A really interesting article was published in the Australian Financial Review today by Robert Bolton … “Universities set to turn away hundreds of thousands of students”.   Robert outlines how admission centres across many states are reporting massive increases in applications to start university next year – NSW alone has had a jump of 88% compared to the same time last year (7,824 versus 14,669 applications).

But, and it’s a big BUT, from 2020 onwards universities only get increased funding for bachelor-level Commonwealth Subsided Places (CSP) based on population growth in the 18‒64 year-old age bracket or the ‘working-age population’.  As an example, in the year ending 30 June 2019, the Australian working-age population increased by just 1.3% (or 207,400 persons).

So you can see the problem already….a massive increase in demand but only a super tiny increase in funding.

This is where understanding university margins becomes essential.

Let’s look at a very simple example.  Jane wants to enrol in a Bachelor of Engineering and John, a Bachelor of Accounting at a university that has already reached its ‘cap’.

Question #1 – should the university accept them?  Based on the knowledge that the university won’t receive any Commonwealth funding for those two students, then it appears to be an easy no.

Now without making the example too complicated, the majority of Jane’s subjects fall into Funding Cluster 7 (engineering, science, surveying) whilst the majority of John’s subjects, Funding Cluster 1 (law, accounting, administration, economics, commerce).  The current funding rates for these clusters are:

Although the university wouldn’t receive the Commonwealth funding as they’re over their ‘cap’, they would however receive the applicable student contributions.

So, Question #2 – should the university accept them based on only receiving the student contribution?  If we were to take the average cost to teach a bachelor student in 2018 as being $17,600, then the answer would still be no as neither of these student contributions would cover this cost.

However, the question should never be ‘should we enrol Jane and John?’ as there’s not a simple yes or no answer.  Rather the question needs to be  ‘can we afford to enrol Jane and John?’.  And the only way to answer that question is to know what the costs are to teach subjects in each of these funding clusters.

So, Question #3 – should the university accept them based on only receiving the student contribution and knowing what it costs to teach each funding cluster?  If, at this university, they have a cost model and they know that it costs an average of $12,000 to teach accounting and commerce subjects and $22,000 to teach the engineering related subjects, then many would still say no, as again, the student contributions still don’t cover these costs.

But, and again it’s another big BUT, what would the answer be if the university’s costing model could differentiate the fixed from the variable costs by funding cluster?  After all, for every new student enrolled, the cost of many of the central administration and even faculty support services doesn’t change…the university doesn’t hire a new Vice Chancellor, a Faculty Dean or Head of School.  In addition to some of the student supports areas, it is really only the direct cost of teaching that changes and depending on the subjects being taken, that will differ by the type of subject being taken.  For example, a subject where there are large lectures…one more student sitting in the lecture would normally not cost the university any more to deliver.  There would be a small amount of additional marking and assessment effort (and therefore cost) for that one new student, and the course coordinator may need to add another tutorial, but in the overall scheme of things, this additional cost may not be that large.  However, for those subjects that are taught in small groups and that may require additional resource-intensive laboratory classes etc, the cost may be significantly more.

So the real question should be ‘what is the marginal cost to teach an additional student in each funding cluster and is it more or less than the student contribution?’  In the example used above, it may end up that the additional cost to the university (the marginal cost) may be less than $11,155 to teach John’s subjects, yet may cost more than Jane’s student contribution of $9,527.

There are, of course, numerous other factors involved in the decision however hopefully this example helps to illustrate that the answer may not be just a blanket ‘no’.

Finally, this in turn raises even more questions!

• The Commonwealth Government, so far, has seemingly been unconcerned about the potential loss of thousands of jobs caused by the reduction to Australia’s 3^rd largest export – the international education market ($32 billion in 17/18).  Will the Minister for Education now consider an increase to the 2021 CGS cap to help satisfy the increasing domestic demand?  More enrolled domestic students would also result in a lower unemployment rate – a figure near and dear to the Government’s heart.
• What do university Vice Chancellors do right now?  Should they still look at downsizing their workforce based on the reduced number of international students, or take a chance on the emerging local demand?  Whilst marginal analysis for a university may show that they breakeven on only a small number of funding clusters / subjects / courses, it may be just enough to allow them retain the majority of their existing workforce with some additional balancing of workloads or use of sessional staff and avoid the loss of hundreds of jobs.