OPTIONS FOR IMPROVED FINANCING OF HIGHER EDUCATION

Charles Simkins | Nov 10, 2015
The first two briefs in this series were entitled “Principles of Student Financing 101” and “The University Funding System”. The second brief identified two things which need to be done immediately. This brief sets out options for consideration in the longer term.
 
Our principles and suggestions are as follows:
 
1. Access to higher education is a progressively realisable and not an immediate right. The Constitution says so. Section 29(1) reads as follows:
 
Everyone has the right –
(a) to a basic education, including adult basic education; and
(b) to further education, which the state, through reasonable measures, must make progressively available and accessible.
 
‘Further education’ must be read as including higher education.  
 
2. The increase in the number of funded student places from year to year should not increase by more than the projected economic growth rate. The number of funded places in 2015 was 1 222 348 [1]. The White Paper on Post School Education and Training states that the objective is to have 1 600 000 million enrolments by 2030. This implies an average enrolment growth rate of 1.81% per year. The projected average growth rate of funded places between 2015 and 2018 is double that rate, at a time of very low economic growth. It is placing too great a strain on the system and should be revised downwards. Competition for scarce places will be increased as a result and universities should reconsider their criteria for entrance to programmes accordingly. Unless the long-term growth potential for South Africa collapses to below 1.8% per annum, we shall still be able to reach the 2030 goal.
 
3. The average tuition fee per student in each University should not rise faster than nominal (current price) gross domestic product per capita. This rule would prevent fees from becoming increasingly difficult for households to pay. Applied to 2016, this would have meant an average fee increase cap of 5.6%. The actual agreed increase cap was zero, in response to political pressure. The decision can be rationalised as compensation for high fee increases in recent years.  A zero cap is, of course, not sustainable, but the suggested rule is.   
 
4. The claim for resources by higher education has to be balanced against the claims of basic and further education.  Indeed many have argued internationally for a reallocation of resources away from higher education towards education at lower levels on two grounds. First, a better general grounding at lower levels will yield higher social returns and secondly, given that the possession of a higher education qualification confers substantial additional earning power, a contribution by students towards costs is appropriate.These general points have to be interpreted in the light of specifically South African circumstances. Though our basic education system has improved over the last two or three years, it remains plagued mainly by inadequate application to task and accountability. More capital spending is needed, but our school teachers are quite well paid by international standards.  On the other hand, a great many of our University students are the first in their households to receive higher education. This matters. Nonetheless, the following statistics on enrolments in public institutions in 2015 should be borne in mind:
 
Ordinary schools                                              12 248 279
FET/TVET colleges                                          639 618[2]
Universities                                                     1 222 348 [3]
 
TOTAL                                                           14 110 245
 
University students account for less than 9% of the total.
 
5. The approach to privately provided higher education should be reconsidered. At present, the Department of Higher Education and Training regulates private higher education institutions. As it should. But it does not fund them, nor are their students eligible for NSFAS loans. Changes should be made. It would not be necessary to fund private higher education institutions at the same rate per student received by public institutions. One third of the rate, accompanied by access to NSFAS, would have stimulate a large supply response.  And the system would be able to subsidise more students with a given sum of money. This would require a revision of heavily public-centred approaches to higher education but, after all, the state is constitutionally obliged to take reasonable measures to promote access and availability.
 
6. NSFAS should revert to being a pure loan scheme and repayments to it should be collected by the South African Revenue Service. The predecessor to NSFAS was the Tertiary Education Fund of South Africa which started lending in 1991. It began as a pure loan scheme, but it was not long before rebates of various kinds were introduced. Administrators and politicians have loved playing Lady Bountiful, and the system is now so encrusted with rebates that return flows to NSFAS are now very low in relation to advances. The encrustations should all be scraped off. Moreover, an appropriate rate of interest on loans should be charged [4]. On the other hand, an income-contingent repayment system should be retained. Furthermore, NSFAS should not advance more money to any student than can be paid off by a graduate over fifteen years and any outstanding loan balance at the end of a fifteen year period should be written off. Longer repayment periods, as in the United Kingdom and the United States, are not desirable. The Australian experience is that the average repayment period is about eight years, but their loan scheme advances money for fees only and not living expenses.
 
7. By June each year, each University should publish on its website sufficient information for households to calculate the costs of study they will have to bear in the following year. This information includes registration and tuition fees, residence fees, the cost of private accommodation for students who need it, an allowance for meals for students who need it, an allowance for books and other study materials, information about University funding of student costs, information about NSFAS, information about commercial bank lending and a ready reckoner to help households work out what they will need to contribute. Household decisions are crucial, but they cannot be properly informed if the relevant information is not available.
 
8. An earmarked graduate tax should be considered. Extensive earmarking of taxes is a bad idea in general, because it imposes unwarranted constraints on the pattern of state expenditure. But there is a special case to be made here. The first duty of students upon leaving universities is to pay back NSFAS loans where these have been made. With a fifteen year limit, most students will have paid back their loans by age 40. It would then be time to pay back the teaching input and output subsidy paid by the state to the universities. This would be done in twenty instalments, so that by the standard retirement age of 60, the graduate tax would come to an end. The easiest way to calculate the tax is to take the teaching input and output grant per student in public institutions and divide by the student places funded. Then divide that number by twenty and multiply by the minimum period of study for each qualification obtained from a South African University. That would be the graduate tax payable for the current year.  
 
An example will make this clearer. In 2016/17, the teaching input and output grants are projected at R 13 753 540 000 and R 3 512 017 000 respectively.  The sum of these grants divided by the number of students (1 277 641) is R 13 514, and that figure divided by twenty is R 676. Suppose that you have a Master’s degree, preceded by an Honours degree and a three year Bachelor’s degree, all from South African universities. The minimum study period would be five years (three for the Bachelor’s, one for the Honours and one for the Master’s) so that your graduate tax liability would be R 3 380 for that year. At that rate you will pay a total of R 67 600 graduate tax over your life time, assuming you live to the age of 60. In future years, the calculation would be repeated.  In current price terms, the repayments would probably rise, but so would your income. One would have to put an upper limit on the payment, say 4% of total ordinary income tax payable, so that low earners would be overburdened. And a lower limit could be imposed, say 2%, so that people who have done well would pay back more. But this would be the general idea. People who have not graduated will not be taxed. Nor will South African graduates not resident for tax purposes. 
 
The proceeds of the tax would be earmarked for a division between NSFAS allocations and improved grants to universities. Such a tax, if imposed in 2016/17 would raise between two and two and half billion rand. This will not remove all financial constraints, but it will soften them.
 
9. It should be recognised that, if the Universities are going to get through the next fifteen years, all actors will have to do things they are not currently inclined to do. The Treasury will have to allocate a somewhat higher proportion of Gross Domestic Product to higher education. The Department of Higher Education and Training will have to stop talking about what they will do when funds become available and tailor its policies to the resources that are actually available. Universities will have to concentrate on developing third stream income, expanding bursaries in particular, and accept that austerity will last for a considerable period of time.  Prospective students will have to cope with competition for places and the fact that free everything (i.e. never paid for) is not possible. It won’t be perfect, but it will be more tolerable than what we have. There will be fewer students in desperate financial circumstances.
 
Sources:
1. Ministerial Statement on University Funding 2015/16 and 2016/17, November 2014:  Table 5
2. This is the 2013 enrolment, the most recent estimate available
3. This is the funded place figure.  An estimate of actual enrolments is not available 
4. The ALSI 7-12 year bond interest rate, published in Business Day, would be appropriate.
 
Charles Simkins
Senior Researcher
charles@hsf.org.za