Options on the table as South Africa wrestles with funding higher education

The storm clouds above South Africa’s universities could be dissipated with careful fiscal planning. Reuters/Mike Hutchings

A report into the feasibility of offering free higher education at South Africa’s universities has finally been released. It has been nearly two years in the making, developed by a commission of inquiry that President Jacob Zuma set up in response to nationwide fee protests.

The lengthy report provides an accurate diagnosis of the state of higher education funding, as well as the problems it faces. But its proposed solutions are problematic. Many of its limitations arise from a failure to properly integrate an understanding of public finance and public economics into the analysis and recommendations.

The Commission’s report gets two critical things right – even though neither will please student activists. The first is that planned student numbers are simply too high and should be revised downwards. The second is that the country simply can’t afford free higher education for all students given its other priorities and weak economy.

But its recommendations are poor. Models are proposed that represent, I would argue, a significant step backwards from scenarios developed by the Department of Higher Education and Training two years ago. The department’s scenarios are indirectly supported in another report that’s just been released, by the Davis Tax Committee.

The tax committee endorses a hybrid scheme for higher education funding. This would retain and increase grants for poor students’ university fees. It would use loans to fund the “missing middle” – students from households that earn too much to qualify for government funding but still can’t afford higher education. If South Africa’s concern is really about immediate improvements in equitable access to higher education for poor students, this is the option that should be receiving the most attention.

The Fees Commission report

I have argued previously that one reason for the current state of affairs has been excessive student enrolment, relative to appropriate standards and adequate resources. Yet various policy documents propose rapid increases to enrolment in the coming decades.

The fees commission correctly argues in its report that these projected enrolment numbers are unrealistic. It points out that such high student numbers threaten quality and make adequate funding even more unlikely. It recommends that the numbers be revised downwards.

The commission also does well in recognising that – given the state of South Africa’s economy, public finances and other important government priorities – free higher education for all – or even most students – is simply not feasible or desirable. It rejects both the possibility of fully funded higher education and the demand for university fees to be abolished. But it endorses the abolition of application and registration fees, along with regulation of university fees.

There are three critical issues within the current student funding system.

  1. What household income threshold should be used to determine student eligibility for support from the National Student Financial Aid Scheme (NSFAS) to ensure all students who need partial or full support are covered?

  2. What resources are needed to ensure that all students below the threshold receive the adequate funding; up to full cost where necessary?

  3. How should the support provided be structured in terms of grants versus loans, or combinations of these?

The commission errs in trying to address these questions.

A worsening of equity

The fees commission’s fundamental proposal in response to the demand for free higher education is the adoption of an income-contingent loan (ICL) scheme. Under this all students regardless of family income who register for university are funded by loans up to the full cost of study.

These loans would be from private banks based on guarantees of repayment from government. In other words, after a specified number of years either the student or the government would have to start repaying the loan. There are numerous problems with this model.

The ICL would, in some ways, constitute a worsening of equity. Poor students who currently qualify for NSFAS grants would now only get loans.

In the ICL scheme, either students pay or the government does. The current state of the higher education system suggests a significant number of students will not be able to repay such loans. But nowhere does the commission calculate the implications for future government expenditure.

A number of other proposals are seriously problematic. One involves extending the loan scheme to students in private higher education institutions. This constitutes a dramatic change in post-apartheid policy, potentially leading to indirect privatisation of the higher education system without proper consultation or sound basis for doing so.

Another is the suggestion that higher education expenditure should be benchmarked as 1% of South Africa’s Gross Domestic Product. This is wrongheaded because it does not take into account the proportion of young people in the country or the state of the basic education system.

The Davis Tax Commission’s report is more narrowly focused but, perhaps as a result, endorses arguably the best and most feasible way forward for tertiary funding.

Better scenarios

The current NSFAS threshold is R122,000, which means that students whose households earn less than this in a year qualify for funding by the scheme. There are two problems: first, not even all students below this threshold are getting all the financial support they need. Second, there are students in the “missing middle” who are above the threshold. They cannot fully fund themselves but have no access to support.

In 2015 the department of higher education and training provided rough estimates of the cost of raising the NSFAS threshold and fully funding students below the different, hypothetical thresholds.

It estimated that increasing the NSFAS threshold to R217,00 and covering full cost of study for all students below that would require an extra R12.3bil in 2016/17 for approximately 210,000 students.

The Davis Tax Commission effectively endorses this scenario, proposing a hybrid scheme that retains and increases grants for poor students and university fees, but uses income-contingent loans to fund the missing middle. It estimates that an additional R15 billion could be raised annually for higher education through a combination of increasing the rate of income tax for the highest earners by 1.5%; increasing capital gains tax for corporations; and, raising the skills levy by 0.5%.

In contrast, the commission’s proposals for raising funds for the loan scheme and other proposals – such as taking R50 billion from a surplus in the unemployment insurance fund for infrastructure investment – arguably violate some fundamental public finance principles and may be illegal.

The tax committee’s report suggests that the department’s scenario is feasible from a public finance perspective. If the government is genuinely concerned with creating maximally equitable access to higher education for poor students, this is the immediate option that should be receiving the most attention. The design and cost of a more modest income-contingent loan scheme for those students who are not covered, even with expanded support, will require detailed technical analysis and further discussion. Some related work has been done under the umbrella of a separate income-contingent loan initiative, the Ikusasa Student Financial Aid Programme, which could be useful. As the commission report notes in rejecting it, however, there are various concerns about the actual financial aid programme proposal that make it an unconvincing option at this stage.

The different all-or-nothing approaches being proposed by student activists and the fees commission risk the possibility of hundreds of thousands of poor and needy students not being assisted – even though the resources are available to do so.

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