This brief is the fourth in the series dealing with the analysis and proposals contained in the Heher Commission report.



The Commission was much impressed by the testimonies of George Hull and Lorenzo Fioramonti, and it has published a study by each as annexures to its report.  In line with their recommendations, the Commission advocates a new income contingent loan (ICL) system for university students, with NSFAS reserved for TVET students.  There are differences in detail between the three recommendations, but all three advocate a universal system of income contingent loans covering the full cost of study.


Can such a system work?



As the Commission points out, NSFAS is itself an income contingent loan scheme, but it is not universal since it is available only to students coming from families earning less than R 122 000 per annum.  Nor does it always cover the full cost of study, since the annual loan size is capped at less than the full cost of study at some universities, and some universities top slice allocations in an attempt to give some assistance to all eligible students.  And the earnings threshold at which repayments start has not been adjusted for several years and is now a very low R 30 000 per annum.


The advantage of a universal system is that it removes the necessity for a means test which, as Hull points out is expensive to administer, often unreliable, open to corruption and resented by students.  The disadvantage is the heavy financing requirement, especially since the Commission recommends that postgraduate students should have access.  The average full cost of study for undergraduates was assumed in the actuarial analysis appended to the Commission’s report to be R 92 000 per annum and for postgraduates R 57 600 for postgraduates in 2017 prices.  The actuaries estimate that the initial loan advance will be R 53.2 billion and, assuming a 1.9% annual increase in enrolments, the value of the loan book in 2030 will be R 786 billion (in 2017 prices) in 2030.  The assumption is that the real interest rate (the nominal interest rate minus inflation) will be 2%.  There are reasons (see below) that it might need to be higher. 


Moreover, the actuaries’ calculation has been based on public universities only, despite the fact that the Commission has recommended that students at private universities have access to the ICL system as well.  In 2015, 147 210 students were enrolled in private universities, adding 15% to those enrolled in public universities.  Such an extension would promote the private sector, taking financial pressure off public universities, since private universities, as opposed to their students, would not be subsidised by the government at all.  But DHET has always set its face against it.


Several things follow:


  1. A case can be made for government borrowing the money to finance the advances, but this will be impossible to achieve at a time when government debt as a percentage of GDP is rising rapidly, from 50.7% in 2016/17 to 59.7% projected in the October 2017 Medium Term Budget Policy Statement in 2020/21, and when the risk of government debt guarantees being called is rising.


  1. It follows that reliance will have to be placed largely on wholly on the private sector.  The Commission reported that, although the Banking Association of South Africa has expressed the interest of its members in participating, it has remained essentially uncommitted.  As well it might, given the risks.


  1. Assume that the private sector does become involved.  In Fioramonti’s view it would require a return of at least prime (currently at 10.25%).  This would in turn require that all the subsidies presently available in NSFAS be withdrawn, and this is what the Commission recommends.  But nobody has considered the implications for repayments.  Consider, for example, a capable and diligent B Com student who passes all her courses the first time round and completes the degree in three years.  She would be entitled to a 40% rebate on the first tranche, a 40% rebate on the second tranche and a 100% on the third tranche.  Her loans would attract no interest until 12 months after graduation and the interest rate charged thereafter would currently be 5.4% (80% of the current repo rate), just over half of prime.  Discounting advances and repayments back to the present (or any other date) at prime, the value of repayments would be about a quarter of the value of advances.  Three quarters of the loan is effectively a bursary.  Put another way: if all these concessions were withdrawn, her repayments would quadruple.


  1. One way to cut down on the need for constant new injections of funds – and the actuaries conclude that it will take more than 30 years and high rates of collection for the loan book to be self-sustaining – is to specify that, while every student would be entitled to a loan for the full cost of study, every student would equally have the right to waive part or all of that entitlement.  Students might do this because they can be accommodated and fed at home, or their parents might be able to willing to pay part or all of their tuition fees.  In effect, waivers would amount to self-administered means tests.  The right to waive might seem obvious, since to require students to take a loan they do not want would be odd.


  1. But Fioremonti specifies that a graduate with ‘good’ earnings should repay 100% of their loans and high earners should pay more than 100%, i.e. face a loan surcharge.  He does not specify how this surcharge might be imposed, but the notion resurfaces in the Commission’s recommendation that any student should be able to opt out of the ICL system, but at the cost of paying a substantial equalisation premium to the state.  Such payments should be held in a special account dedicated to making up any shortfall resulting from any student failing to meet his or her loan repayment obligation.  This premium will act as a disincentive to opt out and hence will raise the need for injections of loan capital.


  1. And there is the question of what to do with incomplete loan repayments.  Repayments terminated by death or inability to work can be covered by insurance arrangements, which will add to the burden on students.  More serious is the number of students who fail to graduate and are, on average, ever in a position to fully repay their loans.  Of the students entering universities, just over 50% graduate.  The Commission’s report emphasises the importance of measures to improve throughput, but these require resources and, in any event, there is a ceiling on what can be achieved.  Only 70% of students who enrol in state universities in the United States graduate.  The actuaries estimate that R 119 billion of the loan book in 2030 would be bad or doubtful loans on baseline assumptions, though they warn that this estimate is very sensitive to changes in their assumptions.  How are these losses to be financed?  Surely not from opt-out equalisation charges.


The Commission has considered the proposals of the Ikusasa Student Financial Aid Programme (ISFAP), which has been running a pilot programme in 2017.  The proposal provides for a system of loans and grants for students from families who are deemed poor or part of the ‘missing middle’ (i.e students from families with incomes between R 150 000 and R 600 000 per annum).  Loans would become more prominent as family incomes rise.  The Commission observes that this would require more extensive means testing than NSFAS, since the only students who are means tested now are those who believe they might be eligible.  And the accuracy of the means test would be more important.  Moreover, ISFAP would require funds from NSFAS as well as funds from the private sector, the NSFAS funds being necessary for the grants provided in the earlier years of study and to fund any losses on loans.  This would make reallocation of university NSFAS funds to TVET students very limited or even completely impossible.  The Commission regards the mobilisation of private sector funding as a positive aspect of the ISFAP proposal.  But it observes that there remains a question of whether the ISFAP model is currently affordable. 


Both the ISFAP proposal and the ICL proposal envisage recovery of loan repayments through the South African Revenue Service, which would be an improvement on the inefficient system currently run by NSFAS.



Charles Simkins

Head of Research