One of the more interesting recommendations contained in the Organisation for Economic Cooperation and Development’s (OECD’s) 2017 economic survey of South Africa relates to how higher education could be financed without posing a risk to fiscal sustainability. The proposal comes amid strong calls for higher education to be made free by some student and political organisations, as well as ongoing deliberations into the feasibility of fee-free higher education by the so-called Fees Commission, established in January 2016.
The OECD argues that, given limited government resources, the country needs to design a financing scheme that takes account of higher enrolment levels and the fact that many students from poor and middle-income households are struggling to fund their education. Such a scheme should also reflect the reality that higher education financing is already a sizeable Budget item and that the current financing system of extending means-tested loans will become unsustainable as enrolment expands. Any remedy will also have to be sensitive to the cost pressures being confronted by universities, particularly in light of the fact that direct government funding has declined to only 40% of universities’ overall income. To address these cost pressures, universities have increased fees in recent years, which provided the spark for the #FeesMustFall protests.
The OECD’s proposed solution is premised on the argument that higher education is both a public and private good and that government and students should, therefore, contribute to its financing – a position that is unlikely to be universally welcomed. Therefore, the survey suggests a financing mechanism that involves banks, government and students to cover university fees for all students. Banks providing universal loans contingent on future incomes and government extending guarantees for repayment based on future tax records of borrowers. The setting of interest rates on the loans should be negotiated between government and the banks. Such a mechanism, the OECD says, overcomes the problem of access, while ensuring that government does not have to advance all the funds. Instead, the loans would be recorded as a contingent liability to government, the fiscal risk of which could be mitigated by linking repayments to income tax payments. In addition, government would still provide grants and bursaries for poor students to cover living costs. To limit the selection bias in the loan scheme, given the dropout rate, the OECD proposes that the loans contingent on future incomes be reserved for students from the second year onwards. It’s an intriguing proposal and one that appears to add value to the current debate.
However, the survey makes a further crucial contribution that cannot be ignored. Access to finance, it argues, is not the only reason for the limited take-up of higher education. Instead, the poor performance of primary and secondary schools remains the main reasons for limited access, as well as the fact that only 14% of those aged between 25 and 34 have degrees. In other words, attention has to be paid to the entire educational chain, with a strong awareness that the quality of primary and secondary education remains a weak link.