Some people believe that student loans are little more than a revived form of colonial indenture.

In South Africa many students object to the loan component of the National Student Financial Aid Scheme (NFSAS) because it saddles them with debt. Even the government seems to have lost confidence in its loan scheme. Recent reforms have increased the bursary component of NSFAS and undermined its recovery ratio.

But government-backed student credit is a financial instrument well suited to funding higher education. If managed correctly it could deliver increased access, fiscal fairness and academic excellence more effectively than other funding options.

Other African countries where higher education used to be free have increasingly moved towards loan schemes. In countries including Kenya, Nigeria, Mozambique and Zambia fee-free higher education generally meant a small public higher education sector dominated by well-schooled children of the rich.

Students from the lower middle class paid high fees to attend private universities of variable quality. Even rich countries such as New Zealand, Australia and the United Kingdom have found they needed to introduce cost recovery through loans once their higher education participation rate rose above around 15%.

Almost all South Africans who complete an undergraduate degree are guaranteed employment and high lifetime earnings. This means they can afford to pay their share of the costs of their qualification -— but only once they have graduated and are reaping the benefits of a degree, not while they are still students.

That is why the credit model -—buy now, pay later—- is so well suited to financing higher education.

But the loan scheme needs to be underwritten by government as commercial banks won’t provide credit for tuition fees without security. A government-backed scheme would make tuition payments manageable by providing credit to students via a national loan agency.

I believe that a well-designed student loan scheme is the solution to South Africa’s higher education funding crisis.

The best funding option

There are several other funding options which would make student costs manageable. These include fee-free higher education, non-repayable government bursaries and a flat-rate graduate tax. But a government-backed student loan scheme is superior to all of these, because it can achieve four important policy goals simultaneously: fiscal fairness, higher education expansion, efficiency driven by price and increased access.

Fiscal fairness: University education is both a private and a public good. Universities generate important benefits for the whole of society. These range from innovation and entrepreneurship to a critically-minded intelligentsia and sensitive political leadership. In the global South higher education is an indispensable driver of national development.

On the other hand, the private returns on higher education are unusually high throughout sub-Saharan Africa. A South African who has completed secondary school can increase their chances of employment to near certainty and increase their lifetime earnings by 140% on average, if they go on to complete a degree.

So it is easily justifiable that up to 50% of the unit costs of university tuition should be publicly funded. But it is also fair that graduates should cover 50% or more of these costs once they have healthy earnings.

Higher education expansion: South Africa is one of the most economically unequal societies in the world and its welfare provision remains patchy.

Because of this, it must prioritise public spending on the projects which attack inequality most effectively, including universal healthcare and pensions, infrastructure improvements and school-level education. Even if tax revenue could be increased it would be hard to justify spending the extra money on higher education.

Yet the country risks falling behind in the knowledge-driven global economy if it doesn’t expand its higher education sector.

Government-backed student loans offer a way out of this dilemma. They enable South Africa to fund higher education expansion with money from the future – a share of graduates’ high earnings – rather than by taking it away from pressing projects in the present.

Price as a market mechanism: If universities charge fees and are allowed to set them autonomously, price should serve as a market mechanism, signalling demand to suppliers and cost and quality to consumers of higher education.

The South African higher education sector includes a large number of suppliers, and a healthy range of fee levels at different institutions and for different programmes of study. In these circumstances, autonomous price-setting can be expected to drive down waste and drive up quality. These positive effects would disappear if university tuition was fee-free or funded by a flat-rate graduate tax.

Increased access: A well-designed student loan scheme would reach every school-leaver who qualifies for university but could be deterred by upfront charges. It would cover both tuition and living cost, and guarantee that repayments were manageable by making them a percentage of graduates’ monthly earnings. Such a scheme would eliminate the financial barriers to higher education, while retaining fair cost-sharing and the signalling virtues of price. It would do so by ensuring the costs of tuition fall not on poor students, but on rich graduates.

A loan scheme fit for purpose

South Africa’s current loan scheme has a number of design flaws. Five measures would correct these:

- The current low minimum earnings threshold for repayment of R30,000 per annum deters poorer students. It should be raised to at least the same level as the income tax threshold, R75,000.

- The interest rate – 80% of the repo rate which is set by the Reserve Bank – is too low. It should be increased to above the government’s cost of borrowing. This way, graduates would not only repay their loan in full but repayments would also cover some of the shortfall caused by students who drop out of university or never attain high earnings on graduation.

- Up to 60% of a loan can currently be converted into bursary by students who finish their degree in time with good grades. Given the dramatic private returns on a degree, this extra incentive is unnecessary. No portion of a loan should be convertible into bursary.

- The responsibility for loan collection should rest with the South African Revenue Service.

- Currently all outflows to the loan agency (NSFAS) are counted as expenditure on the Department of Higher Education and Training’s financial statements. Once the loan recovery ratio has been improved the recoverable portion of loan outflows should be counted as an asset in the public accounts. The government could then increase the size and coverage of loans without any extra expenditure. The necessary cash could be raised from the capital market by either the government or the loan agency.

Student debt is not always a bad thing. An improved and enlarged loan scheme could expand South Africa’s higher education sector and break down barriers to access, while driving up academic quality. It would also allow students to graduate with an easy conscience knowing they hadn’t trodden on the poor in their ascent to a privileged position.

George Hull is a lecturer in Philosophy at the University of Cape Town.

This article first appeared on The Conversation