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Deloitte Restructuring Services

Vocational education: unintended consequences and bad apples

Background

The Australian technical and vocational education sector consists of 3,700 businesses with annual revenue of $8.9bn, which is expected to increase at 2.2% p.a over the next five years to $9.9bn[1]. The sector is made up of public and private providers.  A key source of funding for private providers is tuition fees charged to students eligible for the VET FEE-HELP scheme.  This was $1.8bn in 2014.

VET FEE-HELP is a Federal Government income student loan scheme that helps pay tuition fees for higher level Vocational Education Training (VET). When an eligible student takes out a VET FEE-HELP loan, the Commonwealth pays the student’s tuition fee directly to the approved Registered Training Organisation (RTO).  The loan is repaid by the student when they attain a certain level of income.

The scheme went live in 2009. It initially applied only to courses where credit could be transferred to a higher education program. The scheme aimed to encourage students into higher education by supporting students studying higher level VET courses who would otherwise have been required to pay fees up front. In 2011 however, a post-implementation review of the scheme found that the take-up rate of the scheme was low.  Specifically, it found that credit transfer arrangements were making it hard for RTO’s to manage applications. As a result of the review, the scheme was expanded from 1 January 2013 to remove the requirement for a link to a higher education program.

Impact of expansion

  • Unregulated pricing and information asymmetry led to increased average tuition fees…

Although course prices are unregulated, the theory was that the opening of the VET market to additional providers should have increased competition and pushed course prices down. In reality, the incentive for students to compare providers and obtain the best price for a particular course was low because payment is deferred until a certain income threshold is met.  In some cases the courses were marketed as “free” or “government funded”.  The result was that average tuition fees grew from $5,917 in 2012 to $14,018 in 2015[2].  The cost of delivery did not rise this quickly over that time. In fact the shift from face to face delivery to online delivery actually reduced costs

  • …Disproportionately impacting disadvantaged students…

VET FEE-HELP take-up increased rapidly as a result of the expansion, with the increase in disadvantaged student numbers being significantly higher than non-disadvantaged students. While this was one of the objectives of the scheme, the lack of a link between funding and student outcomes resulted in some RTOs engaging in unscrupulous marketing tactics. These included targeting people in poor areas via door-to-door salesmen and offering iPads, cash and vouchers to prospective students to enrol in VET FEE-HELP supported courses. In a number of cases students were signed up to courses for which they did not the academic capability to complete.  In other cases, students appear to not have understood that the student loan would have to be repaid. Commonwealth figures[3] show that average annual tuition fees for Indigenous students were 39% higher than non-Indigenous students, and the average annual tuition fee for low socio-economic status students was 26% higher than high socio-economic status students

  • …With no resultant improvement in completion rates or course quality.

The VET sector has historically had lower completion rates than higher education programs, as students may be looking to acquire a specific set of skills or a partial qualification. Students may also disengage without formally withdrawing, and enrol in courses simply to meet welfare requirements. However, the rise in VET FEE-HELP supported students was accompanied by a decline in completion rates between 2013 and 2014. Completion figures from the largest individual providers show a steady decline from 2011 to 2014[4]. A significant contributing factor appears to be the lack of any link between funding advanced and course attendance or completion rates and some providers enrolling students in courses which they may not be capable of completing.

Recent changes

In 2015 the Commonwealth banned inducements to students to sign up to VET FEE-HELP loans and introduced rules to prevent the marketing of courses as “free” or “government funded”. Further changes were introduced from 1 January 2016 to strengthen the scheme including:

  • Capping provider payments under the scheme up to the maximum of their 2015 loan amounts
  • Improved student protection provisions such as: erasing VET FEE-HELP debt where there has been inappropriate behaviour by an RTO or agent; introducing a language, literacy and numeracy test; and preventing RTOs from charging total course fees up front
  • Restrictions on RTO eligibility around the length of time a RTO has to have been established for, the provision of sufficient, trustworthy financial information and a measure to ensure that VET FEE-HELP courses are not the RTO’s sole source of revenue
  •  Allowing the Commonwealth to place payments to a RTO on hold where there are concerns about its practices
  • Introducing penalties for breaches of the VET Guidelines.

The Department of Education and Training has also increased the level of evidence required when making payments under the scheme.

The result of these changes and action taken by the Australian Competition and Consumer Commission against suspect RTOs has resulted in funding for a number of RTOs being reduced, and in some cases the appointment of external administrators.

Conclusion

Further changes to the scheme are likely. Submissions for a consultation process closed on 30 June 2016. The previous Minister for Vocational Education and Skills, Simon Birmingham, stated an intention to introduce a new model for VET FEE-HELP in 2017[5]. Although Senator Birmingham has since been promoted to cabinet (into the Education portfolio), it is expected that the new Assistant Minister for Vocational Education will continue the process of redesigning the scheme.

The Commonwealth’s latest discussion paper[6] contained a number of suggestions and potential changes. It seems likely that at a minimum any changes would include:

  • Further strengthening of the Commonwealth Government’s ability to audit and obtain information from RTOs
  • Linking RTO payments to compliance with relevant regulations and guidelines, including quality requirements
  • A method of reining in course fees through student loan caps, RTO loan caps, price regulation or a subsidy model that allows for higher funding for courses in industries or areas where a skills shortage may be present.

RTOs will continue to come under increasing scrutiny as a result of stricter regulation and increased investigations. Margins will also come under pressure through linking the level of funding provided to the actual cost of delivery.

The Australian Skills Quality Authority (ASQA – the national regulator for the VET sector) recently announced changes to announced changes to its decision-making and audit processes as well as the development of a new audit model which more effectively targets “the small percentage of providers that consistently exhibit poor outcomes, practices and behaviours”. It is likely more scrutiny will also be applied to RTO governance arrangements, particularly where there has been significant growth in VET FEE-HELP funding which may have outpaced the ability of RTOs to maintain course quality and student outcomes. Private providers unable to meet stricter requirements may be forced to exit the industry through reduced funding or having their registration cancelled.

Summary

  •  The VET FEE-HELP scheme has undergone significant expansion since 2013. Recent regulatory changes and action by the Commonwealth Government through the Department of Education and Training and the Australian Competition and Consumer Commission have addressed some of the abuses of the scheme
  • RTOs may be subject to increased scrutiny and where they are found to have broken the law may be forced to repay funding, placing a significant strain on the RTO. The ACCC in particular has been successful in pursuing RTOs in relation to misleading, deceptive and unconscionable conduct
  • Further changes are expected in 2017 which will likely further restrict RTOs, placing a greater burden of proof on RTOs to provide information when claiming under the scheme and provide increased powers to the Commonwealth to audit RTOs and link payments to compliance
  • RTOs are likely continue to experience margin pressures as a result of attempts to rein in the cost of courses and link the level of funding provided under the scheme to the actual cost of delivery
  • The way that RTOs are assessed by ASQA is changing to better target RTOs with a history of poor practices. Some of the factors that ASQA may use to target high risk providers include the rate of growth in VET FEE-HELP funding, the concentration of Indigenous students and low socio-economic status students, the level of tuition fees being charged and student completion rates. Funders or investors in RTOs should investigate these factors, together with the RTOs overall governance arrangements, to understand the risk profile of a particular organisation.

[1] IBISWorld

[2] Commonwealth Department of Education and Training, Redesigning VET FEE-HELP Discussion Paper

[3] Commonwealth Department of Education and Training, Redesigning VET FEE-HELP Discussion Paper

[4] Commonwealth Department of Education and Training, Redesigning VET FEE-HELP Discussion Paper

[5] Sydney Morning Herald, “Simon Birmingham to take 'leading role' as government plans vocational education overhaul”, 19 July 2016

[6] Commonwealth Department of Education and Training, Redesigning VET FEE-HELP Discussion Paper

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