The Australian senate was debating the higher education sections of the Howard government's summer budget this week. The package puts most of the burden of savings from higher education on students in the form of increased contributions, steepened loan repayment terms, and provisions allowing universities to charge full-cost fees for over-quota home students.

The proposals are controversial and the government does not have a majority. Education minister Amanda Vanstone has therefore been lobbying hard to get vice chancellors to lean on independent senators to support the package. Otherwise, she has threatened that their operating grants, scheduled to shrink by only 5 per cent over three years, would be hit hard next summer to recoup any reduction in planned savings from the present budget. Cuts in operating grants do not require senate approval.

The Australian vice chancellors are in a nasty bind. They do not want to be seen to be gung-ho for charging students and they are worried by the sharp hike in proposed charges, particularly for science courses at a time when too few apply to study science. However, along with the 5 per cent cut, they face a pay claim from academics of 15 per cent over two years with, for the first time, no supplementary funding allocation to cover it. Each university is locked in pay negotiations with its staff. The rises look likely to be set at about 10 per cent, which will mean redundancies, course closures and site sell-offs. Further cuts in operating grants would be hard to handle.

Meanwhile, on the other side of the world in the United Kingdom, vice chancellors meet this week to discuss their next moves in the long war of attrition with Britain's Conservative Government, which has for 16 years been imposing cuts greater than those imposed this year on their Australian colleagues. They have some grounds for self-congratulation. Last week's Budget slowed the rate of shrinkage in their public funding compared to what was planned this time last year. But it did not, as the National Union of Students apparently believes (advertisement page 9), produce more money but an easing of the year-on-year squeeze. There is no extra money to pay staff, invest in information technology and mend roofs.

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The Government may have calculated the size of its bribe correctly and bought acquiescence in universities for long enough to get through the election campaign without the vice chancellors provoking demonstrations on the streets by imposing charges. The underlying problems, however, are as acute as ever.

This makes the Australian debate particularly relevant to the UK. Australia is further down the path that the UK vice chancellors have said they would like to see Britain follow in terms of funding. The Dearing committee is just the most recent of the groups to visit Australia to study their experience. It has seemed to many until now that Australia might have got it right.

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When the Labor government forced reform on higher education, merging institutions and ending the binary line, it, unlike the British Government, also reformed funding arrangements. The Australian Higher Education Contributions Scheme whereby all students faced a flat rate charge which could either be paid up front with a discount or repaid later through tax when earnings reached a set level, seemed to be the least worst way of expanding rapidly without excessive public spending and charging students without deterring access.

Australian universities' recent experience, however, suggests some lessons for the UK. First is that politicians' promises are not to be trusted. When HECS was set up, it was agreed the money would go into a separate trust and not be siphoned off by government for other purposes nor be used as an excuse to reduce central funding. Higher education would get the extra money. Much more recently the Howard government promised no changes to HECS. But now reducing the budget deficit has priority. The promises are being broken.

Second, schemes like HECS mean cuts in higher education can be transferred to students instead of institutions. Vice chancellors may see this as an advantage. Students will not. No wonder the NUS is increasing the vehemence of its campaign against tuition charges, since the vice chancellors have been pressing for a HECS-type scheme. Charges allow universities to escape the iron bonds of public funding. Rapid rises in tuition charges in United States universities amply demonstrate the way this source of funding is exploited once it becomes available.

Present proposals for different fees for different courses and full-cost fees for extra students alters HECS's egalitarian character. Working on the assumption the changes will be approved, high-prestige Australian universities like Melbourne are already busy organising scholarship funds so that they can attract top students both from Australia and abroad. The Australian scene is rapidly becoming more like the American.

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Third, Australia's experience shows that government charging regimes linked to loan schemes are expensive in terms of public debt. The Australian scheme is about Aus$4 billion (Pounds 2 billion) in deficit. Hence the pressure to collect repayments faster. Both the British and Australian governments are now looking for ways of privatising student debt. Britain's Student Loan Company's debt is to be sold. Mrs Vanstone is keen to explore ways of doing the same with Australia's debt in order to find the money to invest in information technology. Australia does not, for example, have the equivalent of Britain's Joint Academic Network and would dearly like it.

Finding ways of privatising student debt - if not the whole loan scheme - is likely to be a pre-condition for any large-scale expansion of loan facilities in either country. In Britain at least, an extension of loans is needed badly if part-timers, further education students and postgraduates are to be eligible for help alongside full-time first-degree students.

Given the emerging difficulties with the Australian system, British vice chancellors might do well to pay serious attention to one of the more radical pieces of evidence submitted to the Dearing committee. Nick Barr and Iaian Crawford (front page) have suggested that the universities should take over Britain's Student Loans Company.

Britain's universities already collectively own a number of agencies of which the Universities Central Admissions Service is the largest. There is no obvious reason why they should not similarly own the Student Loans Company.

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Such a move would require a level of agreement and a boldness of approach unusual for the CVCP, the only body that could plausibly take on the job. It would mean finding a bank as partner since the Government would want cash for the debts. It would mean tough negotiation with the Government over the collection mechanism for debts. The scheme would be realistic only if debts were collected by the Inland Revenue acting on an agency basis.

There would also need to be some Government money to subsidise interest rates and cover an agreed percentage of debt default, a commitment that could still allow a considerable saving in public spending terms compared to the present scheme. None of this would be easy but in present circumstances the idea at least merits further exploration both by the Dearing committee and the CVCP.

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