It is in all South Africans' interest to make university education available to every qualifying student regardless of their financial situation. The whole country benefits if all these young people have the chance to gain the skills and values offered by a university education.

But it can’t only be up to universities and the government to finance this opportunity. Universities don’t have the resources to meet this demand on their own without compromising their other important research and teaching responsibilities and their obligations to their employees.

The government cannot turn this demand into a reality without short-changing other equally deserving groups – such as learners in primary and high school, those who do not qualify for university but need help getting a job, and those who are sick.

This means that all South African businesses and individuals who have the means to do so need to come to the party and offer some contribution towards making university education available to all who qualify. Fortunately there is a way this can be done: through perpetual bonds issued by universities.

How it works

A perpetual bond, or “perpetual”, is a debt instrument that has no maturity date but makes regular interest payments to the holder. This means that it offers the bondholder a regular income stream while relieving the issuer of the obligation to repay the principal.

So how would it work in the scenario I’m describing? Either each university acting alone or all universities acting jointly form a non-profit company whose purpose is to provide financing to qualifying students. The company then issues a perpetual to a broad range of potential investors. This includes all alumni of South Africa’s universities, whether they are living in the country or not, all concerned South citizens, and all businesses that participate in the South African economy.

The perpetual will be for sale either through financial institutions or on the internet. The bondholders will receive an annual interest payment, which could be fixed or could fluctuate in line with a stipulated interest rate such as the repo rate.

The perpetual can offer the bondholder the option of either holding the instrument and receiving interest payments for as long as they wish or, after a stipulated period of time that allows the company to build its reserves, surrendering the bond in return for a small payment.

The university company will have the authority to issue bonds periodically for as long as more funding is required to meet students’ needs. In order to enhance their attractiveness, the company could offer one version of the perpetual to businesses and another with a smaller face value – say, R1000 – to individuals.

A repayment plan

The company can then use the proceeds of the perpetuals to finance qualifying university students. Those receiving the funds would have no obligations to the company while they remain students.

However, after leaving the university they will be obliged to pay a stipulated percentage of their salaries to the company. It is reasonable to expect those graduates who are financially able to repay the debt to do so, since this will contribute to funding the next generation of students.

The form of this repayment means those students who graduate and begin earning large salaries pay more than those earning lower salaries. It also means that those students who cannot find work do not pay anything until they find work.

The stipulated percentage would be set so that the repayment obligations are not unduly burdensome for the students. The students would continue paying the company until they have paid back the full amount of the funds they received for their studies plus some interest.

Since the company does not have any obligation to repay the principal of the debt to the holders of the perpetuals, it will have some flexibility in setting the interest rate it charges the graduating students.

Win-win solution

In short, perpetuals offer a win-win solution. They will help ensure that all qualifying students, regardless of financial need, have the opportunity to study at university without incurring a crippling debt.

Second, by helping to build human capital, it will contribute to making a more inclusive and productive society for all South Africans.

Finally, by helping universities finance student education, it will ensure that they are able to meet their other responsibilities while remaining open to all qualifying students. And it does all this while offering bondholders a regular income stream. It is hard to think of a better investment in South Africa’s future.

Written by Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria

This article was originally published on The Conversation. Read the original article.