Funding of Tertiary Education

The following article is an excerpt from our December 2017 newsletter:

In principle, the DTC has confirmed that a blanket free higher education (including the wealthy) is not economically financially possible. The following key issues were noted:

  • 1 in 8 children get to university, 1 in 17 graduate
  • The wealthy are considerably more likely to get to university
  • The richest 10% of households received 48% of governments subsidy in 2011
  • Graduate unemployment is 6%
  • Approximately R60 Billion extra per year would be needed for no fee higher income

Best way to eliminate or decrease financial exclusion from higher education 

There are a number of models to fund higher education. The one with the largest leverage potential is a system of government-backed student loans. Given that 10% of the population own “at least 90-95% of assets”, the vast majority of South African households do not have sufficient assets or income to stand surety for their children. Thus, the financial markets play almost no role in funding higher education for the poorest 80% of students. In this context, a government-backed income-contingent loan could be a way to ensure that more/all students are not excluded on financial grounds. The key features of such a system would be:

  • Leveraging existing financial infrastructure to facilitate the administration.
  • Loans would be repayable once students graduate and/or find employment (bear in mind there is only 6% unemployment amongst graduates)
    • The DTC does not deal comprehensively with the fact that only 50% of all students graduate. Clearly those who do not graduate will still have to repay their loans, but in all probability there will be a high level of default from these students.
  • Financial Leveraging. Using the traditional bank lending model of roughly R1 deposits for approximately R4 of loans, a student “lending fund” of around R40 billion could be created by a deposit of R10 billion.

Conclusion, Recommendations & Tax Implications

The DTC recommends that a system of free education for the poorest students combined with a sliding scale of income-contingent government-backed loans for the missing-middle and full-fees for the wealthy is the best workable solution. It is estimated that R15 billion would be required per annum to be sourced as follows:

  •  Raising the top marginal rate of personal income tax by 1.5% would yield R5,1 Billion
  • Increasing the Capital Gains Tax Inclusion rate for corporates from 80% to 100% will yield R1.4 Billion
  • Increasing the Skills Development Levy would yield and additional R8.8 billion.

The budget in February 2018 promises to be very interesting indeed with all the current demands on the fiscus!

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