Funding Free Higher Education

The purpose of this post is not to provided an exact funding model. What we want to do is to crunch some numbers, and determine if the funding of free higher education is even feasible.

If we crunched the numbers, and our funding model is nowhere near feasible, then we need to come up with some other way. It turns out, that we get incredibly good numbers. What we get is not technically “free” higher ed, but fees are fully subsidised essentially through taxes, where the student pays pack the money over the lifetime of their working career.

Based on 2013 figures, we know two things: There are 938 201 students, and the graduation rate is 15%. We also know that the graduate unemployment rate is 5%.

Using those figures, and assuming the yearly drop-out rate is constant, we can work out the distribution of students for each year of study:

Year of Study Count
1st Year 517 302
2nd Year 274 858
3rd Year 146 040
Graduates 77 595

Then, of the 77 595 students that graduate, 95% will find employment, which is 73 715 employed graduates.

What we want to do, is to work out the total cost we would have to put into the system in order to generate a single employed graduate. Scaling the above table, and assuming a single year of study costs R50 000, we get the following:

Count Cost
1st Year 7 R350 000
2nd Year 3.72 R185 965
3rd Year 1.98 R98 809
Graduates 1.05
Employed 1

A University/State needs to accept 7 students in first year, in order to produce a single employed graduate. Someone needs to pay for those 7 students. Four of them will drop-out and not enter second year, but of those that do, their fees need to be paid. etc

Thus the total cost for a single employed graduate is a sum of these figures, which is R634 774.

Here we have assumed, that the students that drop-out never pays back their fees. The burden then, could fall on the shoulders of the 1 employed graduate. I mean, someone needs to pay. We cannot just run around giving away free money. Is it fair for this burden to fall on the shoulders of the single employed graduate? I think so. They are the ones that will have a degree. They are they ones who will potentially be accruing significant private wealth. Never mind the social good I think a graduate has the responsibility for.

Let us now assume that the money used to fund all this education is debt. That the interest rate is 6% (the current repo rate). For those three years of study, as the graduates are not paying any taxes (since they’re working hard on their studies), the total amount that must be paid back with interest jumps to R730 543.

It seems like a lot of money. It is a lot of money. Would it be feasible to make that single graduate pays back this money?

We make some more assumptions, that the graduate works his entire life. Graduating at 21, and working till 65, the graduate has 44 years to pay back not just their studies, but the studies of all the students that dropped out. If we assume that this is a Government-type model, where they take out these loans, then we are allowed to take a long-term view.

If this employed graduate has a starting salary of R12 500 per month, and gets an 8% p.a. increase every year (which I don’t think is an unreasonable assumption – they are a supposed skilled graduate), then over their entire working career, 7.38% of their salary will go to paying back their fees.

Now, this 7.38% is not on top of their taxes. The 7.38% is from within their taxes. With a starting salary of R12 500, an employed graduate will pay about 9% in taxes. So in their first year of working, when they pay their taxes, 1.62% will go straight to the state to use for what ever, and the other 7.38% goes to pay back their studies.

Over time, of course, as this graduate’s salary increases, the ratio of “fee tax” to “regular tax” decreases. I mean, if they worked really hard and increased their salary to the point where they were paying 25% in taxes, about a third of their taxes will go to paying back their studies.

The cost for all current students is about R47 billion. Which is not a small amount. A significant amount of taxes will be diverted back to paying these fees. But we must remember, that one of the virtues of having a university educated work force, is that they generate more value than just income tax.

Is it a feasible model? Yes. Even at an absolute worst case, higher education could be entirely funded by graduates.

There are numerous tweaks that could be made to the system. For instance, in New Zealand, only the interest on fees is paid by the state. This would dramatically reduce the repayment percentage.

In our model, we have assumed that the students that dropped-out pay back nothing to their failed studies.

I must admit that before I started crunching the numbers, I was half expecting the pay-back-rate to be more than 20%. Which would make the model completely infeasible. That it is not shows that their is something here worth investigating further.

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