Public service would help graduates pay back debt

The ministerial task team appointed by the minister of higher education and training is to be commended for publicising its draft proposal for a public-private partnership to fund university tuition (“Student help is on the way”, June 24).

This is an excellent initiative, but it relies primarily on a standard financial mechanism — a medium-term bond — for the bulk of the financing. It also misses an opportunity to foreground public service as an option for paying back the money.

We agree with the ministerial task team that university tuition is too big and too complex a problem to be left to the government alone. In reality, it is both a financial issue — where is funding to be raised and on what terms, and who is to receive university funding and on what terms? — and a social challenge that has implications for equity, academic freedom and nation-building.

To balance these different considerations, any university funding model must satisfy the following criteria:

without constant injections of government funding;

government to leverage its contributions to the funding of university education; companies, individuals, alumni and foundations that are interested in helping to build a stronger, more inclusive South African society an opportunity to participate in solving the problem of university tuition;

financial needs and constraints: It should provide adequate financing to all qualifying students in a form that takes into account their current capacity to pay for their education and their postgraduation capacity to repay their debts;

graduating students the opportunity to repay their debts by working in small towns and rural areas that lack appropriately skilled personnel;

with a just claim on state support: It must avoid prejudicing the govern-

young people who did not qualify for university education; and

The funding model should support and not interfere with university prerogatives relating to their teaching, research and service functions.

The task team has responded to this financial and social challenge by including a social impact bond in its model and by putting limits on the amount of debt students can incur.

As it appears to expect most of the funding to be raised on commercial terms, however, it is likely to place an unrealistic burden on graduates, particularly given the current realities of the job market.

It would be better to structure the loans around an accepted financial instrument that responds to both the real needs of students and to the financial imperative to ensure that investors earn a return on their investment in university education. Unless both of these conditions are met, the model will not be sustainable.

One instrument that meets these criteria is a perpetual bond, which offers an annual interest payment but has no maturity date or principal amortisation schedule. Historically, this financial instrument has primarily been used to fund sovereign states. It is an attractive option in this context in which investors are being asked to help resolve a complex social problem that, if left unresolved, will adversely affect them and their other investments.

The perpetual bond, because it only requires the debtor to make annual interest payments, creates the space to offer students repayment terms that are responsive to their social realities while providing investors with a real, albeit less than 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 are interested in investing in the future of South Africa.

plates that graduated students will get jobs and be able to repay their debts from their salaries.

By limiting the repayment options in this way, the task team has missed an i mpo r t a n t n a t i o n - b u i l d i n g opportunity.

This could be corrected by offering students the opportunity to pay back their loans by doing a period of public service, such as working in undercapacitated small towns and rural districts in their areas of study in return for help paying back their loans on an accelerated schedule.

graduating student works in a qualifying public service position, the employer helps the student pay back the loans for one year of study.

The public description of the min- on the organisational aspects. It is not clear who will make the decisions on which students to fund, who will be responsible for monitoring student performance during their education and who will have the task of collecting the repayments after graduation.

ment bureaucracy, we suggest that the universities collectively create an independent special entity that they own and that is responsible only for raising the funds for student loans through issuing bonds, for disbursing the funds to the universities, collecting the interest payments from the universities and disbursing the payments to the bondholders.

This entity will not require a large staff complement, so will not drain any of the resources raised with the perpetual bond away from funding student education.

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.