Daniel Bradlow and Edward Webster
The South African government has moved a long way toward achieving fee-free higher education for many that are in need of assistance. However, the nationwide protests on our campuses make it clear that the pace has been too slow.
What is needed now is a timetable for a participatory process involving all stakeholders that leads to a clear plan for how fair and free access to higher education is to be progressively realised. This policy can then be incorporated into the next budget cycle.
The starting point for this process rests on four key principles:
Right of access to university education
Both our Constitution and international human rights law recognizes that every qualifying candidate has a right of access to university education.
This means that governments and universities have a responsibility to progressively realize this right, and ensure there is no impediment, including financial issues, that prevents any person who gains admission to university from being able to accept the offer of admission- and having a fair chance of succeeding at their studies.
It also means that the goal should be to ensure that every student has access to sufficient financing to pay for both the tuition and living expenses associated with their studies.
Universities must have the autonomy to perform their role as educators, producers of knowledge and contributors to solving social problems.
If universities cannot perform these functions, it will adversely affect the reputation of our universities, the quality of student degrees and, ultimately, the ability of universities to contribute to the development of our society.
This will ultimately harm all South Africans.
There is no such thing as free education. Ultimately, someone has to pay: and it is reasonable that all who benefit from it should contribute to the cost, provided they do so at a time when they are in fact able to pay for it.
The beneficiaries of university education are many.
There are the students and their families. Then there is both the public and private sectors that rely on employees with the skills that the students have acquired. And of course, there is South African society as a whole who benefits from a solid tertiary education system.
It follows, therefore, that all these stakeholders should be contributing to funding university education.
The system for financing university education must be sustainable: meaning that its demands on the government fiscus should at least be predictable and stable.
Because our students come from a broad range of family situations and economic backgrounds (and have varied career aspirations based on their areas of study, political views and personal situations) they need access to a diverse package of funding options, including grants, bursaries and loans with a variety of repayment options.
There are a range of financing models that can be used to fund university education that take into cognisance the diverse social backgrounds of the student population of South Africa.
Our proposed model, which we call a Sustainable Autonomy model meets the diverse needs of our universities and their students. Nevertheless, we anticipate it being only one of the group of funding options that universities can offer to their students.
Our Sustainable Autonomy model has three key components:
A Special Purpose Entity (SPE) Owned by Universities
This SPE will be responsible for raising the funding for student loans. It will do so by issuing a perpetual bond, which is a bond that only makes annual interest payments to its investors and does not repay any of the principal investment.
Our bond will however have a long term retirement option so that investors who eventually want to withdraw from the bond will be able to do so.
The bond will be offered for sale to individuals, graduates, companies, and charitable foundations and development financing institutions.
They will be offered an interest rate that is a real interest rate but one that is likely to be less than a fully commercial rate. In this way the bondholders, many of whom will benefit from our country producing enough well qualified graduates, will also contribute to the funding of our universities and its students.
We anticipate that government will participate in this bond, possibly both as an investor and by providing a guarantee in regard to some aspects of the bond transaction.
The SPE will also have some other responsibilities. It will distribute the proceeds of the bond to each university, collect interest payments from each university and disburse the annual interest payments to the bond-holders.
The operations of the SPE will be financed from the interest earned on the funds the universities invest in the SPE when they create it.
All students assured of full financing of their education: The universities will use the funds they receive from the SPE to offer students loan financing for their university education.
The universities will decide for themselves how they want to use these funds to finance their students’ education, provided that one of the major criteria for allocating funding is financial need.
That financial need is the most important criterion means that some students will get full funding of all their tuition and living expenses, whilst others will only get partial scholarships.
To ensure the funding model is consistent with the principle that no student should have to contribute towards the costs for their education before they are in a position to be able to do so, the students will not have to pay any money back on these loans before they graduate.
The universities, after a grace period, however will begin making annual interest payments to the SPE so that it can pay the interest owed to the bondholders.
Each graduating student will be given a choice on how they want to repay their loan:
Pay back through community/ public service:
The student commits to working in their chosen field of study in an area of the country where their skill is needed, for example a rural district or small municipality.
The employer agrees that they will pay the graduate’s salary in two parts. The first part will be a monthly wage that is only a portion of the normal salary for that position but is enough for the graduate to live on for a year. The second part will be paid by the employer to the university from which the employee graduated.
The central government will commit to top up this payment so that the payment that the university receives is equal to the full amount owing on 1 year of the employee’s university debt.
Thus, a graduate who has a 4-year degree can fully pay off the debt owing to the university by working for 4 years in this position.
At the end of the 4 years, the graduate will be debt free and have marketable experience that he/she can then use to get a job in government service, the private sector or civil society.
Pay back through annual debt service payments:
A graduate who has found a well paying permanent job can accept the position and begin paying the loan back as his/her salary exceeds a set amount.
In our model we have assumed that the minimum salary is R150 000 p.a. (which is about 5 times the current NSFAS minimum level)
Once the graduate’s salary exceeds this amount he/she will be required to allocate a set portion of their salary (for example 8-10%, which is comparable to current NSFAS requirements) to service their outstanding debt.
These payments will therefore increase as the graduate’s salary increase. The payments will continue for a fixed number of years so that the debt is fully repaid with interest. This is similar to the current arrangement for repaying NSFAS debts.
Our model has a number of advantages.
First, linking funding tuition to capacity to pay makes it possible to create a sustainable financing model in which all stakeholders in university education can participate.
Graduating students can thus make a contribution but so can companies, individuals, alumni and foundations.
In this regard, government plays an important role as investor and guarantor.
The participation of all these stakeholders mitigates the impact of university tuition on the government’s ability to meet other social demands – such as those of young people who did not qualify for university education. These young people are also entitled to an opportunity to get training and access to good jobs.
It is worth noting that 75% of learners who start in grade one each year will not make it to university.
By offering graduating students a choice of how to pay back their tuition, the model gives students more autonomy in developing their careers, and in meeting their repayment obligations – more so than is possible under the current funding arrangements.
It also allows them to use the knowledge and skills that they have acquired to contribute to resolving the serious problems that our country faces. In this sense our model includes an important nation-building opportunity.
Raising the funding through using a perpetual bond, which has usually been used to fund sovereign states, is attractive because it only requires the debtor to make annual interest payments.
Reducing the annual payment obligations should enhance the investors’ confidence in the debtor’s ability to service the bonds.
Importantly, it should create the space to offer students repayment terms that are responsive to their financial realities, while providing investors with a real, albeit most likely a less-than-market, rate of return.
Raising the funds for university education through a bond is new in SA.
As a result, there is not the historical record that investors need to assess the likelihood they will receive both principal and interest payments over the life of a fixed-term bond issued on purely commercial terms.
To further enhance confidence in the bonds and the public service option, we propose that the government acts as a guarantor of the interest payments on the bonds and on the obligation of the public service employer’s ability to pay the student’s debt for a year of education.
The fact that the government’s primary role in this regard is as the guarantor of the debt obligations means that its risk will diminish as the issuers of the bond gain knowledge about the repayment rates of student debts – and are able to use this information to refine the funding model.
This means that over time the government will be able to more effectively determine the limits on its commitments to this programme which will allow it to spend more money for other educational purposes and on other social needs.
Fourthly, using an SPE both minimizes the bureaucracy associated with funding university education and enhances university autonomy.
This option delegates to universities the responsibility to select the student loan recipients, work with them during their studies to enhance their chances of success and collect the repayments from the students.
This arrangement respects each university’s educational prerogatives and allows them to decide for themselves how they can best serve society.
It also encourages the universities to work with their students to help them succeed in their studies and gain employment after they graduate.
The model will also help universities strengthen their ties to their graduates – which can generate future benefits for the universities and their students.
Funding university education cannot be the sole prerogative of government and a few concerned businesses. We all need to contribute to this project.
Our model allows us to do so – on a basis that should become progressively more sustainable over time.
The authors have a more detailed concept paper discussing the sustainable autonomy model described in this article. It was submitted to the Heher Commission and is available on request from the authors.
DANIEL BRADLOW IS A SARCHI PROFESSOR OF INTERNATIOAL DEVELOPMENT LAW AND AFRICAN ECONOMIC RELATIONS, CENTER FOR HUMAN RIGHTS, UNIVERSITY OF PRETORIA, AND PROFESSOR EMERITUS, AMERICAN UNIVERSITY.
EDWARD WEBSTER IS PROFESSOR EMERITUS IN THE SOCIETY, WORK AND DEVELOPMENT INSTITUTE (SWOP), UNIVERSITY OF THE WITWATERSRAND, AND VISITING PROFESSOR, RHODES UNIVERSITY