Journal of Higher Education Policy and Management

ISSN: 1360-080X (Print) 1469-9508 (Online) Journal homepage: www.tandfonline.com/journals/cjhe20

Financing Higher Education in Australia: the case

for SuperHECS

Paul W. Miller & Jonathan J. Pincus

To cite this article: Paul W. Miller & Jonathan J. Pincus (1998) Financing Higher Education in
Australia: the case for SuperHECS, Journal of Higher Education Policy and Management, 20:2,
175-188, DOI: 10.1080/1360080980200205

To link to this article: https://doi.org/10.1080/1360080980200205

Published online: 07 Jul 2006.

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Journal of Higher Education Policy and Management, Vol. 20, No. 2, 1998 175

Financing Higher Education in Australia:

the case for SuperHECS1

PAUL W. MILLER, The University of Western Australia, Australia

J O N A T H A N J. PINCUS, The University of Adelaide, Australia

ABSTRACT This paper advocates and costs a reform package called SuperHECS, for the financing of
Australian undergraduate education. SuperHECS is designed to give institutions more autonomy and more
incentives to efficiency; to generate more student choice; to enhance the quality of teaching; and to be fair
to all eligible Australians wishing to enter university. Under SuperHECS, a tuition subsidy of 50% of
standardised costs would be paid directly to universities on actual load. Institutions only would set and
receive fees, which could be paid through an income-contingent loan scheme. Fee payments could be
claimed as a deferred deduction against taxable income. SuperHECS should cost Treasury no more than
do the current arrangements.

1. Introduction
The higher education sector is Australia is organised and financed in ways that limit its
ability to contribute to Australia's future prosperity. Students are not given clear signals
of the cost of the course in which they are enrolled, resulting in a pattern of enrolments
that is inefficient. Institutions have remarkably little incentive to improve the quality of
the services they offer. And students' choice between investment in education and
investment in physical capital is distorted by a tax system that discriminates against
wealth accumulation through the acquisition of a university degree. These matters are
discussed in detail in the companion paper to the current study (Miller & Pincus, 1998).
In this paper we propose a framework for setting fees for places at universities. The
integrated package outlined modifies the direct public subsidy to the teaching functions
of universities to remove the distortions associated with the current differential subsidy,
adapts the Higher Education Contribution Scheme (HECS) charge scheme, and intro-
duces deferred tax dcductibility for repayments of loans for fees. The reforms proposed
would give institutions considerable autonomy to set prices for specific courses; would
present students with far greater choice than they currently enjoy; would enhance quality
1360-080X/98/020175-14 © 1998 Association for Tertiary Education Management
176 P. W. Miller & J. J. Pincus

in teaching and research; would encourage more efficient arrangements within the
higher education sector; and would be fair to all eligible Australians who wish to enter
university and to the Australian taxpayer.
In section 2 we outline the major components of our proposal. We address four major
issues: the level of public subsidy; the method of paying the public subsidy; the
mechanisms of SuperHECS; and tax deductibility of educational expenditures. Section
3 reports a feasibility study of the package of reforms while section 4 investigates several
public finance matters. Section 5 assesses the merits of the proposals of the West
Committee against the SuperHECS benchmark and offers a brief conclusion.

2. The SuperHECS Proposal

SuperHECS is an integrated package of reform that retains a public subsidy to tertiary
students of around 50% of course costs. This subsidy is to be paid directly to universities
on the basis of actual student load. Universities set fees to cover the remainder of their
operating costs, and these fees are paid through an income-contingent loan scheme. Fees
paid to educational institutions can be claimed as a deferred deduction against taxable
income. Each of these major reforms is discussed below.

The Level of Public Subsidy

The subsidy to a course can be measured as the difference between the course costs and
the HECS fee. The current subsidy to university students averages around 50% of course
costs, but varies considerably across degrees. The subsidy to an economics degree, for
example, is under 25% while that to a science degree is over 60%. Our proposal
maintains the average level of the subsidy at around 50% of course costs. As we show
in section 3, 50% turns out to be the level of average subsidy that, in our funding
scheme, has about the same cost to the Treasury as under the current funding scheme.
It is on this basis that we chose 50%. Fifty per cent is also the level that the Productivity
Commission (1996, p. 98) supports on the basis of the public benefits of higher education.
We doubt that the differential subsidy across discipline types which characterises current
funding arrangements can be justified on the basis of differential rates of production of
externalities across disciplines. Setting the level of subsidy to all courses at a uniform rate
(as a percentage of average DEETYA (Department of Employment, Education, Training
and Youth Affairs) determined course costs) would be consistent with the primary reason
for providing subsidies, namely to cover the value of externalities associated with the
teaching functions of universities.
This proposal would reduce the existing extremely high rates of subsidy to high-cost
courses and increase the rates of subsidy to low-cost subjects. Consequently, there will be
shifts in the relative attractiveness of various courses of study. If these changes result in
a supply of graduates inconsistent with market needs, then we would expect to see
adjustments in salaries for the various occupations in order to counter-balance the
changes.
If there are emerging national priorities (e.g. a shortage of trained scientists) then these
can be addressed by the provision of scholarships or cadetships. These scholarships could
be funded by government, industry or universities, singularly or in partnership. To be
cost effective, however, the scholarships should be carefully targeted on particular fields:
scholarships tenurable in broad fields of study would serve no useful purpose.
 Financing Higher Education in Australia 177

Paying the Subsidy

A public operating grant subsidy to universities equal to 50% of average DEETYA

determined course costs could be paid via vouchers allocated to students or through
funds allocated directly to universities. Our preference is for funding universities on the
basis of actual student load.
A voucher is a government grant that can only be spent on a particular good. The
rationale for educational vouchers is that education is a mixed good, in that it provides
both private as well as public benefits, and a voucher can finance the latter.
Vouchers come in a variety of types. The voucher could be the same absolute value
for all students, so that students who enrol in high-cost courses may be required to pay
the additional cost. The voucher could be compensatory, and related to (parental)
income. Or the voucher could be cost based; from a practical perspective, the value of
such a voucher could be set at a fixed percentage of DEETYA assessed course cost. The
voucher could also be achievement based, in that the value of the voucher is related to
academic achievement.
Peter Karmel is the leading advocate of vouchers in Australia (see, in particular,
Karmel, 1996). Karmel (1996) envisaged the number of vouchers either being set by
government as a fixed number (and being allocated largely on the basis of merit, but with
special cases being accommodated) or being available to all students above a given
percentile in the ability distribution, with the number taken up being determined by
conditional demand. The scholarships would be for a limited tenure (such as five or six
years of full-time study or the equivalent of part-time study), and vary in value according
to the course undertaken. The Relative Funding Model (RFM) could be used as a basis
for establishing the relative value of the vouchers. Institutions would be free to charge a
fee above the scholarship value, and HECS arrangements would be available for the
collection of the fee (subject, however, to a maximum on the margin imposed). Individual
institutions could admit full fee-paying local students, subject to satisfying the institution's
entrance requirements. Individual universities would decide the total student intake and
the mix across courses of the intake.
Karmel argued that his scholarship package is market oriented. Given that students
rather than institutions were being funded, institutions would have to compete for
students by offering quality products at attractive prices. Students would be able to
compare products and fees charged across institutions. The outcomes predicted under
this proposal include diversity among institutions in the nature of courses, the levels at
which they are pitched, the size of the institutions, the facilities available, the emphasis
and ethos of the institution, and greater autonomy to management (Karmel, 1996, p. 9).
Karmel's scheme was built around students receiving a voucher for a fixed percentage
(say 50%) of course costs, regardless of the course. This cost-sharing arrangement plays
a pivotal part in Karmel's scheme as well as our own. Thus, Karmel argues (p. 12) that
imposing a higher liability on students in more expensive courses would reduce the
chance of a blow-out in the costs to the Treasury from a shift to more expensive courses
(which often have quotas).
There are some similarities in expected outcome between Karmel's voucher scheme
and ours to fund universities directly on the basis of actual student load. Under the
voucher scheme, a student will attempt to gain a place in a particular course at an
institution and the student is funded at x% of current average course cost. This amount
is then passed onto the institution, notionally by the student (but in the form of a voucher
that is redeemed by the government). The voucher scheme relaxes the controls on
178 P.W. Miller & J. J. Pincus

student numbers at particular institutions effected through profiles negotiations, and in

this sense permits a greater role for market forces (Pincus, 1997).
Funding universities directly on the basis of actual student load rather than planned
student load can be regarded as an implicit voucher scheme. With this implicit arrangement,
a mechanism through which the total number of government subsidised places is
determined needs to be devised. One possibility, raised by Karmel (1996), is that all
students above a given percentile in the tertiary entrance exams (or their equivalent)
could be funded at the university of their choice (subject to satisfying the entrance
requirements of the institution).
If the voucher scheme and the implicit voucher scheme provided by direct funding of
universities on the basis of actual student load deliver the same outcomes, is there any
basis for choosing between them? We suggest that there are three main matters that need
to be considered.
First, there is the issue of budget predictability for the government. With a voucher
scheme, government controls the total number of vouchers issued, and, with reasonable
projections of the distribution of student preferences across disciplines, has control over
the total funds required for the higher education sector. With the alternative of funding
via an implicit voucher scheme, there is less certainty about the numbers enrolling in any
given year and hence less control over the funding required. On this basis, therefore, one
might favour the explicit voucher arrangement.
The second issue is the costs of administration under each of the funding mechanisms.
It would appear that the transactions costs of the voucher scheme will be larger than that
of direct funding to universities. On this ground, therefore, there is preference for the
implicit voucher scheme.
Third, how will the value of a voucher be set so as to enable students to choose
subjects? If a particular student is provided with a AS3250 voucher for an arts degree,
will her/his choice be restricted to the low-cost courses? Any reasonable answers to these
questions quickly lead us back to funding on the basis of actual student load.
It would appear that the control over the claims on the public purse under an implicit
voucher scheme would be easier to implement than it would be to reduce the (higher)
transactions costs under an explicit voucher scheme.

SuperHECS
If the subsidy to higher education is to be set at no more than 50% of average
DEETYA-determined course costs, the question needs to be answered of how the
balance of course costs will be met. For publicly funded students, an extension of the
current HECS charges, termed SuperHECS, is recommended.
SuperHECS is a method of supplementary funding for universities, advocated by
Pincus (1996). Under Pincus' original SuperHECS proposal, each university would be
able to add its own amount of HECS-able fees to the government-determined charge.
Pincus noted that 'The scheme need not give carte blanche to the universities. For
example, the government may insist that the level of fees not exceed some nominated
amounts or nominated fractions of HECS; it may insist that merit scholarships be put
into place by any university choosing to impose SuperHECS fees; government may wish
itself to institute an equity scholarship scheme.'
In the current package of reforms to tertiary education funding, SuperHECS charges
could be seen as encompassing HECS charges. Hence, HECS would disappear and the
level of fees for each course would be set by the university itself. For each publicly
 Financing Higher Education in Australia 179

subsidised student the institution would have two sources of funds: the public subsidy and
the revenues generated by SuperHECS,
The advantages of this approach are considerable. First, the fees levied by the
institution for publicly subsidised students are collected in the form of an income-
contingent loan. They therefore satisfy efficiency and equity criteria (see Miller & Pincus,
1997). On the basis of Australian experience with HECS, SuperHECS should have
minimal equity implications. Second, SuperHECS allows university administrators sub-
stantial freedom to set fees that reflect student demand for the quality of product that is
produced. Third, SuperHECS will provide university administrators with incentives to
tailor the quality of products to student demand.
The consequences of the introduction of SuperHECS should include: (i) a range of
prices across institutions for the same type of degree; (ii) variations across institutions in
the quality of any given degree (higher level of computer usage; greater levels of ancillary
services like study skills support and essay-writing workshops; smaller class size, more
contact hours, etc.); (iii) students having choice of the price-quality combinations they
wish to purchase.
An issue that needs to be addressed when using the HECS mechanism to collect
SuperHECS is the amount of revenues that universities could expect to collect from each
dollar of fees levied, and the time period in which the revenues would be collected. The
main reason why collection of fees for higher education has been through the HECS
mechanism to date is to meet various equity objectives (Chapman, 1996). The same
motivation applies to SuperHECS, and we argue that the cost of operating an
income-contingent loans scheme should be borne partly by the pool of borrowing
students (as is proposed in Barnes & Barr, 1988), and partly by government (as is the case
with the current HECS system).3
Currently, any student paying their fees up-front pays only 75% of the HECS charge.
It would be appropriate, therefore, to give universities an amount similar to this 75%
figure for all fees levied.

Tax Deductions for Educational Expenditures

Under the integrated package of reforms to higher education outlined, the subsidy to
tertiary education is set at a level that may appropriately reflect the externalities
generated by the higher education sector. Students will be liable for fees amounting to
50% or more of average course costs, a factor that may discourage some from attending
university. A major reason for this is that investment in education is discouraged by the
current tax system which dramatically favours investment in physical capital to
the detriment of investment in human capital (see Miller & Pincus, 1998). We propose
that fees paid to educational institutions should be allowed as a deferred deduction
against taxable income.
Allowing education expenditures as a deduction against taxable income is a major
change, and many fine details will need to be debated. We suggest that the deduction
should always be for the student rather than to the student's family, for the reasons
discussed briefly below; and that the deduction could apply to all expenses rather than
be confined to SuperHECS repayments (an extension of the current AS250 limit on
education expenses to a higher value in line with medical expenses could be considered);
and that pros and cons of alternative arrangements for amortisation (e.g. 10-year versus
20-ycar write-off periods) need to be examined. It would also be appropriate for fees paid
180 P. W. Miller & J. J. Pincus

at educational institutions other than universities be allowed as tax deductions. This may
require the government to establish a list of registered providers of education services.
In some countries, and this is part of proposals made in the US, parents can claim
deductions for fees paid on behalf of their children. However, to be consistent with our
rationale for tax deducibility—that fees are an expense of earning the income upon
which tax is being paid—only the student or graduate should be able to claim the
deduction. When parents lend or give money to students for fees, the value of
the deduction will depend on the student's or graduate's income, not the parents';
similarly, when children are the beneficiaries of family trust arrangements.

3. A Feasibility Study
To determine the impact of our recommendations on the average student, various
simulations were conducted. These simulations were based on the income profiles of
employed graduates derived from the 1991 Census of Population and Housing. Age-
income profiles for males and females were adjusted for secular real income growth by
applying a 2% compound growth factor. The 1997 repayment rates for HECS are used.
In the simulations where depreciation of the capitalised value of the educational expenses
is permitted, a straight-line write-off of the capitalised amount was allowed, with the
write-off period being 20 years. A real discount rate of 5% is used throughout.
The simulations were conducted for a three-year degree. Three costs levels were
examined: a degree costing AS6500 per year (AS 19,500 for three years), which approx-
imates the course costs in the lowest-funded undergraduate cell in the Relative Funding
Model (Accounting, Administration/Economics, Law and Other Humanities); a degree
costing AS8000 per year (A$24,000 for three years), which approximates the course costs
in the second undergraduate cost cluster in the RFM (Behavioural Sciences, Education,
Mathematics/Statistics, Other Social Studies); and a degree costing A$ 13,500 (A$40,500
for three years), which approximates the course costs in the fourth undergraduate cost
cluster in the RFM (Engineering, Science and Surveying).
Table 1 presents the present values of student payments under three schemes. The first
is the current HECS system, shown in the left-most panel (columns 2-4). Consider a
student incurring an annual HECS debt of A5S47OO per year. This debt comprises
a tuition charge of AS3525 a year, plus a borrowing charge of A$ 1175 or one-third of
the tuition fee, together totalling A$4700, the middle HECS level in 1997. For three
years, the total tuition fee is A$ 10,575, as shown in column 2; and the total HECS debt
is A$14,100. These are the HECS payments required of students doing Accounting,
Mathematics/Statistics or Science, and who defer payment of the HECS tuition fee.
Deferred HECS fees may be paid on an income-contingent basis. Consequently, the
typical student will attach a lower value to the repayments than the AS 14,100 tax debit.
When evaluated using the discount rate of 5%, the present value of the HECS
repayments is A$l 1,900 for males and A$ 11,500 for females (shown in columns 3 and
4, respectively).4 The lower value for females occurs because the lower incomes of
females imply a slower rate of repayment compared to males, and so the present value
is reduced.
Hence, the status quo may be described as follows: the typical student outlays the
equivalent of slightly less than A$ 12,000 in income-contingent payments.5 In return they
gain access to an income-contingent loans scheme and are educated in a course costing
A$ 19,500 if enrolled in the lower-cost group of subjects, A$24,000 if enrolled in the
medium-cost group of subjects, and A$40,000 if enrolled in the higher-cost group. The
 TABLE 1. Net present values of payments by students under alternative grant and fee regimes, three-year degree of various costs

HECS system Alternative systems

'Neutral' system SuperHECS

HECS Repayments (AS) repayments (AS) repayments (AS)
Operating grant
Course cost (AS) Tuition fee (AS) Males Females as % of cost Tuition fee (AS) Males Females Males Females
1 2 3 4 5 6 7 8 9 10

19,500 10,575 11,900 11,500 0 19,500 14,700 15,300 14,100 13,400

10,575 11,900 11,500 25 14,600 11,100 11,500 11,400 11,000
10,575 11,900 11,500 50 9800 7400 7700 8200 8100
10,575 11,900 11,500 75 4900 3700 3800 4500 4500
55
24,000 10,575 11,900 11,500 0 24,000 18,100 18,900 16,400 15,200
10,575 11,900 11,500 25 18,000 13,600 14,100 13,300 12,700
10,575 11,900 11,500 50 12,000 9100 9400 9700 9500
10,575 11,900 11,500 75 6000 4500 4700 5400 5400
40,500 10,575 11,900 11,500 0 40,500 30,600 31,800 22,300 19,300
10,575 11,900 11,500 25 30,400 23,000 23,900 19,000 17,200 !
10,575
10,575
11,900
11,900
11,500
11,500
50
75
20,300
10,100
15,300
7700
15,900
8000
14,500
8500
13,700
8300 I
Notes: On graduation, the debt includes a borrowing charge equal to one-third of the tuition fee in columns 2 (for HECS) and 6 (Super HECS). The HECS debt for column 2 is AS4700
3'
annually, or AS14,100 for three years. Numbers in columns 3, 4, 7-10 are rounded to the nearest hundred.

CO
182 P. W. Miller & J. J. Pincus

rate of subsidy, therefore, is sizeable in the last group of disciplines. The current HECS
arrangements impose a uniform charge on students even though the cost of provision of
the various courses differs by a factor of more than two. We know no other publicly
provided or subsidised good where the consumption of the highest cost alternative is
encouraged as much as in higher education.
Columns 5-10 of Table 1 illustrate the finances of alternatives to HECS. To focus the
discussion, consider the numbers highlighted in bold. These report the calculations for
a course that costs A$ 19,500 to deliver, for which the university receives a government
grant of 50% of cost, namely A$9800. Naturally, in this case the student tuition fee is
also A$9800, shown in bold in column 6.
What Table 1 shows in columns 7-10 are the present values of student loan
repayments, for males and females, under two alternatives to HECS. The first alternative
we term the 'Neutral' taxation system. Under this arrangement, a male student would be
faced with repayments worth AS7400 (column 7, bold) instead of A$l 1,900 under
HECS, shown in column 3; and a female student faced repayments worth A$7700
(column 8, bold) instead of A$l 1,500 under HECS. Reading up or down columns 7 and
8 in the first box, the table shows what happens to these repayments as the Operating
Grant varies as a percentage of cost from zero, to 25%, to 50%, to 75%. The second
and third boxes in columns 7 and 8 report repayments for courses costing A$24,000 and
A$40,500.
The 'Neutral' model mirrors what we consider would be a practical compromise on
theoretically ideal financing and taxation arrangements for higher education expenses. In
it, students are required to pay a fraction of the cost of their degree, as indicated in
column 5, and pay the tuition fees of column 6 to the university up-front. To achieve this
we permit the student to borrow from the government at a 5% rate of interest
(a relatively low, but practical level). All educational expenses, but not the interest on the
debt, are deductible against incomes over 20 years. The interest payments are not
allowed as a tax deduction in recognition of the relatively low rate of interest charged on
the debt.
Under the 'Neutral' arrangements, there are higher present values of the payments for
females than for males. These are due to lower average income earned by females, which
implies a lower value of the tax deduction, and higher interest charges due to the slower
repayment of the tax debt. These differences in repayments can be easily overcome if
required: the lower value of the tax deduction by using a tax rebate scheme; and the
higher interest charge by replacing interest with a sendee fee as under HECS and under
the proposed SuperHECS system.
Examination of columns 7 and 8 of Table 1 for the 'Neutral' taxation arrangement
reveals that, as course costs rise, the present value of the payments by students rise. This
is in stark contrast to the current HECS arrangements, where the student contributions
are invariant to changes in course costs (see columns 3 and 4, headed 'HECS
Repayments'). Introducing a system whereby fees and, therefore, demand for places may
be affected by cost considerations would seem to be a vital first step to transforming the
university sector from a public to a private market.
Comparison of the net present values under the 'Neutral' taxation regime and the
current HECS system reveals major discrepancies at all levels of uniform public subsidy.
In other words, a uniform HECS payment will be associated with distortions compared
to the 'Neutral' taxation system. It is apparent from other simulations that we conducted
that the differential HECS system currently in place will tend to accentuate rather than
ameliorate these distortions. From the perspective of achieving the efficient use of
 Financing Higher Education in Australia 183

society's resources, the current HECS system is not closely aligned with a neutral
taxation system.
The third model is our preferred model, SuperHECS, shown in the left-most columns,
9 and 10. Under SuperHECS, students are required to pay an amount to the
government equal to the tuition fee charged plus a service fee for borrowing equal to
33.3% of the tuition fee.6 Considering again the numbers in bold, if for a course costing
A$ 19,500 the tuition fee is $9800 (column 6), then the total liability of the student will
be A$ 13,000, after addition of a borrowing service charge of A$3200 in lieu of interest,
costs of administration and so on. Only the course fee component of the total charge is
permitted as a depreciation allowance. Repayments are made via the current HECS
schedule, with the real rate of interest being zero.
Consider the values in Table 1 for SuperHECS for a course costing AS 19,500. The
situation where the student is required to fund the full cost of the degree is shown on the
first line. The present value of the SuperHECS repayments (inclusive of the service fee
and depreciation offset) would be A$14,100 for males and A$ 13,400 for females (columns
9 and 10, first entries). Where a public subsidy is provided equal to one-quarter of the
cost of the degree, then the present values of student repayments are A$ 11,400 for males
and A$ 11,000 for females (second line, columns 9 and 10); for a subsidy equal to half
of the cost of the degree, the present values are A88200 for males and A$8100 for
females (third, bold line of columns 9 and 10); and so on.
The values for the other two course costs, A$>24,000 and A$40,500, can be read in a
similar manner.
The main points of note from Table 1 can be summarised as follows:

1. Judged against the 'Neutral' taxation regime, the share of operating costs that the
government is actually paying under HECS is slightly less than 25% for
the lowest-cost courses, slightly more than 25% for the medium-cost courses, and
more than 50% for the highest-cost courses in the table.
2. The current HECS system is not closely aligned with the neutral taxation system. As
a result, there will be distortions to students' choice of subject and the labour market.
3. For students in the two lower-cost courses, SuperHECS is a reasonable approxi-
mation to the 'Neutral' taxation benchmark at all rates of public subsidy. For subsidy
rates of 50% or more for the highest cost course, SuperHECS is also an adequate
approximation of the 'Neutral' taxation benchmark.
4. If a SuperHECS scheme with a uniform subsidy of operating costs of 50% were
adopted as recommended above, there would be minimal distortions as compared to
the 'Neutral' taxation regime. Students in the lower-cost courses would be slightly
better off, and students in the higher cost courses would be slightly worse off than
under the current HECS arrangements.
5. The fact that students in the lower-cost courses would be better off under Super-
HECS reflects the removal of the unfavourable relative treatment under current
HECS arrangements.
6. Many institutions might wish to maintain the fees for lower-cost courses at their
current levels. The premiums gained could be used to enhance the quality of the
courses, or to subsidise other courses or research. Some institutions, however, might
attach merit to offering courses at a price lower than the current HECS payments of
(in net present value terms) A$l 1,900 for males and A$l 1,500 for females. This would
be a competitive response to the changed circumstances, and would be a strategy that
would lead to diversity and choice in the higher education sector in Australia.
184 P. W. Miller & J. J. Pincus

7. Institutions that wish to offer high-cost courses have several options under the reforms
we suggest. First, they could charge a SuperHECS fee sufficient to cover the current
costs. Second, they might use surplus funds from other courses or endowment income
to cross-subsidise the high-cost course. Third, they may offer a course that costs less
to teach—the costs of teaching any given course are endogenous rather than being
technologically determined. Fourth, they might advance a case to the government or
industry that scholarships covering the full cost of the degree are required.

All the simulations in Table 1 are for a benchmark case with the average income of
graduates, a AS4700 per annum HECS tax debt in the current differential HECS
system, and a 20-year write-off period for any education expenses permitted as deferred
deductions. Additional simulations were conducted to examine the sensitivity of our
findings to some of these assumptions (see Miller & Pincus, 1997). These simulations have
three major lessons for the current debate.
First, SuperHECS, which links course fees to the cost of provision, is shown to be more
likely to yield an economically efficient outcome than the current differential HECS
charges. This is because it is inappropriate to levy relatively high HECS charges in
relatively low-cost courses, or, conversely, to levy low HECS charges in high-cost courses
as under current arrangements.
Second, the SuperHECS package is based on income-contingent loans. This is
demonstrated in our simulations to be an attractive means of financing higher education
when there is variability in incomes. If the student never earns more than the minimum
threshold for repayment (A82O,7OO in 1997) then no repayment of the debt incurred will
be required. If the student dies without ever having made a repayment on the debt then
the debt is extinguished. As the repayment rates are graduated, from 3% of taxable
income (for income between A$20,701 and A$21,830) to 6% of taxable income (income
of A$37,263 and above), the repayments should never constitute an undue burden on an
individual. Where the repayment would cause serious financial hardship or there are
other special circumstances, repayment can be deferred under the current HECS system
(application to the Deputy Commissioner of Taxation is required) and we envisage this
arrangement continuing under SuperHECS.
Third, our examination of the implications of a shorter amortisation period reveals
that choosing a write-off period of 10 rather than 20 years would be of benefit to the
student (worth between AS500 and A$ 1000). Conversely, the Treasury would incur a loss
of this amount. Whether any savings in costs of administration associated with a shorter
write-off period are sufficiently great to warrant this change would be the main principle
that should govern future discussion. A further issue that emerges from this simulation
is that, through progrcssivity in the marginal tax rate, the value of the deferred deduction
to the student is quite sensitive to the magnitude of the income stream. Consequently,
individuals with relatively low incomes derive a lower benefit from the depreciation
allowance. If this is viewed as a problem with the package of reforms, a tax rebate system
could be considered in place of the deferred deductions.

4. Public Finance Issues

In this section we report on the effects on the flow of payments to Treasury of a switch
from HECS to SuperHECS in a simplified model. Basically we ask, 'What level of
uniform subsidy would be required to generate government outlays of the same
magnitude as those that characterise current (1997) tertiary finance arrangements?'
 Financing Higher Education in Australia 185

Answering this question requires a number of assumptions. The most important of

these is that all HECS obligations of students are considered to be revenue. Hence, while
a A$4700 HECS charge can be reduced to A$3525 through payment up-front, this
possibility is ignored. Similarly, while a feature of the SuperHECS proposal is that
universities will receive only 75% of the value of SuperHECS, the total charge levied on
students (i.e. inclusive of the 25% service fee) is viewed as revenue. Second, enrolments
arc assumed to be insensitive to the fee charged. While the evidence shows that
enrolments were not particularly sensitive to the introduction of either the uniform
HECS charges in 1989 or the differential HECS charges in 1997, a correct assessment
of this matter requires information on enrolments plus unmet demand. Such information
is not available. To the extent that our assumption is in error, the bias is expected to be
that the public outlays will be lower than in our simulations due to the switch from
high-cost courses to the low-cost courses that are penalised under the current differential
HECS charges. Third, we assume that, when universities do charge fees, they are set
exactly equal to the difference between cost and the operating grant; that is, we assume
that total university income per student in each course is unchanged under SuperHECS.
The question to be addressed in this section can be restated in a more direct form with
an example of a student population of two, one enrolled in a cciencc degree and one
enrolled in an economics degree. At present the government outlays approximately
A$ 13,500 per annum to educate the full-time science student. The student incurs a
HECS liability of A$4700 per annum. Ignoring the deferred nature of the HECS
liability, the cost of operating the HECS scheme and the possibility of up-front payments,
the net government outlay for the science student can be considered to be A$8800 per
annum, or 65% of the total resource cost of the degree. For a student undertaking an
economics degree, the comparable figures are: outlay of A$6500; HECS liability of
A$4700; net outlay of A$ 1800 or 28% of the resource cost of the degree. The average
subsidy for the science and economics students (per dollar of resource outlay) is around
53%.
Obtained using information on the distribution of the 1996 student load across course
cost and across the 1997 differential HECS categories, the results of this type of
calculation are shown in Table 2. The first line of Table 2 reports A5J3791 million as the
estimated 1997 operating costs of the 1996 student load; and in the column labelled
'HECS', the third line shows HECS liabilities of A$ 1732 million would have been
incurred, leaving A$2060 million as the aggregate 'subsidy'. Thus, the average subsidy
on this basis is found to be 54.3%. Hence, to be equivalent, the SuperHECS fee would
need to be imposed at the uniform rate for which, when allowance is made for the tax
deducibility of the educational expenses, the net outlay for the government is also
A$2060 million. This rate is approximately 48%.
However, the calculation just reported is not the most relevant one. In our earlier
discussion, we have suggested that the public sector should subsidise the 'standardised'
operating costs of undergraduate teaching at the rate of 50% when moving from the
current HECS system to SuperHECS. That is, universities would charge fees on top of
the implicit voucher provided at the rate of 50% of 'standardised' operating costs. The
reasons for choosing 50%, and not 48%, relate to the need to consider all revenue flows
in present value equivalents.
To a close approximation, a SuperHECS fee equal to 50% of cost would yield the
same net SuperHECS payments as HECS payments, in present value terms, from
graduates who had the following characteristics: completed three-year degrees, full-time,
in numbers exactly equal to 1996 full-time-equivalent enrolments by RFM and HECS
186 P. W. Miller & J. J. Pincus

TABLE 2. Costs, debts and repayments: comparison of HECS and

SuperHECS, for 1996 student load and 1997 HECS levels and course costs
(present values)

HECS SuperHECS
(AS million) (AS million)

Costs of EFTSUs 3791 3791

Tuition fees 1299 1896
Debt incurred3 1732 2528
Apparent subsidy 2060 1264
Apparent subsidy rate 54.3% 33.3%
PV repayments of debt 1480 2031
PV tax credits 557
PV net payments'1 1480 1472

Notes: aAssumes all students borrow with a 33% service fee.

t o t a l s do not add up, due to rounding.

categories in courses with actual costs in our synthetic RFM as reported above; all
students deferred the payment of HECS and SuperHECS fees; upon graduation, each
earned the mean incomes, by age, of employed graduates in the 1991 census (updated
to 1997, as explained earlier). Under the assumptions listed, the present value of HECS
liabilities is A$ 1480 million and the present value of SuperHECS payments after tax
credits is A$1474 million (see the last line of Table 2).
Most of the assumptions we have made turn out to be innocuous when reasonable
variations are considered. There are, however, two major deficiencies in our calculations,
in that they assume no responsiveness, in demand or in supply, from a change in the
funding system. The calculations assume that universities charge fees exactly equal to
the operating grant, no more, no less: yet one of the major purposes of the proposal is
to permit universities to decide upon their own fees for undergraduates. Similarly, we
have not allowed in our calculations for any response in student enrolments to changes
in fees and course costs. Since variations in demand and supply will be in response to
a more rational and economically justified funding system, they will be desirable.
Nonetheless, although we consider it unlikely, they could impose additional costs on the
Treasury, which we have not estimated.

5. Conclusion
In this paper we have proposed an alternative funding scheme for Australian higher
education. It is an integrated package that modifies existing funding arrangements by
permitting universities to set their own course fees. It also adds a new element, deferred
tax deducibility of those fees. Our proposed funding scheme recognises the strength of
the case for public assistance to higher education, as acknowledged by the Productivity
Commission and most commentators, but not any case for large variations in the rates
of subsidy offered to students in different degree courses. The public subsidy is to be
provided as a flat proportion, 50%, of standardised course costs and is to be paid directly
to the university on actual enrolments, by way of operating grants. Each university sets
fees for each course, zero if it wants, but otherwise over and above the public grant.
Available to all students who bring with them a public subsidy is a loan system called
SuperHECS, modelled on the successful HECS arrangements. For these, the vast
majority of Australian undergraduate students, there will be no up-front, course fees:
 Financing Higher Education in Australia 187

payment is deferred, as in HECS. In recognition of the fact that these educational

expenditures are investments, we insist on tax deductibility of fees paid, on an amortisa-
tion schedule. As with SuperHECS repayments, the tax deductions can be deferred until
income reaches some appropriate level.
How does this model compare with the proposals of the West Committee
(see Department of Employment, Education, Training and Youth Affairs, 1997)?
Unfortunately, the West Committee does not make firm recommendations. Nor does it
undertake the detailed feasibility study that we present here or in Miller & Pincus (1997).
Our reading of the West Committee report is that it endorses an education subsidy
approximating current average levels (see p. 28), that it is supportive of universities being
able to set their own fees to cover operating costs in excess of the public subsidies
(see p. 31), and that it strongly advocates the availability of an income-contingent loans
scheme for the payment of student fees (p. 30). In all these aspects, the principles
underlying the West Committee's Discussion Paper are consistent with the SuperHECS
proposal.7 Where the West Committee's Discussion Paper diverges from the SuperHECS
proposal is its failure to support tax deductibility of student fees. The statement on page
131 of the Discussion Paper, 'The taxation treatment of education expenses could also
be improved' is both encouraging and disappointing.
In conclusion, SuperHECS is a feasible way of funding the higher education system.
It is consistent with most of the discussion of the West Committee. That Committee,
however, does not support tax deductibility of education expenses to the extent that we
would have preferred. Unfortunately the final report of the West Committee does not
consider this issue in depth (DEETYA, 1998, p. 41).

Correspondence: Paul W. Miller, Department of Economics, The University of Western

Australia. E-mail: pwmiller@tigger.cc.uic.edu. Jonathan J. Pincus, School of Economics,
The University of Adelaide, 5005, Australia. Tel: + 61 8 8303 4664; Fax + 61 8 8223
1460; E-mail: jpincus@economics.adelaide.edu.au.

NOTES
1. Adapted from Miller and Pincus (1997). We thank Peter Karmel, Bruce Chapman and two anonymous
referees for helpful comments.
2. Our recommendations would seem to satisfy the desiderata of the Productivity Commission (1996, p. 97)
that the funding scheme should 'give students signals about the relative costs of course, and thereby make
costs, as well as future benefits, a consideration in course choice. It would also provide better information
to universities on students' valuations of courses in the light of those costs.'
3. We endorse the proposal of the National Commission of Audit (1996, p. 33) that consideration be given
to securitising HECS debt. If the service charge is not sufficient to make the debt saleable, then there is
still a case for additional public subsidy on equity grounds (on the adequacy of the service charge). Note,
however, that the adoption of an accrual-based accounting system by government would reduce the
advantages to the Treasury of securitisation of these debts.
4. In other words, a capital sum of A$ 11,900, if invested on graduation at 5% (free of tax), would, when
drawn down progressively, be exactly sufficient to satisfy the annual HECS obligations of the average male
graduate. There is a difference of AS1325 between AS11,900, which is the present value of debt
repayments, and AS10,575, which is the HECS tuition fee. Thus, AS1325 is an estimate of the costs of
borrowing for this type of graduate.
In view of Commonwealth budget arrangements, there is a strong case for regarding the recent increases
in HECS charges as a graduate tax.
5. Over half of the enrolments of 1996 were in the categories that incurred the middle level of HECS in
1997.
188 P. W. Miller & J. J. Pincus

6. In our opinion, this is how HECS charges arc most accurately described: a tuition fee and a borrowing
charge equal to one-third of the tuition fee.
7. The SuperHECS proposal is part of the information basis for the three options considered in Appendix
9 of the West Committee's Discussion Paper.

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