Government-backed loans the ‘most workable’ solution to fund tertiary education

“Free tertiary education wouldn’t be socially fair in a country like SA that doesn’t have enough public money to guarantee more basic services.”

This is the view of Professor Lorenzo Fioramonti, the director of the Centre for the Study of Governance Innovation at the University of Pretoria, who believes that universal free tertiary education is not affordable and might burden SA’s already constrained public finances.

Fioramonti is one of the academics that made submissions to the commission of inquiry into the feasibility of free higher education and training, headed by retired judge Jonathan Heher.

Fioramonti’s proposal for tertiary education to be funded through government-guaranteed loans sourced from commercial banks, known as income-contingent student loans, was adopted as a key recommendation by the Heher commission’s report.

The Heher commission recommended that all students from universities and colleges, irrespective of their background and family household income, would qualify for government-guaranteed loans.

Loan repayments would only kick in when graduates start earning an unspecified annual salary threshold, which is the antithesis of conventional bank loans that require borrowers to repay loans regardless of their financial capacity to do so.

“What we are saying is that we need an acceptable threshold that is morally justifiable.”

Making the loans accessible to students – even those from affluent families – spreads the risk of non-payment and makes the system more resilient, Fioramonti argued.

“If we have a cohort of people that are accessing the loans, it’s likely that most won’t be able to pay the money back. But if you have the rich that buy into the mechanism, one day they are more likely to get better-paying jobs, pay more [in the loan system] and subsidise those that wouldn’t likely get better-paying jobs.”

Economic implications

The income-contingent student loans model has been criticised mainly for potentially burdening the fiscus at a time when it grapples with a R50.8 billion budget shortfall.

Fioramonti said the income-contingent student loans model is not perfect but it’s the “most workable” in getting the public and private sector to collaborate in solving the funding problem and create job opportunities.

Should students fail to repay the loan, the government would assume the liability of the loan by purchasing it from commercial banks. In theory, this implies that the government will take 100% of the loan risk.

Fioramonti doesn’t believe that the government should cover 100% of the loan risk as this makes it too easy for banks.

“We have created a system in which banks have a very good cushion that is provided by the government in case of systemic default. In my view, the government has to act as a guarantor up to a certain amount and banks have to come to the party with a margin of risk. The risk has to be shared whether it’s on a 50%/50% basis.”

In doing this, Fioramonti proposed that during the first year of study, loans should be guaranteed by the government and in the second and third year, the loan and risk should be shifted to the private sector.

Another point of Fioramonti’s risk-sharing proposal that the Heher report didn’t recommend is using the approximately R17 billion annual funds held in the National Student Financial Aid Scheme to guarantee the loans to students instead of funds from the fiscus.  “If the system doesn’t work, that money has been allocated to funding tertiary education anyway.”

The Heher report has instead recommended government increase its expenditure on higher education and training to at least 1% of GDP from the present 0.78%.

Much of the income-contingent student loan model’s success hinges on the ability of the economy to create jobs. With economic growth stuttering at 0.7% in 2017 and a projected 1.2% in 2018, market watchers have argued that reducing the jobless rate of 27.7% (third-quarter 2017) would be difficult. A 5% growth, as has been argued, is required to have a dent in the unemployment rate.

Income-contingent student loans have long been adopted in the US, England, and Australia with relative success. However, university and college dropout rates could undermine its success in SA. The Department of Higher Education released a report in 2015 indicating that 47.9% of university students did not complete their degrees.

Fioramonti said the Heher recommendations are lowering the risk of students dropping-out as loans cover the full cost of study (tuition, accommodation, transport and more).

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