The problem with the fees report

The Heher Commission’s solution to the university funding crisis will saddle the state with a potentially unlimited contingent liability, says the architect of the alternative plan that got relegated to “option B”.

Sizwe Nxasana is chair of the National Student Financial Aid Scheme (Nsfas) and the brain behind the alternative to the Heher proposal, the Ikusasa Student Financial Aid Programme.

“The Heher model would cost the state a lot more [than Ikusasa],” he told City Press this week.

The overwhelming consensus is that some form of income-contingent loan (ICL) scheme using private credit and the SA Revenue Service (Sars) as a debt collector is the only reasonable answer to higher education funding.

The Davis Tax Committee already proposed essentially the same thing last year, in a short report on funding universities prepared for the minister of finance at the time, Pravin Gordhan.

READ: Fee-free university education 'regressive' - Davis Tax Committee report

Ikusasa, which has had government and banking sector support and is running a pilot with 680 students this year, would use ICLs for the “missing middle” only and retain grant funding for the poor.

The Heher Commission, however, takes it much further by proposing a universal and mandatory ICL scheme all students have to borrow from.

The fundamental difference is that the state guarantees the Heher loans.

Ikusasa is premised on redirecting corporate money through an amendment to the BEE
codes.

The two proposed loan schemes end up with wildly different financial risks, and proponents on either side say the other scheme is worse.

Banks are the most important part of the Heher proposal and their response to it has been lukewarm.

“The essential difference between Ikusasa and the Heher proposal is that Ikusasa does not involve government underwriting of the debt,” said Cas Coovadia, managing director of the Banking Association of SA.

It amounts to risk-free credit creation and could lead to unhealthy behaviour, he said.

“You need the right incentive for the private sector to get involved.”

With low or zero economic growth and a growing fiscal crisis, government should not be piling on new liabilities that could prove unsustainable, he warned.

A whole new financial market 

The scale of the debt book that South Africa’s universities would generate under the Heher proposal is enormous.

It would be a fundamental restructuring of the financial sector in South Africa, with up to a quarter of all personal debt being government guaranteed in the not-too-distant future.

Rough projections done for Heher by the Actuarial Society of SA (Assa) put the outstanding balance of the loans at anything between R550 billion and R1.7 trillion by 2030, depending on which assumptions are used.

READ: SA doesn't have money for free higher education - Heher Commission

The current debt of all South African households is in the region of R1.5 trillion and this has increased by 8% on average over the past decade.

Assuming that rate continues up to 2030, and that Assa’s estimate is realistic, the student ICLs could be a quarter of all household debt by 2030.

The Heher report makes several contentious assumptions about how its government-backed ICL system will be made safe.

“The ultimate amounts of ex-student indebtedness for which the state must stand good are, as the actuaries acknowledge, imponderable,” the report’s authors say.

“Mindful of this, the commission has recommended that long-unclaimed pension benefits [amounting to over R42 billion] should be used as a backup for the state’s liability to pay the banks for such loan debt it cannot recover through Sars.”

Critics say this kind of backstop cannot be presumed to exist.

“With the dropout rate as high as it is, many of those loans are going to go bad,” Nxasana said about the Heher proposal.

“They said the UIF and pension surpluses could be put into equity for loss absorption, but I am not sure if that would be possible. Then, at the end of the day, the state must find equity to inject to absorb the losses ... the state must put a lot more money in,” Nxasana said.

The Ikusasa plan is premised on an amendment to the BEE codes that will allow companies to contribute 2.5% of their payroll to Ikusasa, in exchange for points.

This has been supported by the department of higher education and training. However, Nxasana admits it is uncertain if this will actually happen, after Heher opted for a different model and President Jacob Zuma seems intent on scuppering all the loan-based models entirely.

If Ikusasa did get the BEE amendment it wants, it could bring in R15 billion to R20 billion per year, said Nxasana.

“It is proper money,” said the former banker.

Under Ikusasa, most of this would get used for grants to students alongside the Nsfas.

Some of it would, however, go into the ICL scheme as equity that absorbs nonperforming loans.

Nxasana said this is a much better arrangement compared with what the Heher commission is proposing, where the banks provide these income-contingent loans and the government carries the liability.

“Government is then the only shock absorber,” said Nxasana.

Risk 'exaggerated'

The Heher report’s proposal is based on a submission by Lorenzo Fioramonti, a professor of political economy at the University of Pretoria.

Speaking to City Press this week, Fioramonti pointed out that Heher’s proposal is not precisely what he had put forward.

Fioramonti had suggested that the loans only be partially guaranteed, so that the state does not use more than the current Nsfas allocation of R15 billion every year to back them.

Banks have to take risk the same way they do with all lending, said Fioramonti.

“I think the commission tried to send a signal that it would not be free to government.

“In theory, however, if it works, it will eventually be free.”

The terrifying size of the total debt that will accrue is misleading, said Fioramonti.

It does not take into account how much money is already spent every year on Nsfas, bursaries and commercial student loans.

“It is relatively unproblematic compared with banks’ exposure to state-owned enterprises, for instance.”

Fioramonti believes his scheme would result in a systematic transformation of the financial sector, for the better.

A banking sector with massive exposure to the future prospects of graduates would do more to support economic growth and jobs, he said.

Fioramonti and Heher rejected the Ikusasa model of distinguishing between rich, poor and “middle”. Making the loans universal and mandatory is key, Fioramonti said.

“It has to spread the risk and avoid what economists call adverse selection, where only the poor participate. That increases non-payment. We want to capture the rich to cross-subsidise it,” he said.

A model like Ikusasa is more likely to accumulate losses over time, Fioramonti
claimed.

Key parts of the model have not yet been discussed. These include the proposed rate of interest and the income level at which graduates would start repaying loans.

“I think it is unfortunate that the political debate is all about the costs and not the virtues of the model.”