Higher education for rich and poor — with little stress over funding it
Bank loans whose repayment depends on recipients’ earnings after graduation align different interests in society
In my recent testimony before the Commission of Inquiry into Higher Education and Training (aka the fees commission), I presented an approach that builds on the successful experience with income-contingent loans (ICLs) in Australia, New Zealand, Hungary, Ethiopia, South Korea and other countries, but with adaptations pertinent to the South African context. Time is quickly running out and we need to be as innovative as possible if we are to succeed at achieving good education as well as sustainable and equitable development for all, especially in times of low economic growth.
Let’s start with the first question: what is an ICL? It is a loan that covers the costs of tuition for a degree, which in our country average between R200,000 and R250,000 for a four-to five-year study programme. Unlike an ordinary loan (a conventional mortgage, for instance), the ICL requires no upfront collateral and repayments are deferred until the student gets a job. So, it can be accessed by anybody (rich and poor) and it comes with no stress regarding ability to repay, given that repayment only kicks in if and when the student is in a position to pay back the money.
Second question: how does it work? The key virtue of the ICL is its flexibility. It can be adapted in many different ways, for instance by establishing a minimum threshold below which no repayment is made even if the debtor finds employment and/or by tweaking the interest rate progressively with the salary: the more you earn, the more you pay.
This is important, because the repayments made by higher-income earners will offset the lower contributions made by those who earn less or the nonrepayment of those who fall below the threshold or stay unemployed, thus guaranteeing the overall sustainability and profitability of the process.
This is why most countries make it mandatory for all students to subscribe to a loan. Income fluctuations can also be taken into account, so as to ensure that no debtor is ever expected to pay more than he/she can afford at any time. Across the world, repayments fall between a minimum of 6% of annual salary in the case of Hungary, to 10% in the case of New Zealand. In most countries, repayment is completed within a 10-year period.
Who should manage this system? ICL funding mechanisms are usually managed by governments, which find it more efficient than other approaches, including new taxes, grants and private loans. Indeed, the universality of the ICL makes it quite easy to manage: there are no complex application forms or lengthy screening processes.
The administrative costs associated with the process are minimal, saving money for whomever is in charge. In the case of SA, however, I recommend a public-private partnership involving private banks, the South African Revenue Service (as repayments will be gauged according to tax returns) and the government, which would act as a guarantor of last resort, setting aside a guarantee fund equivalent to the current budget of the National Student Financial Aid Scheme to prop up banks’ loans in the remote case of default.
Is this really the silver bullet? No system is perfect, but I believe this approach is the least imperfect of all. It avoids the debt trap into which many students are falling, which feeds suspicious financial schemes and loan sharks
Why such a partnership? First of all, because the private sector needs to take more responsibility in ensuring that tertiary education is made accessible to everyone. Second, because it would be a good investment for many banks seeking a decent return on investment.
Third, because it would save the government money, which should rather be invested in other critical areas of social development, from primary and secondary education to healthcare. More importantly perhaps, because this partnership helps align the short-term interests of the government and business with those of society at large.
How? By having invested in the future careers of students, banks will have a stake in the real economy rather than in the financial markets; indeed, the likelihood of steady repayment will be proportional to the creation of good and dignified jobs across society, not in one sector but in as many sectors as possible. As the profitability of the loans will depend on the diversification of job creation, banks will be more inclined to provide credit to small and medium enterprises — the real job creators vis-à-vis the corporate giants.
The government will have a similar interest, because if the repayment cycle sustains itself, thanks to the steady creation of good jobs, it will not need to use its own resources to back up the loans. So, we should expect public officials to focus on policies that promote diversification, job creation, good governance and broad-based economic empowerment, thus levelling even more the regulatory playing field between big companies, which have thus far been supported by cheap labour and direct/indirect subsidies, and the many small and medium enterprises struggling to survive.
Is this really the silver bullet? No system is perfect, but I believe this approach is the least imperfect of all. It avoids the debt trap into which many students are falling, which feeds suspicious financial schemes and loan sharks. It avoids sapping important public funds, which should rather be spent to support other areas of social welfare. In fact, achieving free tertiary education through public money is not as socially just as it is usually believed: university graduates tend to enjoy higher incomes than average citizens. Funding them through ordinary taxation, which everybody contributes to, including those who will never go to university, is a bit like asking the current poor to subsidise the future rich.
I believe ICLs are a better option than a "graduate tax", which is a worthy proposal in its own right. Unlike the approach I have described, a tax will not alter the economic status quo, which points towards a shrinking labour market. This risks undermining its sustainability because the graduates expected to pay the tax may never find the good jobs they expect.
What makes ICLs more promising than any form of taxation is their capacity to align different interests in society. They are countercyclical instruments that help turn our economy around: something unlikely to happen for as long as the government, business and the rest of society pull in different directions.
Unlike a tax, which becomes a binary relationship between students and the government, the ICLs turn the private sector into a direct stakeholder in the tertiary education process. Achieving accessible quality education is not just a responsibility of public departments, universities and students. As a public good at the basis of a healthy society, it’s everybody’s moral duty.
• Fioramonti (@lofioramonti) is director of GovInn at the University of Pretoria and author of The World After GDP: Economics, Politics and International Relations in the Post-Growth Era