Govt edu loans ‘most workable’

PROFESSOR: MODEL COULD SOLVE SA’S FUNDING CRISIS, CREATE JOBS

Much of the income-contingent student loan model’s success hinges on the ability of the economy to create jobs.

‘Free tertiary education wouldn’t be socially fair in a country that doesn’t have enough public money to guarantee more basic services.’ So says Professor Lorenzo Fioramonti. The director of the Centre for the Study of Governance Innovation at the University of Pretoria believes universal, free tertiary education isn’t affordable and might burden SA’s already-constrained public finances.

Fioramonti is one of the academics that made submissions to the commission of inquiry into the feasibility of free higher education and training, headed by retired judge Jonathan Heher.

His proposal for tertiary education to be funded through government-guaranteed loans sourced from commercial banks, known as income-contingent student loans, was adopted as a key recommendation by the Heher Commission’s report.

The commission recommended that all students from universities and colleges, irrespective of background and family household income, would qualify for government-guaranteed loans.

Loan repayments would only kick in when graduates start earning a salary threshold. “What we are saying is that we need an acceptable threshold that is morally justifiable.”

Making the loans accessible to students spreads the risk of non-payment and makes the system more resilient, he argued.

“If we have a cohort of people that are accessing the loans, it’s likely that most won’t be able to pay the money back. But if you have the rich that buy into the mechanism, one day they are more likely to get better-paying jobs, pay more [in the loan system] and subsidise those that wouldn’t likely get better-paying jobs.”

Economic implications

The income-contingent student loans model has been criticised mainly for potentially burdening the fiscus at a time when it grapples with a R50.8 billion budget shortfall. Fioramonti said the model isn’t perfect but it’s the “most workable” in getting the public and private sector to collaborate in solving the funding problem and create job opportunities.

If students fail to repay the loan, government would assume the liability of the loan by buying it from commercial banks. In theory, this implies government will take 100% of the loan risk. He doesn’t believe government should cover 100% of the loan risk as this makes it too easy for banks.

“We have created a system in which banks have a very good cushion that is provided by the government in case of systemic default. In my view, the government has to act as a guarantor up to a certain amount and banks have to come to the party with a margin of risk. The risk has to be shared whether it’s on a 50%/50% basis.”

Fioramonti proposed that during the first year loans be guaranteed by government and in the second and third year, the loan and risk be shifted over to the private sector.

The model isn’t perfect but it’s the most workable