Funding model plugs tuition, work and public service gaps

THERE is no such thing as free university education. If students do not pay someone else has to, otherwise our universities will fail. This would be a tragedy that would undermine SA’s future development and harm us all.

But funding should not be a barrier to any qualified student who gains admission being able to take advantage of this opportunity. Therefore, it is in all of our interests to develop a feasible and sustainable model for funding university education.

Such a model must be based on a realistic assessment of students’ ability to pay, universities’ financial needs and the state’s capacity to fund university education. Importantly, it must also respect the right of each university to choose its own students, design its own courses and decide how it can best serve society. Our model, which we call a sustainable autonomy model, accomplishes all these objectives. It rests on three assumptions.

First, all students who have the capacity to pay for their own education should do so when they are in a position to do so. This means rich families should pay for their children’s university education.

It also means poor students need full financial support, including for board, lodging and books. However, once they graduate and are earning above a certain amount they should have to begin repaying the cost of their education.

Their repayment obligations should be equal to a set portion of their income so the amount they pay increases as their income rises. This takes into account both their current financial needs and their post-graduation capacity to repay their debts.

Linking funding tuition to capacity to pay makes it possible to create a sustainable financing model in which government support can be combined with contributions from companies, individuals, alumni and foundations. This combination also avoids prejudicing the government’s ability to meet the needs of young people who did not qualify for university education.

Young people who do not gain admission to university are also entitled to an opportunity to get training and access to good jobs. This is critically important because 75% of the learners who start in grade one each year will not make it to university.

Second, our model offers graduating students a choice of how to pay back their tuition. They can either pay it back through regular payments based on the size of their post-graduation salaries, or through public service. In the latter option they can repay their debts by working in small towns and rural areas that lack appropriately skilled personnel. For example, for each year the graduating student works in a qualifying public service position, the employer, perhaps with state assistance, helps the student pay back the loans for one year of study.

This public service option will not only help students repay their debt but help them get valuable work experience. It also means our model provides an important nationbuilding opportunity.

Third, we suggest the funds be raised through a perpetual bond, which offers an annual interest payment but has no maturity date or principal amortisation schedule. Since raising the funds for university education through a bond is new in SA, there is not the historical record that investors need to assess the likelihood they will receive both principal and interest payments over the life of a fixed-term bond issued on purely commercial terms.

In this case a perpetual bond, which has usually been used to fund sovereign states, is attractive because it only requires the debtor to make annual interest payments. Reducing the annual payment obligations should enhance the investors’ confidence in the debtor’s ability to service the bonds. It should also create the space to offer students repayment terms that are responsive to their financial realities, while providing investors with a real, albeit most likely a lessthan-market, rate of return.

Such a perpetual bond, if combined with a long-term retirement option, should be attractive to all companies, financial institutions, individuals, alumni and foundations that want to invest in the future of SA.

To further enhance confidence in the bonds and the public service option, we propose that the government acts as a guarantor of the interest payments on the bonds and on the obligation of the public service employer’s ability to pay the student’s debt for a year of education.

The fact that the government is only the guarantor of the debt obligations will limit its commitments and free it to spend more money for other educational purposes and on other social needs. Moreover, the government’s risk will diminish over time as the issuers of the bond gain knowledge about the repayment rates of student debts and are able to use this information to refine the funding model.

To minimise the bureaucracy associated with funding university education and enhance university autonomy, we propose the universities collectively create an independent special-purpose entity that they own. The entity would only be responsible for issuing the bonds, disbursing the funds to the universities, collecting the interest payments from the universities and disbursing the payments to the bondholders.

This option will assign to universities the responsibility to select the student loan recipients, work with them during their studies to enhance their chances of success and collect the repayments from the students. This arrangement respects each university’s educational prerogatives and allows it to decide for itself how it can best serve society. It also encourages the universities to work with their students to help them succeed in their studies and gain employment after they graduate.

Funding university education is too important to leave to the government and a few concerned businesses. We all need to contribute to this project. Our model allows us to do so — on a basis that should become progressively more sustainable over time.

Linking funding tuition to capacity to pay makes it possible to create a sustainable financing model

Bradlow is SARCHI professor of international development law and African economic relations at the University of Pretoria’s Centre for Human Rights and professor emeritus at American University. Webster is professor emeritus in the University of the Witwatersrand’s Society, Work and Development Institute and visiting professor at Rhodes University.

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