Are student loans the only answer?

The pressure is on as cries for free education reverberate across university campuses. Although the idea of debt sits uncomfortably with many, an effective loan scheme is increasingly being mooted by experts as the only real solution to funding higher education.

It’s not clear where the government will find the extra R2.6-billion it promised to cover no-fee increases for 2016, let alone future costs.

Now several academics have proposed a state-sponsored lending scheme that could be a fair and workable solution.

The government would need to find an additional R71-billion a year, amounting to a total of 7.7% of the national budget, according to estimates by the South African Institute of Race Relations. Its calculations were based on a cost of R120 000 a year for each of the 800 000 university students, and includes associated costs such as accommodation, transport and study materials.

KPMG’s Christie Viljoen said the average tuition fee for a first-year bachelor’s student is R40 000. To cover this would require R32-billion in funding.

Currently, university subsidies and financial aid cost the state R42-billion — 2.8% of the 2016 national budget.

The state-backed National Student Financial Aid Scheme (NSFAS) is the largest educational financier, with a loan book of R24-billion. In 2013, it funded about 20% of students. The aid is offered to those from families with annual incomes of less than R160 000 a year.

For households earning above the NSFAS threshold, some might be granted an educational loan by a commercial bank at a rate similar to the mortgage rate. The person signing surety has only to pay the banking fees and monthly interest payments. The student has to begin paying off the capital amount once they have graduated.

Others can turn to developmental financiers such as Fundi (formerly Eduloan), which has been in the industry for 20 years and has a loan book of about R500-million.

“For banks, this kind of loan is almost seen as a loss leader … our focus is on education, so we had to find a way to make it work,” said its chief executive, Amasi Mwela.

Fundi doesn’t lend directly to students but to a parent or a sponsor, who can get an unsecured loan from the company. The loan is paid off while the student studies.

Mwela said Fundi, registered as a developmental credit provider, doesn’t charge the maximum fees permitted by the National Credit Act and offers competitive unsecured loan rates. He admitted that the highest number of rejected applications come from those in the lower LSM (living standards measure) groups.

For those who don’t qualify for NSFAS support or pass an affordability test for loans from banks and financiers — the so-called missing middle — there is no real alternative.

To address this, as presented to the current fees commission, NSFAS’s annual household income threshold may have to be raised to R500 000.

NSFAS loans mainly cover tuition fees, but eligible students can also qualify for registration fees and cash allowances to buy books and food and pay for accommodation and transport. The interest rate is set at 80% of the repo rate, annually adjusted. Interest is not accrued while the student is still studying and for up to 12 months after graduation or after dropping out. Up to 40% of the award may be converted into a bursary, determined by the student’s academic results.

But collecting money is the fund’s biggest problem. Its recovered loans declined from R338.8-million in 2014 to R247.5-million in 2015.

This limits its ability to fund new students. NSFAS data shows that funds recovered make a significant contribution to the funds disbursed. In 2006, a year of high recovery, about 44 000 new loans were issued out of recoveries, compared with 7 500 students in 2014.

NSFAS said legislative changes and other policy imperatives, such as the introduction of the National Credit Act and repealing of some sections of the NSFAS Act, for example section 23, which allowed employers to deduct NSFAS repayments from salaries, affected its ability to recover the money owed to it. Some NSFAS beneficiaries have cited poor communication for not paying their debt.

Since the launch of a recoveries campaign at the end of September 2015, and until the end of August this year, NSFAS has collected more than R275-million in loan repayments. It is also working with the South African Revenue Service to obtain nonfinancial information of employed taxpayers who are not paying back their loans.

NSFAS’s impairment ratio is 64%, which includes the impairment loss and the social benefit component of granting loans at a low interest rate. Research shows this is not unusual for such schemes internationally.

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