First, a comment or two on the changes to the youth allowance associated with family and personal income tests. The three important words here are indexation, indexation and indexation.
The levels of income that formed the basis of eligibility had been tied to the consumer price index since 1998, which may seem like a fair thing. However, given that incomes will increase more than prices, it is likely to be this rule that explains why the youth allowance coverage has fallen from about 45 per cent to 32 per cent during this period.
Students from relatively poor families would have found it increasingly difficult to qualify for the maximum allowance and many from less poor but still disadvantaged backgrounds would have been increasingly unlikely to be eligible for any allowance payments.
This has been fixed through a much higher level of income qualifying for the maximum allowance.
Related to this is that the value to students of working part time has fallen substantially since 1993. Over this time period, the fortnightly amount that a student was allowed to earn before youth allowance began to be taken away had, extraordinarily, not been indexed at all.
However, these changes don’t come cheap. The federal Government has taken the advice of the Bradley Review by abolishing a strange aspect of the independence status, which saves enough money to underwrite a reform of the youth allowance.
In 1998 the government extended the basis under which full-time tertiary students under 25 would be considered to be financially independent of their parents and thus eligible for income support grants, even if living at home.
The additional criteria included: working a given number of hours in paid employment for a specified period; or earning $18,850 (in 2008 dollars) in a recent 18-month period.
The latter opened the possibility that students could receive non-means-tested income support after having taken a gap year or even through being employed at an exceptionally high wage rate for a short period by a family member or friend.
This policy development was probably a response to the possible inequities associated at that time with the increase in the age of independence to 25.
The number of students receiving the independent at home allowance increased rapidly from 1999 to 2003, from about 1000 in the first year to about 21,500 in the last. Since then the figure has remained virtually unchanged and stood at 22,689 in 2007, or about 18 per cent of all recipients of the youth allowance.
The critical policy issue concerns whether these income support recipients are in fact financially disadvantaged. In the research on this issue we considered that if young students were also from relatively high-income families it was likely that they did not also need this form of independence assistance.
My colleague Kiatanantha Lounkaew and I compared differences in the household incomes of higher education students who were receiving the youth allowance with those who weren’t. An important complication is that the type of allowance received (for example, means-tested living at home, independent at home or independent not living at home) is not identified in the survey.
Once we made steps to correct for this aspect we were able to compare the household incomes for those in the independent category with those who were not.
There are two striking findings from this exercise. First, as illustrated in the Bradley review, a significant number of young students on youth allowance have relatively high family incomes. For example, we found 36 per cent of the students in the independent at home category were in families with incomes of more than $110,000, and more than half of these had incomes of more than $150,000.
Second, when family incomes exceeded about $80,000, the income distribution of those on an independent youth allowance were extremely similar to those not on the youth allowance.
This is clear when we overlay the data the distributions are the same, an assertion we tested econometrically.
This exercise seems to suggest strongly that some present aspects of eligibility for independent youth allowance sit uneasily with a system motivated by the need to facilitate the participation in higher education of poor students.
Simply, many advantaged students seem to have been enjoying an excessive generosity from this rule, and its abandonment should be welcomed by those giving weight to basic issues of fairness.
In short, these youth allowance reforms should result in more effective and fairer targeting, a conclusion that seems to be understood by many commentators. There is the additional comforting point that these policy changes have clearly been motivated with due weight being accorded the evidence.
Bruce Chapman is from the Crawford School of Economics and Government at the Australian National University. He was a consultant to the 2008 review of higher education, which recommended most of the changes adopted by the Government.
This article originally appeared in The Australian on June 3 2009.
While Chapman, as a consultant to the 2008 review of higher education, which recommended most of the changes adopted by the Government, states that “the result is increased fairness in a system established to allow greater access to higher education for poorer students”, it is arguable whether such a system is fair or not.
Why should poorer students be financially advantaged over other students for receiving higher education if both categories of students have the alternative opportunity to work at their ages? If they are working age, why should their parents’ income should still be tied to their wellbeing?
I think a scheme similar to the past HECS system to provide financial assistance in the form of loans is much fairer than the reformed Youth Allowances. If one takes the view that a person’s life time earnings will be higher after completing higher education, than it is fair to everyone that person pay for his/her higher education out of his/her higher income when it is earned latter on.
Of course, when people are young, they don’t have the financial capacity themselves, so the government can provide an equal access opportunity to all prospective young people if they wish to study higher education by providing a bridge loan for living during their study.
The interest from such a loan can be a little higher than that for HECS, but should be lower than commercial loans. So government smooths the income stream or cash flow of those who undertake higher education, but the main costs are still paid by them when they make higher earnings after their study.
Such a system will provide an equal opportunity to every young person to access higher education, won’t they?
Why don’t we implement a better system that is fair to everyone rather than create new inequality among the young? We need to take a broader view and have a fundamentally different approach to social welfare.
I should have made my point clearer in my earlier comments. The free youth allowance enjoyed by only some of youth who are studying higher education is unfair to not only the other students who don’t receive it, but also to the other young people who don’t undertake higher education but are working. Further it is also unfair to all other taxpayers, because it is their money that is used by the government to subsidise those recipients that are bettering their future pays. That is why I see the current youth allowance system is fundamentally unfair.
Of course Bruce Chapman was going to support the removal of the work participation criteria for earning “Independence” as he was part of the team that reccommended it in the first place. This article mirrors the same problem the Bradley Report faces it’s major criticism for in that it is city-centric. They admit that they don’t have the data they need so they extrapolate, yet the very data they need is what they are missing and that is the data on those students who are truly independent and living away from home, the majority of whom will be from rural and regional areas in Australia. Due to the nature of much of the employment in these areas it also fails to take into account that many (if not the majority) of these students will come from families that are actually subjected to the Family Actual Means Test and not the Parental Means Test. I’d almost defy any family to deal with the paperwork that comes with this income test, and for those that do the accountants fees will be horrendous.
Lincoln the problem with using student loans to finance university is the disincentive of $100,000 in loans on top of HECS debt will have to university participation for those students who have no option but to live away from home if they want to attend university. It is discriminatory at the very least, and discrimination in access to higher education is legally a Human Rights issue. Why should city kids who can live at home get their university education virtually free while rural and regional students are expected to take massive loans for the privelege?
The very reason for the removal of the two criteria was to stop the rorting of the system by students who live at home in high income households. The Bradley report makes that VERY clear. The answer is to remove their access to it, NOT to remove the access if those who actually do live away from home, who incidentally still have to supplement the income they recieve from YA in order to be able to survive.
Hmm.. Lincoln.
Higher education is an investment in human capital which has positive externalities for the rest of the economy. A well-educated workforce is a boon for everyone, and a well-educated society has very many valuable implications for governance, freedoms and civilised society. These positive externalities are a public good that the government encourages by supporting it with taxpayers’ money. If the rest of society has collectively some benefit to gain from a higher educated population, then society should also contribute to this. So, I disagree with one of your central points – about it being unfair for society to subsidise education.
Why does family income come into the picture, even for individuals of working age? – Well, because family income and the capacity of the family to support (whether practised, or as a potential back-up if the individual cannot support themselves) can make an incredibly big difference to an individual’s choice of pursuing tertiary education. Support mechanisms such as youth allowance are an attempt to remove this consideration from the picture – to bring us closer to that liberal ideal of ‘equal opportunity’. It shouldn’t matter how poor your family is, every individual should have the opportunity to pursue higher education.
On this same point, the government sees society as valuing a high degree of social mobility and equality of opportunity – hence government provides support to these things.
I grew up in a low-income family and even went to school in one of the lowest-income areas in Brisbane. I am surrounded by friends from poor families that simply could not afford to support their kids at university. For some of them, youth allowance made an incredible difference – and gave them that extra bit of support, in addition to the little part-time work they did alongside study, to get them through university.
On the other hand, in my later years of secondary education, I also went to one of the better public schools in Brisbane, and so have a lot of friends from wealthy families. The proportion of my friends who could enter university and simply rely on their families for support, was incredibly higher. In fact, many of them, just like the above article suggests, would fulfill the $18,000 over 18months criteria working under a relative or in a 3 month internship, and claim youth allowance as well, while living at home, with full support from their wealthy parents (who already had large asset bases, and combined incomes of easily over $100,000). – Hopefully the changes to youth allowance limit these cases.
Finally, on your point about support to university students being unfair to those who choose instead to enter the workforce directly.. Those same individuals, have the choice to go to university. They choose not to do so. Upon entering the workforce, given the level of wages in Australia, these people are typically able to support themselves. This isn’t necessarily the case for students. Students are occupied with full-time study, that can take 30-40hrs or more of their week – and the best they can do outside of that is some small amount of part-time hours which cannot support them by itself. Youth allowance payments, even at the highest rate, by some standards actually remains below the poverty level, so, it’s supposed to supplement their income, to enable these individuals to survive and complete their education while maintaining at least somewhat of a socially acceptable lifestyle.
You put forth the idea of providing financial assistance to these same people, in the form of loans with below-market interest rates. Technically speaking, this is no different than simply handing them money payments. A loan with a below-market interest rate, can be simply conceptualised as a free cash payment plus a smaller loan at market-rates. It just comes down to how big the difference in the interest rate is, and equivalently, how big the underlying free-payment is derived to be.
Anthony,
With respect, I think you appear to have misunderstood my points in my comments. I did not say higher education should not be subsidised, that is the first part you misunderstood me. We have HECS like program (I can’t call the current program name, sorry), that has two aspects. One is that it is below the costs of higher ed, so it reflects a government subsidy to most non-full fee students. I did not argue against or oppose that. That means I implicitly accepted what you said the externality of higher ed. Two the provision of HECS like program means a way to assist those students who may or may not have the financial capacity to borrow from the government to finance their study and repay it latter on when they earn enough income. This is available to every student who wishes to use it. That is what I call fair.
I don’t have problem with finance available to students who don’t have the financial capacity to live independently while pursuing higher ed. My point is how equal access, your central concern, should be defined and implemented. You seem to suggest the only way to create equal access is to give them free money. On that point I beg to disagree. As I argued in my earlier comments, and also mentioned here, HECS program has gone some way in that direction in terms tuition fees, without creating new inequality. Why can’t a similar approach to living expenses be adopted? Why there should be a difference between HECS and youth allowance? That puzzles me and your new elaboration has not provided any new insight, I am afraid.
I acknowledge that a subsidised loan or below market interest rate loan as you put it, has an element of free money. but that does not mean it is free money as the current youth allowance. The difference is significant. If it is not, you would at least implicitly agree that my proposal is equivalent to youth allowance and can be implemented. The reason you insist on free youth allowance is that difference. I think that difference is important and reflects why the current youth allowance is unfair and my proposal is fairer that youth allowance. That is my point.
Besides, you mentioned only the externality side of education, but did not mention about the fact that people with higher degrees tend to have higher pay and a better life style latter on when they work. The higher earning latter on is an important issue when considering how students’ living should be assisted by government through taxpayers money.
Also, you said that those young people who have not gone to university and are working chose to not go. I beg to differ on this point as well. Yes, some of them did that by choice, I don’t dispute that for a moment. But there are many young people who did not go to university not because of their own choice not to go, but because of the limited positions available from universities. So saying those who are working chose not to go is false at best and misleading at worst. That is why you couldn’t see the unfairness of youth allowance. If that has been your deeply held belief when you provided advices to policy makers, it reflects at least an innocent error, or maybe biases based on own family background.
So we need to approach this issue objectively. That means we might need to get out of our comfort zone.
Heather,
I’d like to respond your comments on my point in my first comments. To be frank, I am afraid you missed the point altogether. You say a loan approach is discriminatory. That is not, unless you think people have different assets or earn different income are discriminatory, that would be a communism approach to a social system of distribution, or wouldn’t it?
I can sense that you are concerned with students away from home from rural areas. If that is a problem (although I don’t think it is, I am afraid to say), a program to subsidise those students as opposed to the current youth allowance may be designed. We need the first best approach when it is possible rather than a second best approach. Don’t you think that would be better?
A loan approach should resolve the access dilemma, but is fairer than the youth allowance approach. It is fairer to more people, although not so “fair” to those who could get the current free youth allowance. I acknowledge that. There is no system that is universally fair to everyone, because there is always “wants”, as opposed to needs. Not all wants can be satisfied, I am afraid.
You say that the loan approach would deter some people because of the burden of $100000 or more debts. There is some truth to your argument. But I don’t think that should be the deciding factor. First, the burden needs to be considered in conjunction with the higher future earnings. Second, it needs to be compared with the option of foregoing university study for no such a burden and earn less in the future. Third, the interest can be used to reduce the burden, if that is really a problem. Fourth, this component of debt from higher education can be allowed to kick in at a higher income level, so one only needs to pay it when income is sufficiently high. Fifth, the loan is optional to all, so the requirement to pay it latter on with income earnings would deter free riding by some that has made the youth system even more unfair.
Further, there can still be a free allowance to those really and really in need to supplement the loan program. But that should be strictly limited to a tiny number of students, with well specified, verifiable and audited criteria.
To sum up, a loan approach to living expenses of university students is better and fairer to more people. It also has a built in deterrence for free riding of taxpayers’ money.