The Australian model as a fair mechanism for funding our universities

In his Hindu column yesterday about Indian doctors staying on in the US, Shashi Tharoor says:

[But the case of doctors is different]. Mainly for two reasons: they possess knowledge and training that is still in short supply in our country; and the Government of India, through its generous subsidies for higher education, has spent a large sum of money helping them to acquire the skills they are taking abroad.

He concludes by asking "But must the Indian taxpayer subsidise [Indian doctors] for seven years to [work in the US than in India]?"

While Tharoor poses this question only in the context of Indian medicos, it's valid for everyone -- non-medicos or medicos, irrespective of whether they work in India or elsewhere. Let me start with two statements:

• College education allows one to earn a far higher future income.
• College education is enjoyed, not by the whole population, but only by a section of it,

If you, like me, believe that these statements are largely true, then you would probably conclude that it is unfair to subsidize it. But subsidy is the name of the game in higher education in India. Tuition at government colleges is a pittance [I recall paying about Rs.200/- per semester during 1981-85; even our monthly living expenses -- about Rs. 250 -- were higher! ]. What is worse, tuition at private, unaided institutions is also controlled tightly by our government [That they circumvent it through fees for libraries, computers, etc. is another matter]. Such low fees do not allow our colleges and universities to upgrade their infrastructure and hire high quality faculty. Clearly, this situation is untenable.

On the other hand, making every college student pay -- up front -- the true cost of higher education may render it inaccessible to the deserving among the poor.

There are several ways of addressing this issue with a view to finding a middle ground. Let me say right away that merit-based and need-based scholarships cannot be this middle ground. Why? If the beneficiary chooses to emigrate, it's a money sink twice over! [India has programs such as the National Talent Search, KVPY, etc. They are meant for rewarding excellence, and their number is small: 1000 per year under NTS and about 250 per year under KVPY.]

Another alternative is educational loans; in rare cases, however, the student may not be able to repay it because he/she doesn't finish college, or his/her future earnings turn out to be too low. Thus, educational loans are a good idea, they are hard on those who don't make it in life.

To me at least, it seems clear that the middle path we seek would not only work like a loan, but it would also have a certain built-in safety net to protect those who fall on hard times. Such a middle path does exist -- in Australia!

Essentially, in the Australian model, every student who is eligible for college gets to go to college with the help of a loan from the government. The repayment of this loan is through an interesting tax mechanism: when the student enters the workforce, he/she pays taxes at a higher tax rate (say, 32 percent instead of 30 percent) until the loan is repaid. Prepayment is possible at a premium. More importantly, this additional tax kicks in only when the income exceeds a certain minimum which, I believe, is the median income in that country.

This model has a lot going for it. First of all, it's fair for everyone; nobody is ripping anyone else off! It ensures that the government's higher education kitty keeps getting replenished by the ex-students and present-day employees. It protects those individuals who fall on hard times from loan repayment, because the 'repayment tax' kicks in only beyond a minimum income.

There are other advantages as well. If, for example, the society (er, the government) wishes to favour certain professions -- because of their 'innate goodness' or, more likely, important national needs -- it can do so by converting the loans into scholarships for those studying those courses. For example, in 2005, Australia designated education and nursing as 'National Priorities'; tuition is free for students in these courses. Similarly, this program has the flexibility to allow colleges to charge differential tuition in different fields.

In this model, the students retain their freedom too! They can go to public or private colleges. Since tuition costs at public institutions is typically lower (because it gets additional funding from the government) than at private colleges, and since the government-financed loans are capped, students in private colleges would have to dip into their personal finances (or, assume additional commercial loans).

I see quite a few other collateral benefits flowing from this middle path. It would promote healthy competition among institutions to attract bright students. All colleges would use their endowments to fund a vigorous scholarship program to attract bright students, thus bringing philanthropy money into the higher ed system. [Right now, lack of transparency in our private colleges leads me to suspect that much of what is sloshing around there is not-so-clean money.]

Sidebar: Our cash-starved universities are always on the look-out for new revenue streams. One such cash cow is distance education in popular subjects. A technical university in the South just admitted over 5000 students to its first MBA distance education program! Another cash cow is short term 'certificate' courses that are academically 'soft' and undemanding. To the extent that faculty time is spent in organizing and teaching these programs, this can only erode the importance of their core activities -- rigorous teaching and research.

This system would also force our universities to strive for efficiency, because their income stream would depend on the number of students they teach. In the present system in India, for example, the share of tuition in the total revenues of our public universities is minuscule. Not surprisingly, universities do not have an incentive to increase their intake. For example, M.A. Pai chides the IITs for their student : teacher ratio of about 10:1, while it's as high as 20:1 in many US public universities. This sort of a jump in student numbers will also require other efficiency-enhancing measures -- use of online resources, reliance on teaching assistants, and so on.

Finally, our large mainstream universities, which have been perfectly content to 'outsource' undergraduate (UG) teaching to their affiliated colleges, may be forced to do a re-think, if their income is tied, explicitly, to the number of students they teach. To me, this is also desirable, since it would bring researchers and UG students together -- perhaps for the first time in more than a century!