Why students should bear some of the burden of hikes

As featured in Business Live | 3 October 2016

The Fees Must Fall campaign of 2015 has placed the financing of higher education at centre stage in the political arena. Students complain that fees have increased at rates higher than consumer price inflation. This has indeed been the case from 2009 to 2015, with the rate of fee increases exceeding consumer price inflation by two percentage points on average.

Most commentators cite the decline in the share of government subsidies in total university-sector income (for all universities combined). The total income comes from government subsidies, student fees and private income. In 2000, the government subsidy contributed almost 50% of total university income, before it fell to roughly 40% in 2005, where it has remained since.

However, a falling subsidy ratio does not necessarily mean subsidies have declined in nominal or real, inflation-adjusted rand terms. Neither does it mean subsidies have fallen in per-student terms. The real subsidy per student (expressed in 2010 rand) has actually remained quite stable at between R18,000 and R19,000 since 2005.

If real per-student subsidy has remained stable, why have university fees increased faster than consumer inflation? There are two reasons: the interaction between the funding of fixed costs and changes in the composition of income streams; and cost pressures emanating from a deteriorating rand-dollar exchange rate.

First, consider the interaction between the funding of fixed costs and changes in the composition of income streams. Since 2007, student numbers have increased at a faster rate than university activities that generate private income. As a result, teaching activities grew relative to private-income activities and, therefore, had to fund a larger portion of the fixed costs.

To cover a larger portion of fixed costs, fees had to increase. Consequently, the contribution of private income and fees to total university income changed: the contribution of private income declined from 33% in 2007 to 27% in 2013, and that of student fees increased from 27% to 33%.

Measured over the period 2007-2013, half of the top-10 universities registered a real decrease in their private income, while several others registered only small increases (at most 10%).

The full effect of the decline in private income can be seen by calculating the real private income per student. Between 2007 and 2013, aggregate student numbers increased from 761,000 to almost 984,000 — an increase of 26%. As a result, real per-student private income declined for most institutions by between 10% and 30% over the full period. Student fees had to increase by more than inflation to make up for the lower proportionate contribution private income makes.

The second reason for rapidly rising fees relates to the exchange rate. From December 2007 to July 2016, the rand-US dollar exchange rate went from R6.82 to R14.42.

Universities have to import books, subscribe to international journals, pay page fees for articles published by academic staff in international journals and buy imported equipment and software. The cost of all these is affected drastically by a weakening rand. If state subsidies do not increase to cover these costs, and private income per student falls, raising student fees is the only remaining way to do so.

The cost pressures faced by universities will not disappear should higher education become “free”. If fees were to be abolished, the continuing increases in student numbers and a likely deteriorating rand would merely mean that, instead of fees, the government’s subsidy would have to increase at a rate exceeding consumer inflation.

Given other public services such as health and social welfare that must also be financed, fully subsidising all students and abolishing student fees is not sustainable.

Options such as eliminating government wastage, “finding money” somewhere in the 2017 budget or increasing taxes will produce one-off increases in available funds, while universities face frequent above-inflation cost increases. In recurrent budget cycles, the budgetary choices that must be made between competing social and economic needs will not go away.

This raises the question whether fees or subsidies should bear the expected above-inflation cost increases universities face. Higher education benefits society at large, which explains why the state subsidises it.

However, those who obtain a qualification usually end up earning significantly more than they would have earned without higher education. This is what economists call the “private benefit” of higher education. One question protesting students have not answered is, why should anyone else be paying for that private benefit?

To the extent that students will personally benefit in future, they should at least partially pay for the fee increases — partially, because society at large also benefits from higher education.

This means that to the extent that society benefits in the future, the government should also pay more and thus increase the real per-student subsidy.

How much students pay can be related to the expected size of the private benefit they can expect from their education.

For poor students entering higher education, a loan scheme that enables them to pay their fees and living expenses should exist. Of course, this means students still pay, albeit at a later stage.

Student numbers will, in all likelihood, continue to grow and, due to a weak economy, universities’ private income will probably continue its lacklustre growth. The weak economy also does not bode well for the exchange rate. Thus, universities are likely to continue experiencing significant cost pressures in the foreseeable future.

The government and students will have to pay for it. The question we need to talk about is the relative contributions of students and the government. But for that, we need cooler heads and serious debate that avoids either-or approaches.

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