/ 23 September 2016

​Grants and loans are the fee answer, says Max Price

​grants And Loans Are The Fee Answer, Says Max Price

In an ideal world, if South Africa were a rich country with little inequality and was already providing sufficient state funding to support socioeconomic rights such as universal fee-free quality primary and secondary schooling, universal access to early childhood development centres, health care, social welfare support for all elderly and unemployed, I would support a system of no-fee higher education.

A medium-term plan for the next 30 years, however, will have to fit a different context in which fee-free higher education cannot claim to be the highest priority.

I therefore argue that, for the foreseeable future, higher education has two main sources of funding — government grants and tuition fees.

Cofunding is not intended to diminish the imperative for increased government funding. Subsidy should be increased, ideally to about 1% of gross domestic product to reflect the public good that derives from higher education. But even with improved subsidy, cofunding is desirable for the following reasons:

  • Fees enable the system to generate more funding for higher education beyond only government funding. There is a public out there willing and able to pay for a good education, as illustrated by current practice and by the spend on private schools at rates much higher than university fees, private universities and overseas study. This additional revenue would be lost if universities are not allowed to charge fees.
  • Higher education benefits the general public — even those who do not go to university. Society benefits from a generally more educated population, from research and innovation that benefits the environment and all people, and through reducing inequality — societal benefits that must be publicly funded. On the other hand, universities generate a direct benefit to the future graduate — what economists would call a “private benefit”. Thus everyone who benefits directly from higher education should contribute towards this preferential benefit.
  • Tax-based public funding should benefit all. Higher education is only accessible to about 20% of the population and an even smaller percentage of households. Furthermore, this 20% is already relatively privileged: they have been to better schools and come from family backgrounds that have enabled them to succeed academically. They will also become even more privileged as a result of their university education. This is quite different from, say, schooling or healthcare, where everyone benefits directly from tax-based funding.
  • Public funding that benefits only a portion of the population with direct private benefits can be justified if the effect is redistributive to the poor (for example, child care grants are for private benefit but are redistributive). Free higher education, however, does not differentiate between those who can afford to pay and those who can’t. It generally benefits the rich much more than the poor.
  • Fees are a central driving mechanism for funding research universities. Current government funding strategy gives all universities the same amount of funding for the same number of students, weighted in a standard way for the costs of delivering different study programmes. Research-intensive universities are more expensive than the average university and have been able, up to now, to cover their higher costs with higher-than-average fees. Unless government changes its funding strategy dramatically, without fee income the research universities could no longer compete globally, and would also then lose their ability to attract top research staff, top teaching staff and top postgraduate and postdoctoral students.

Equity requires that, in a system that relies on fees for cofunding, “the poor” should have equal access and affordability should not be a barrier. Society does not divide in a binary way between poor and rich. The continuum of income determines a continuum of affordability. I use the term “lower income” to refer to that group that may have no income or an income that still renders full fees unaffordable. The extent of financial support they require will vary.

One way of ensuring access for the lower-income students is to create variable fee levels, with free education for the lowest income, mid-level fees for lower-income households and higher fees for the rich. The challenge of this system is the difficulty of administering multiple fees for each course (including multiple fee levels for costs of accommodation, food, books and so on.) If there were only two levels — free and full fee — the income threshold that determines whether one’s tuition is free would have to be quite high, with significant loss of income to the sector.

A simpler, fairer and more efficient solution is to have the same tuition fee for everyone, just as all students face the same costs for books and food, and then provide a personal bursary or loan for those who need it on a sliding scale. For those with the lowest income, the bursary could cover their total fees, thus in effect creating a fee-free education.

Should financial aid be a grant or a loan? A loan system returns money to the system and reduces the fiscal burden. Second, a loan system is necessary if the sector wishes to draw on private sources of capital that will not donate to a financial aid scheme, but could be expected to make loans. Thus the use of loans enables government to share the burden of capital and cash flow in funding higher education.

Third, the private benefits of higher education ought, to some extent, be funded by the individual. Finally, the system currently generates significant funding from private sources. If there were no fees, or fees for lower-income students were pure grants, there would be no incentive for these third-party funders to contribute to the funding of higher education, but they could provide funding to reduce loans and debt.

Around the world, student loans are often designed so that repayment is income-contingent: the amount to be repaid in any year is related to a graduate’s income, not to the total debt or interest rate. Such loans are guaranteed to be manageable, because when you are not earning you are not required to make any payment, and repayments each year are always a manageable proportion of earnings.

I propose that the lowest income be funded by grants, and middle income by income-contingent loans.

Max Price is the vice-chancellor of the University of Cape Town. This is an edited version of the presentation he gave to the fees commission earlier this month.