Loans weigh students down

It reportedly took the United States president more than a decade to pay off his student loans, about the same time it will take many students in South Africa to shake off what they owe tertiary education institutions.

A student debt crisis has become a hot-button issue in the US, where outstanding student loans have reached $1-trillion and have been likened to the subprime mortgage bubble that toppled the financial world in 2008. Rohit Chopra, student loan ombud at the US Consumer Financial Protection Bureau, told a banking conference earlier this year that the market looked "too big to fail".

In South Africa, student debt is becoming a serious concern as well. It is connected to the historical injustices of the education system and has weighty consequences such as which universities students are able to attend and the quality of education they are likely to get.

But, despite the costs, a tertiary education is still believed to be the best way to enhance an individual's employability and earnings potential.

According to Gerald Ouma, senior lecturer at the University of the Western Cape, student debt levels have become "dire" and the historically disadvantaged institutions – the former black universities that often cater to the poorest aspirant graduates – feel the burden most keenly.

Precise data on how much credit has been extended to students is not available. But, Ouma said, some extent of the debt could be calculated by how much money is owed to educational institutions. In addition, about 80% of students rely on the National Student Financial Aid Scheme to pay for their education, which means the scheme is carrying the bulk of the debt.

Governance issues
A review of the scheme, completed in 2010, showed the amount of debt owed to institutions had soared to R2.7-billion by 2009. At the time, only R3.2-billion of the total R12-billion in funds disbursed by the scheme had been recovered. On average, beneficiaries of the scheme took a decade to repay their loans.

From the scheme's inception in 1992 to the 2011 academic year, it disbursed a total of R23-billion in loans and bursaries, but by the 2011-2012 financial year the scheme had recovered only R3.8-billion.

The scheme has faced serious governance issues and long-standing challenges over collecting the outstanding loans. In addition, up to 40% of a loan can be converted into a bursary if the recipient meets some academic requirements, although it is not clear how much of the total funds disbursed have been converted as such.

The scheme is aimed at those from poor and previously disadvantaged backgrounds, but there is a group of students who cannot afford tertiary education and do not qualify for assistance from the scheme.

This "missing middle" depends on private loans from financial institutions. The qualifying and repayment requirements are much more stringent and little is known about the number of students involved.

Ouma said the debt owed to higher education institutions varied. In 2010, debt as a percentage of tuition income for some of the historically disadvantaged institutions was as high as 50%.

There were a number of reasons for this. First was the students' socio-economic background. The feeder areas for many historically white universities included students from far more affluent backgrounds. Often, for many of them the university fees were less than the fees of the expensive private schools they attended. This left the disadvantaged institutions with the poorest and most vulnerable students.

Second, a grant from the scheme did not pay for all the university fees, Ouma said.

The third factor was the drop-out rate of students, which materially affected the extent of their debt because they were still liable for it.

The fourth reason was that many historically disadvantaged institutions suffered from poor management, which adversely affected their ability to collect and administer fees. The extent of this was also unclear because it was not known how many students could not pay their outstanding fees.

Ouma said all these problems also affected the quality of the graduates those institutions could produce.

The former white universities also benefited from many sources of income, such as grant funding or alumni endowments, whereas the disadvantaged institutions depended solely on state allocations and tuition fees to keep going.

"The level of need at these institutions is very high and what they lose in tuition revenues cannot be compensated for from state funding," Ouma said.

"They are forced to cut back in other areas such as infrastructure maintenance and staff recruitment and begin to run suboptimally. The labour market is aware of these trends and treats these students as half-baked," he said.

Banks keep lid on statistics

According to the National Student Financial Aid Scheme, it supported about 32% of all university students registered in 2011.

Although parental support, bursaries and scholarships help a large number of students to afford their tuition, many have to turn to private banking institutions to fund their education.

But the extent of this is not clear. Three major banks would not disclose the size of their student loan book or the levels of payment default on these loans.

The National Credit Regulator said banks do not give figures for student debt – classified as either "credit facilities" or "other loans" – and so it cannot determine a rand value for student debt. Parents or guardians also often stand as surety for student loans and the debt is thus listed under their names.

Arrie Rautenbach, Absa bank's head of retail markets, said most of its student loans are in the name of a parent or sponsor, who generally understand the discipline associated with debt. He said the bank has "an acceptable bad rate". The average size of an Absa student loan is R49500 and it takes, on average, between six and eight years to repay it.

Standard Bank shows a slightly shorter repayment term of about five years, according to Sugendhree Reddy, head of personal markets at Standard Bank.

Education pays off

South Africa's education ­system is still battling with ­widespread inequality and it has a ­significant impact on the ­quality of education individuals can afford.

Nevertheless, tertiary education improves a student's chances of finding a job. University of the Western Cape lecturer Gerald Ouma referred to a study done by the Centre for Higher Education Transformation, which revealed that an individual's chance of being employed, as well as the prospect of moving on to better- paying jobs, was substantially improved with a qualification.

Information provided by the centre and drawn from research done by the Southern Africa Labour and Development Research Unit in 2009 indicated that earnings showed a linear improvement from matric to a degree. At the time, a person with an average matric received R1100 a month, but this increased to R3100 a month with an average diploma or certificate and rose to R5400 a month with an average degree. People with a tertiary education were twice as likely to be employed, according to the research.

The ability of graduates to pay back loans from private institutions also suggests that they are deemed more employable.

"One of the fundamental underlying risks of granting a student loan is whether that student eventually gets employed and is able to pay back the loan," said Sugendhree Reddy, head of personal markets at Standard Bank.

"Our low delinquency rates indicate to us that we see a large scale of employability of graduates using student loans to finance studies."

But the level of surety parents or sponsors provided had an impact on this, Reddy said.

Standard Bank only funds courses offered by institutions that are accredited by the Council of Higher Education

or relevant skills education training authority, which means the students hold better qualifications and "should be more employable". 

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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