A Student Bank to fund free education

#FeeesMustFall is a continuation of the campaign waged by historically black universities. The objective of this campaign is to problematise the current tertiary education funding model. The current funding model places an undue burden on poor, working class and middle income household students. The NSFAS loan model has become a debt sentence for economically poor students and further adds to their black tax burden. Working class and middle income household students are denied access to tertiary education due to lack of funds. This denial of access is because they are not covered by NSFAS, yet simultaneously they lack the assets to collateralize loans from banks.

A solution to this impasse is to scrap NSFAS and create a Student Bank. The Student Bank would be a state parastatal similar to the IDC (Industrial Development Corporation). The Student Bank would have only one requirement for granting funding to students, and that is that an applicant be registered as a student at a tertiary institution (university or TVET college). The bank would require no collateral from students to offer funding. The funding extended would not only cover tuition but also importantly include both accommodation and living expenses. The bank will be run as a digital bank in order to reduce its running cost footprint.

The bank would be capitalised through a series of once-off capital injections by the private sector. In other words, the core initial balance sheet of the bank would be raised from the private sector and business. The basis for involving the private sector is twofold: the private sector is the biggest beneficiary of tertiary graduates in SA and the private sector is the biggest beneficiary of consumption from poor, working class and middle income households in SA.

Government would provide additional annual funding, in the same way it does for the IDC, to meet any annual shortfall of the Student Bank. Further, the Student Bank, much like the IDC, would have access to debt capital markets to augment its funding through bond issuances.

The funding extended to a student would become that student’s private debt. Debt? But is this not taking us back to the debt sentence type model. No, because there would be rebates for the debt. These rebate categories would span household income rebates, academic performance rebates, scarce skill study rebates and post-graduate study rebates. This rebate structure would ensure that given the class inequality in South Africa we have a targeted intervention rather than blanket “free” education.

So for example, Student Bank funding of R30k extended to a student from a family with household income of R400k could be rebated to R20k, whilst that of a student from a family with income of R600k would be rebated to R27k. In other words the student would only have to pay back either R20k or R27k off of funding of R30k depending on their family background.

The rebated debt would be recovered from each recipient student as a tax deductible cost (much like pension fund contributions) from their salary. This payback amount would be capped as a percentage of the recipient graduate employee’s salary. Further the debt would only be payable once the graduate employee’s salary exceeds a certain threshold. Companies would also be in position to buy out the debt of a student and claim this amount as a tax deduction. A below market interest rate would be applied to the rebated debt.

A cost attribution model based on private debt with rebates has an embedded benefit of individual behaviour shaping. But surely no student is going to varsity to waste government money so why is their individual behaviour a problem? Well consider the following scenarios. How do you ensure fairness when one student lives in a R800 per month residence versus another who chooses a palatial R5000 per month apartment, if the funds are agnostic of individual behaviour. How do you ensure fairness when one student finishes a 3 year degree in three years yet another finishes in seven years. How do you ensure fairness when one student comes from a family with a household annual income of R400k versus another from a family with R900k annual household income. How do you ensure alignment with national goals if one student studies a scarce skills education stream whereas another studies a stream in over supply. How do you ensure alignment with national goals if one student stops studying after under-graduate level whilst another goes on to complete post-graduate study.

The rebates would ensue that a poor student can study debt free whilst simultaneous ensuring that a well performing middle income student might get something like a 60% discount rebate on their student debt. Further the privatisation of this debt ensures that a student can pick and choose a tertiary experience that meets their appetite (e.g. use only parent funding, use funding combination of parents paying along with Student Bank funding, can stay in cheap accommodation but have access to healthy food, choose a scarce skills degree to maximize rebate received, etc.).

The Student Bank system forgoes having field of study quotas, but rather has system of incentives for prioritised fields of study without restricting access to other fields. For example, one would have access to pursue one’s passion for marketing, English or human resource management whilst being fully aware that a STEM programme has better rebate benefits.

What mechanism will government use to fund its contribution to the Student Bank? Will it be via a graduate tax, wealth tax or VAT increase, etc? To answer that question of how government will fund its contribution to the Student Bank, we need to understand how treasury works. The SA treasury does not like earmarked taxes (i.e. taxes ringfenced for a specific purpose). This was most recently witnessed with the rejection of a fuel levy in the E-Tolls saga.

Treasury feels such earmarked taxes (like a fuel levy) create spending and management inefficiencies. So treasury prefers to have a single fiscal pool of funds and have various entities and departments compete and bid for a share of that pool. With this method treasury is then given room to most efficiently fund that fiscal pool through a combinations of taxes and debt issuances in the bond markets.

So to answer the question of how government will fund its contribution, well once the private sector contribution to the Student Bank balance sheet has been determined then Treasury will see to finish how it raises its share. The Davis Tax Commision should have recommendations to this effect.

Twitter: @melomagolego