Currency risk

By Eric Crampton 13/03/2013 4


Radio New Zealand reports international student visa numbers are down; they blame the high dollar.

The real cost of tertiary education in New Zealand can vary substantially with exchange rates. There isn’t much that any University can do about levels, but we could perhaps be doing more to reduce uncertainty.

Who is better placed to mitigate the risk of currency fluctuations: a family sending their kid abroad for study, or large enterprises with budgets in the hundreds of millions and with finance departments?

A first step in mitigating that risk would be exchange-rate-sensitive international student fees. We could offer tuition packages allowing international students a few ways of offloading currency risk:

  • Pre-paying multiyear tuition to lock in current exchange rates, with guaranteed refund in home-currency dollars if the student drops out [the University then forward contracts or buys options to limit its exposure, enjoys earning interest on the pre-paid fees];
  • Tuition guarantees: for an up-front fee, guarantee that the per-course tuition fee as measured in the student’s home-currency will not vary upwards by more than some amount. Set the up-front fee so that it’s enough to buy options to lay off the risk. So long as the University can buy those option contracts more cheaply and with fewer hassles than can a student, this should be a worthwhile proposition;
  • Exchange rate insurance: the University sells to incoming students contracts that give them a cash bonus if their home currency drops by a set amount. Tuition is maybe a third to a half of an international student’s total cost of study. If the home currency tanks or the NZD jumps, living here gets a whole lot more expensive. Universities can use the up-front fees to buy option contracts on foreign currency that would let them pay out the students in case of dramatic currency fluctuation. Again, so long as large institutions have cheaper access to these kinds of contracts, this should work.
As best I’m aware, no university in New Zealand offers these kinds of currency deals; I’ve never heard of their being offered in other countries either. The odds that I’m missing something big and important seem larger than that it’s just the usual non-profit inertia – it’s unlikely that everybody would be missing this trick if it really were a twenty dollar bill on the sidewalk. Then again, as Tyler Cowen put it:

I work in what is perhaps the most competitive and successful sector in the most competitive and successful economy of all time.

And yet what I see around me is a total, total mess.  And I believe my school to be considerably above average in terms of how well it is run.

If somebody can tell me what I’m missing, I’d appreciate it. 
Another option that could help, and as suggested previously, the government could guarantee that international students completing a degree at one of our better tertiary institutions would be given permanent residence on degree completion, subject to the usual criminal background and health checks. The path from student visa to work visa and residence is pretty easy, but it adds uncertainty for students who don’t know that it’s likely to work out. Making the default be permanent residence on completion unless you screw something up badly, rather than having to go back home unless you get everything right, could make the degree more attractive even when the dollar is higher for a longer period. Added benefit: foreign students currently cross-subsidise domestic students. Increasing the ratio of foreign to domestic students would effectively increase tertiary funding without it having to hit the government’s books.

Update: Luis suggests some reasons:

Management costs per student shouldn’t be that high – when the student purchases the contract, you buy the option contracts, then forget about it until you need to execute. Risks of screwing it up are large though if universities are incompetent at this kind of thing. The link Luis provides points to the temptation to overmanage and earn on the hedge rather than just keep it as insurance. I doubt that any university’s portfolio of international students includes enough home-government funded students to make the packages not worth offering, but it could be true in some places.


4 Responses to “Currency risk”

  • These are the same issues as were about when I ran International Student Support services at a Uni from ~97-2003. I think some solutions were trialled. I recall Uni Otago (I think) once offered set fees in US$.

    Wrt to some of your suggestions. The immigration rules have been changed over the years so that it is already likely that an international student who completes a degree will get PR. SOme research on that here http://www.dol.govt.nz/publications/research/international-students/index.asp (6 year old data)

    Wrt cross-subsidation I am of the opinion that the experiment has failed. The law was clear that domestic fees/Tax payers could not subsidise international (changed later wrt PhD students). International students were meant to be the “cream on the top.” However, they rapidly became a survival mechanism for tertiary institutes and many schools. Imagine what would happen if the number of international students were reduced to levels 15 years ago? (I think at UC it was ~450 students in ’97. We had 40% growth each year for several years after that before numbers fell again as a consequence of the exchange rate, some poor publicity over safety of students in NZ, and eventually competition from emerging education markets).

  • Cool that Otago tried it. I wonder why they stopped giving that option.

    I know that it’s easy to get PR after a degree, but you can’t really market NZ degrees on that basis. If we flipped the default from “oh, if you jump through the hurdles, you’ll get it” to “You’ll get it unless you screw something up”, that could help.

    Agree that international students are what pay the bills, and that everybody’s now hurting with the fall in numbers – that’s why I’m suggesting things that I’d hope would bring in more of them!

  • There are other factors at play also of course. Perceived prestige of the university is one. Perceived safety of the child is paramount for many parents. The mainland Chinese students, for example, are not merely the loved only children of parents (where all authority is with the parents) but often the chosen child of a generation that parents, uncles and aunties and grandparents have invested heavily in. We dropped the ball a decade ago on this.

  • From today’s Australian:
    “BILLIONAIRE James Packer will today urge the federal and state governments to work more cooperatively with the nation’s universities to greatly increase the number of Chinese and Asian students studying in Australia.
    In his first public comments on the issue, Mr Packer will argue that education provides one of the most important means for Australia to bolster its engagement with Asia and that it can underpin the creation of lasting business relationships in the region.
    ‘‘Our federal and state governments must actively work with the university sector to make Australia even more attractive to Chinese students and their parents,’’ Mr Packer will tell an Asian Society lunch in Sydney.
    ‘‘The government can and must do more in China and Asia through our missions and Austrade to help market our country and lifestyle to potential students. And most importantly, we need in an election year to ensure that our universities have the funding they need to considerably raise their academic and student offerings.’’
    The federal government’s Asian white paper unveiled a blueprint for a deeper engagement with Asia, including linking every school with an Asian counterpart, Asian languages being a core part of the Australian curriculum and granting 12,000 scholarships to Asian students to increase links with the region.
    It also said Australia would need to improve its education, skills, innovation, productivity and infrastructure and undertake continuing tax and regulatory reform to take advantage of the rising Asian middle class.
    Mr Packer’s focus on developing deeper links with Asia — China, in particular — comes as he seeks to win broad support from politicians and from an independent review being conducted by former Commonwealth Bank chief executive David Murray for a $1 billion six-star casino resort development in Sydney. Mr Packer’s Crown is also developing a $500 million casino-resort hotel in Perth.
    While Mr Packer’s previous comments on Asia have been focused on attracting the middle class from China and southeast Asian countries seeking ‘‘five-star’’ tourism experiences in Australia, he now intends to turn the focus to education.
    He will argue that Australia faces fierce competition for Chinese and Asian students from some of the most prestigious universities in the US, Europe and Canada and it needs to work harder to ensure they study in Australia. ‘‘I never attended university, but the one thing I do know about them is that they are always the power house behind an advanced Western economy, the incubator of ideas and innovation,’’ Mr Packer will tell today’s audience.
    ‘‘For the Chinese middle class, education is the best gift they can give their child. The US gets it and unless we direct more resources to the task and have a . . . strategy, we will fall behind.’’”