, the terms of the loan mean that no payment is due unless it can be made with relatively little financial hardship.
Those who have used allowances will have lower loan balances than they would have had otherwise. That means they can expect to repay their loans earlier, all else equal. That means the person who had an allowance will get a bonus in the form of a lower tax obligation reduction earlier than the person without – even if that bonus comes at a time when the borrower has reasonable financial capacity.
Meaning …
The student allowances schememakes almost no difference to students’ liquidity, the cash available, at the point of entry to tertiary education. The main difference for students is that those with allowances will repay their loans faster than a similar student who was entirely reliant on the loan scheme. That means that the person who received an allowance gets a financial benefit – in the form of higher take-home pay – just at the point where he or she is facing less financial pressure.
Of course, earlier repayment makes a difference for those who want to do an OE, to travel and work overseas, before the loan is repaid. That is because once the borrower leaves the country, the rules change. The loan ceases to be income-contingent or interest free. It starts to attract interest. Repayment obligations depend not on the borrower’s income, not on the ability to repay, but on the size of the loan. Suddenly, it’s like any debt. Great for those whose OE delivers a massive income, but not at all great for the majority who want to devote much of a low or modest OE income to sampling the delights of living in a larger, more vibrant, more expensive society.
To study or not to study …?
What can we say about the design of student allowances and its effectiveness? What can we conclude about the value it adds, about how well it addresses the access problem?
In a seminal 2006 work on student financial support, Canadian higher education expert Alex Usher described a three-stage model of decision-making by young people at the point of access[7]. Looking at countries where there is a student financial support system – comprising some or all of grants (ie, allowances), student loans, tax breaks, other financial incentives …. – Alex argues that:
- First, the would-be student must see value in the decision to study. Study has to be worth it. The person needs to believe there must be some pay-off, financial, personal or social, that justifies the investment of time, foregone opportunity and cash that study demands.
- Second, if the would-be student does decide to study, the next question is whether it is possible to study. Part of the possibility question is financial – does he or she have access to the cash, the liquidity that makes it possible to study.
- Third, if some or all of the financial support is through a loan, is the would-be student debt averse. Does he or she object on principle to going into debt, any form of debt. Or is the notion of debt – with future repayment obligations and (in most cases) interest – just too scary.
The first of those is obviously key to access but leave that aside for now – that’s the topic of the second article in this series.
In the New Zealand context, our loan scheme is designed to deal with the second stage; it provides access to liquidity to pay fees and for a living allowance for full-time study. But a loan works only if the would-be student is not too debt averse – condition 3.
The loan scheme has income contingent repayments and it’s interest free, factors that mitigate – if not entirely eliminate – the scariness of borrowing; repayments are required only when (and if) the borrower’s income reaches a reasonable level. And zero interest means the real value of the debt reduces over time.
Condition 3, debt aversion, is important in this discussion because much of the government’s policy rationale for the design of the student allowances scheme and for the linkage between the loan and allowances schemes is the argument that people from lower socio-economic groups are more debt-averse than high income people. Now, in his paper, Alex reviews the literature – masses of papers – on this question and concludes that “the evidence in favour of [greater debt aversity among low-income groups] … is slim to non-existent[8]”. And he was discussing interest-bearing loans with conventional repayment obligations, not the milder loans available here!
The implications for the design of the allowances scheme
Benefits for low-income students
In practice, given the connection between allowances and loan living costs entitlements, having an allowance makes almost no difference in the weekly cash available to support students’ living expenses.
And the targeting of student allowances is very loose. Household income data shows that the majority of New Zealand households have incomes below the cut-off threshold for allowances. Only the top third of all households are ineligible.
That is not good targeting. It’s feeble. Like fees free, it is a deadweight intervention[9], with lots of expense for little or no behaviour change. It’s just plain poor policy design.
Debt aversion
The allowances scheme is designed to meet the third issue in Alex’s decision-making model. But given the evidence, given the interest-free and income contingent nature of loans in the New Zealand tertiary education system, it’s hard to give any credence to the government’s debt aversity rationale for allowances. Especially when fees free – ie, a policy that lowered the borrowing share of total cost of enrolment – did not result in more students from low-income families taking up study. Indeed, as Derek’s NZ Herald article pointed out, fees free was accompanied by fewer low-income students enrolling.
Again, more poor design.
Meaning
The student allowances scheme is far too generous – it gives an allowance to people who don’t need it and don’t benefit from it.
And it’s nowhere near generous enough – it doesn’t trouble itself with the real, complicated (and costly) barriers that do exist, those which are summarised in Alex Usher’s first stage of the decision-making cycle and which I’ll discuss in part 2 of this series.
So what should the government do
Everyone knows it’s election year. An opportunity for a visionary policy or, alternatively, for some ugly politics.
As a first step …
A visionary government would cut the student allowances scheme for young students without dependents, retaining the scheme only for students who are parents or have dependents. “Cut”. Not reduce. I mean abolish, eradicate. And then commission work on how to address the serious problem of access – which means addressing the first step in Alex’s three stage model. That is the much harder question but it’s the meaningful way of addressing problems of access. Watch for my next article.
Meanwhile …
Most of us know that the politics of student allowances can get pretty ugly. University students’ associations have long lobbied – sometimes successfully – for greater, not narrower, access to allowances. In recent elections, the Green Party has gone to the electorate arguing for universal access to allowances and writing off all student loan debt. Those policies are highly regressive, lifting the financial transfers from low-income people to the wealthy; they are designed to win favour with the (disproportionately middle/upper class) student population. They simply ignore the access and equity challenges the system faces.
Look out for Part 2 …
End notes
[1] See Aziz O, Gibbons M, Ball C and 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, pp29-38. That paper shows that people in upper income groups receive a greater share of government’s spending on tertiary education than their share of the population would justify.
[2] Note that society needs to pay to have essential skills in the population. That means it needs to train people to acquire those skills. Given the socio-economic disparities in the schooling system, it follows that there will usually be a high proportion of students from upper incomes in the tertiary student population.
[3] The full range of variables used in the targeting are: the student’s age and income, number of parents, whether the parents live together, the parents’ incomes, whether the student is living with a parent, number of full-time students in the family, whether the student has children, whether the student has a partner and if so, the income of the partner. See
[4] The calculation is for a single student without children studying full time, living away from a parental home, with two parents and no other children in full-time study. If the parents’ combined annual income is above $136,770 – which is 130% of the median annual family income – then the entitlement drops to zero. These calculations used the StudyLink student allowances calculator and Statistics NZ data on household income.
[5] Note that if a student with an allowance works during the semester, then, if the earnings goes above a threshold, the allowance begins to abate. No such restriction applies to non-allowances students. In other words, there will be cases where a non-allowances student gets more than a student with allowances.
[6] The exception of course is for students who take an OE before the loan is repaid. When a student goes overseas, interest is charged, the repayment obligation depends on the size of the loan.
[7] Usher A (2006). Grants for students: what they do, why they work Educational Policy Institute
[8] Usher (2006) page 21
[9] Those with long memories will recall that when all postgraduate students lost eligibility for allowances in 2013, the effect on enrolments was zero!
Strategy, Policy, Analysis | Tertiary Education 