The tertiary education game

New Zealand has developed a pragmatic tertiary education system whereby the state pays most of the fees (about 75%) and provides subsidised interest-free loans. Additionally, many students receive allowances, tested against parent income.

Part of the rationale of a student contribution is that they, in theory at least, receive personal benefit from their study.

While this is far from perfect - for example the offspring of some asset-rich families could avail themselves of the allowances - it works reasonably.

In the name of broadening access to tertiary education, Labour introduced its expensive fees-free policy. This year, it applies to first-year students, and it extends later to a second and third year. The final cost could be about $1.2billion a year.

Although it applies across tertiary study, including apprenticeships, it was denounced as more ''middle-class welfare''. Most of the advantage will be to New Zealand's middle and upper classes, the background of the vast majority of university students.

There are gains from universal benefits. They can reduce administration costs, lessen gaming of the system and eliminate perverse incentives. Some of those receiving help might not need it. But they can be among those already paying the most tax, and it gives these people a stake in the principle of public assistance.

In this case, however, the huge spending could well make little difference in attracting the poor and more Maori and Pasifika to tertiary education. Other barriers such as attitudes, expectations and family circumstance are in the way, as well as the burden of living costs as distinct from fees.

As Universities New Zealand chairman Stuart McCutcheon said, just eliminating first-year fees, and in stages, would not encourage students from poor families to attend university. What had to be done, he said, was to focus on those students, not reduce the cost for students who came from relatively well-off parts of New Zealand.

For free fees, too, administrative burdens are increased. Students who have not taken up entitlements previously are eligible, and universities have had to spend an estimated $500,000 more on managing the scheme.

It would be better, although also not easy, to target generous scholarships towards those groups under-represented, and base these on need. While universities already use scholarships to try to snare the best students, these are almost all based on ability and not need.

Universities have been ambivalent at best about the changes, arguing that falling government income per student is undermining them and their ability to compete internationally.

Although idealists might reject education as a ''commodity'', someone has to pay, including for the valuable humanities. At present, it is largely the state - through the fee subsidies, the loans and the allowances.

But students, by paying a portion, have skin in the game. That makes them more discerning about the type of study and courses. They have stronger incentives to succeed, and expectations on the institutions themselves are raised.

While loans are a burden, they do not spiral because they are interest free. And inflation, even at low levels, shaves the capital debt.

The 2005 Helen Clark interest-free bribe helped swing that year's election. All National felt it could do was chip away at the edges of the scheme. Most adjustments made sense, but the restriction of loans to seven years' study was wrong. Labour this week announced it would remove the cap, allowing the likes of medicine and dentistry students to continue to receive this support through their course.

Labour's fees-free policy has its pluses. But if it is so helpful, why not extend it beyond three years? Why not cover the retraining so many will need as the nature of work changes?

There are better ways to spend more than $1billion a year.

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