OPINION: Despite Education Minister Christopher Pyne’s failure to get university fee deregulation passed in the Senate, it remains quite likely that fees will rise one way or another in the next few years. This could be through an increase in the cap on fees (as South Australian Senator Nick Xenophon has advocated), or via passage of some version of the deregulation legislation.

There has been much comment about fee deregulation and the trade-offs involved in having a properly funded university sector and the important issue of equal access. A key part of this discussion concerned the question of how price sensitive university students are. That is, how much of a fee hike will deter students from going to university? And how does this differ by socioeconomic background?

The experience of US law schools

The effect of fees on students commencing university is a profoundly important issue which has implications for social mobility, equality of opportunity, income inequality and the skill base of the Australian economy.

But fees also have very significant implications for students coming out of university. Will private sector employers end up paying higher salaries to graduates, thereby offsetting the higher fees? Will students be willing to go into lower paid but socially beneficial jobs such as those in the government or not-for-profit sectors?

The legal education market in the United States provides a useful lens into these issues, and it shows how important financial support is if we want students to go into public interest jobs — especially those from less privileged backgrounds.

In the US, a law degree can only be taken after a four-year college (undergraduate) degree, so many students already have significant student loans when they start law school. Law school itself takes three years full-time and tuition costs run to between US$30,000 and US$50,000 a year, depending on the prestige and ranking of the university.

Now, before you completely decry America and free markets, there are some offsetting factors. First, there are very well-functioning private student loan markets. Essentially any student can borrow not just their tuition but also living expenses at fairly low interest rates and with long repayment schedules.

Second, many law schools offer financial aid on a needs basis — including free tuition for some students. Third, starting salaries in major law firms are quite high reflecting, as one would expect in a well-functioning and competitive labour market, the costs of education.

For example, a typical starting salary in a major New York law firm is around US$160,000 (with some above US$200,000), compared to around A$80,000 in Sydney (and the latter is a more expensive city to live in).

Public interest legal jobs such as legal aid or community legal centres are more or less equivalently poorly paid in both the US and Australia. Faced with significant student loans and a large difference in salary, many graduates simply cannot afford not to go into the private sector.

The US response to this has been to provide fee waivers and loan repayments for those willing to go into the public sector. Yale even does so (in part) for those who go into legal academia.

Australia is a long way away from US$50,000 per year tuition, but if we head in that direction then we will need to consider similar schemes if we want to make public sector lawyering a viable option for graduates.

The fact that HECS repayments are income-contingent partially addresses cash-flow issues to do with loan repayments, but doesn’t deal with the principal of the debt itself. That still has to get paid back and it can loom large when thinking about buying a house or making other major financial decisions.

Australian universities lack the endowments of US ones

There are, however, some unique challenges in importing this kind of approach into the Australian system. A key factor, of course, is that it is expensive. Universities in the US with significant endowments (there are 20 universities with endowments in excess of US$5 billion) are often willing to do so for a combination of social impact and good marketing.

Australian law schools don’t have any endowments to speak of, so the money would need to come from private sources or the government, with the latter seeming more likely.

Yet having a federal government department administer such a program would fail to utilise the important local information about students that law schools possess: who is most genuinely committed to public interest lawyering, likely to flourish in the environment, likely to stick it out for the long haul.

Our solution (in addition to the proposal that 20% of revenues go into scholarships) is that the federal government should give law schools a “public interest trust fund” to be used only for the purpose of financial aid to those graduates going into public sector lawyering.

The size of such funds should depend on the level of tuition fees and the ability of a given law school to prepare students for success in the sector.

Of course, law is just one example of a field where private sector returns to education are fairly high compared to the public interest sector, where the latter generates significant social benefit. Medicine is another, and increasingly other fields exhibit this divide.

Australia needs well-funded universities and it has been clearly recognised that this cannot come at the expense of access or equity. We also cannot afford to let fees be the main determinant of the career paths of graduates.

Rosalind Dixon is a professor at UNSW Law. Richard Holden is professor of Economics at UNSW's Business School.

This opinion piece was first published in The Conversation.