This article was first published in the 1st quarter 2017 edition of Personal Finance magazine.
The #feesmustfall movement is demanding that the government provides tertiary studies free of charge. To what extent the movement will succeed and whether the issue will be resolved any time soon is anyone’s guess. For the time being, particularly if you are in a middle- to upper-income household, you are going to have to pay for your or your child’s tertiary education. In the case of a university degree, you are looking at a minimum of about R25 000 a year for full-time study, and that’s just tuition fees.
Of the various ways to raise the money, obtaining a student loan is the worst. It is far better to fund studies from your current income, or your savings, or, best of all, by obtaining a bursary or scholarship. Not only is a loan more expensive, but it’s more onerous because of the contractual obligations that come with it.
People who have a tertiary education tend to earn more over their working lives than those without one. With the long-term pay-off likely to outweigh any short-term financial pain, taking out a loan to study is still a better option than foregoing those studies. As far as good and bad debt goes, a student loan falls into the good-debt category, as long as you are disciplined in how you use one. A positive thing to keep in mind is that they typically attract lower interest charges than personal loans.
So how does a student loan work, and where can you get one?
There are two avenues open to prospective students in South Africa who need to borrow money for their education: the government-backed National Student Financial Aid Scheme (NSFAS) and a retail student loan through one of the “big four” banks: Absa, First National Bank (FNB), Nedbank and Standard Bank. A big difference between the two, apart from qualification criteria, is that an NSFAS loan holds the student solely liable for the debt, whereas the banks insist on a parent or guardian of the student bearing ultimate responsibility for the debt.
The NSFAS programme is aimed at students from disadvantaged backgrounds and low-income families. It provides loans for study at any of the 25 public universities and technical vocational education and training (TVET) colleges in South Africa. The loan includes money for tuition, campus or private accommodation, food, books and travel costs.
Students must apply for a NSFAS loan through the university or college that will host their studies. Each institution is allocated a certain amount of money for these loans, with the allocation formula taking into account its fees and the number of black, coloured and Indian students enrolled. The institutions then apply the rules set down by the NSFAS to determine which students will be funded.
The scheme can accommodate only a limited number of students. “There are always more students applying for financial aid than the NSFAS can fund. Even though the budget for financial aid has increased significantly, there is still a massive shortfall,” the NSFAS website says.
Only students from households earning less than R122 000 a year are eligible. The actual amount of the loan is determined on a sliding scale. Students whose families can’t afford to pay anything towards their education receive full funding, which is up to R71 800 a year for a university degree. Students must repay their loans when they finish studying and find a job. However, if the student passes all his or her required courses each year, up to 40 percent of the loan may be converted into a bursary, which does not have to be repaid.
Repayment of the loan begins once the student gets a full-time job and earns R30 000 or more a year. The repayment amount begins at three percent of gross annual salary, increasing to a maximum of eight percent once the annual salary reaches R59 300 or more. For example, this means you will repay R900 on a salary of R30 000 a year, or R75 a month. Once your salary reaches R59 300, your repayment will be R4 744 a year, or R395 a month.
“You can select to pay more than this, so that you can pay your loan off faster, and reduce the amount of interest you will be charged on your loan,” the NSFAS website says. Interest is charged at 80 percent of the repo rate (the repurchase rate at which the Reserve Bank lends to commercial banks, which was seven percent in November 2016).
Students who drop out of their studies are liable for loan funding received to that point. Unemployed people are not expected to pay, according to the NSFAS website, but must start paying as soon as they begin earning R30 000 or more a month.
The NSFAS budget for the 2016/17 financial year is R10 billion. The scheme assisted over 400 000 students at universities and colleges across the country in 2016. This number has doubled since 2009, when the NSFAS provided loans and bursaries to just under 200 000 students.
A new national student funding programme, in partnership with the private sector, is expected to be rolled out in 2018.
According to the Actuarial Society of South Africa, the society’s members, with support from the banking and financial services sectors, are helping to develop a viable programme for funding tertiary education: the Ikusasa Student Financial Aid Programme (ISFAP). The programme will run parallel to the NSFAS.
The ISFAP was initiated by a ministerial task team established in May 2016 under the chairmanship of former FirstRand chief executive, Sizwe Nxasana, to design a comprehensive funding and support model for poor and “missing middle” students. The term “missing middle” applies to students who come from families with an annual household income of between R122 000 (the NSFAS maximum) and R600 000.
Unlike the NSFAS, the new scheme will be student-centred, with the money “following the student” instead of being allocated to universities and colleges. The scheme will not only cover tuition and living expenses, but will also provide students with academic support and life and social skills. It is also designed to address the country’s dire shortage of skills in certain disciplines – there will be a focus on funding those qualifications that are in demand.
What the banks offer
Absa, FNB, Nedbank and Standard Bank all offer loan packages for students. The products for full-time students are structured so that the interest charges do not compound over the entire period of study, which could be four years or more. This means that, although the capital may be repaid only once you have completed your studies, the interest on the loan and the loan administration fees must be serviced as you study. This is done either by you, if you are earning an income, or by a sponsor (someone who takes responsibility for the loan, alternatively referred to as the principal debtor, guarantor or surety), such as a parent.
For example, a student is loaned R60 000 a year for four years, the interest rate is 10 percent and the administration costs are R50 a month. Interest is therefore R6 000 and administration charges are R600 a year, which means an annual repayment by the sponsor of R6 600, or a monthly repayment of R550 in the first year. In the second year, the interest, now on a loan of R120 000, will be R12 000, which, plus the administration charge, will mean a monthly payment by the sponsor of R1 050. In the third year, on a loan now of R180 000, the sponsor will have to pay R1 550 a month, and in the fourth year, on a loan of R240 000, the sponsor will have a monthly payment of R2 050.
At the end of the study period, the student will owe a capital amount of R240 000, which, if paid off over time, will attract its own interest and administration charges. If the interest is not paid and allowed to compound during the study period, the total amount owing by the end of the four years, excluding the administration charges over that time, would be about R330 500.
The loan packages offered by the banks have the following additional features in common:
• They finance one student per loan, covering tuition and accommodation expenses, as well as money for books and study-related equipment. The loans typically do not cover living expenses.
• Loans are granted for a specific year of study and students must re-apply for each year of registration.
• Fees may be paid directly to the educational institution and place of residence, with money for books or equipment paid into the student’s bank account. Typically, the banks offer a student transactional account with the loan, which may have features such as preferential rates. Alternatively, as in the case of Absa, all transactions are through the sponsor.
• Proof of identity, address, income (payslips and/or bank statements), acceptance or registration at the relevant tertiary institution and course fees, among other things, are needed on application.
• The banks usually require you or your sponsor, or both, to take out credit life assurance to cover the outstanding balance on your loan in the event of death, dread disease or disability.
• The course and institution you choose for your studies must be accredited by an authority such as the Department of Higher Education. You must be studying for a recognised certificate, diploma, degree or postgraduate degree or diploma.
• The bank will perform an affordability assessment of whoever is responsible for the loan, taking into account his or her income and credit record.
• A once-off initiation fee and a monthly service fee are charged on the loan.
• The bank needs to know how you are progressing with your studies, so you have to send proof of registration and the results you achieve in your courses.
• Full-time students must start repaying their capital on completion of their studies. The banks do offer a grace period, however, if you do not immediately find employment or have to complete your articles, internship or community service. Part-time students have to repay their loans while they are studying.
Absa study loans are usually opened in the name of a sponsor, who requests finance on behalf of a student. Loans can be from R15 000 to R250 000, although higher amounts are considered in exceptional cases. Funds must be repaid between 12 and 60 months after your studies have been completed.
Absa offers discounts of up to 15 percent on study-related equipment.
You may opt to make capital and interest repayments as soon as your application is approved, or you may repay interest only for 12 months while studying full-time, and thereafter capital and interest. When topping up an existing loan, you may repay interest only for a further 12 months. You or your sponsor must earn a monthly income of at least R3 000.
Rheka Ramcharan, the head of personal and business lending at Absa, says: “Our study loan product has also been designed to cater for difficulties a student may have in finding immediate employment in the job market after studying, and they are allowed to apply, on a case-by-case basis, for a repayment extension. On average, the annual loan requested is R55 000. The average duration of study is 35 months, with an average pay-back (post-study) period being between 40 and 45 months.”
Interest rate: all loans are at the prime rate.
Bank charges: R1 197 (including VAT) initiation fee (on first loan only) and R68.40 (including VAT) monthly administration fee.
All transactions are done through the sponsor (“principal debtor”), and the sponsor remains responsible for the loan, even once the student has finished studying and is employed.
At FNB you have access to loans between R4 000 and R80 000 per year of study. You must be over 18 years of age and your sponsor must be employed, with a minimum income of R6 000 a month. The bank provides a six-month grace period on completion of studies to allow time for the student to find employment. Loans are repaid over a term of 60 months after completion of studies.
Interest rate: Corne Jordaan, the head of credit at FNB Personal Loans, says the interest rate is linked to prime and based on the risk profile of the sponsor and the nature of studies. Rates offered to FNB customers are between prime and prime plus six percentage points.
Bank charges: An initiation fee of R165 per credit agreement, plus 10 percent of the amount in excess of R1 000, but not exceeding R1 050 plus VAT, or R1 197. The initiation fee is charged once; not repeated for subsequent years of study. The monthly administration fee on the loan is R68.40 (including VAT).
The bank says anyone of sound financial standing may stand as sponsor (“guarantor”) and all full-time students must be supported by a guarantor, who must also have his or her main transactional account with Nedbank. The loan is taken out in the student’s name, and the student must open a Nedbank transactional account. During the period of study the guarantor is expected to service the interest due on the loan, and once the student has graduated and is employed, the student repays the full amount over an agreed period (up to 18 months per year of study funded).
Interest rate: prime plus two percentage points.
Bank charges: R75 initiation fee and no monthly administration fee. There is a R65 initiation fee for subsequent years of study. (Charges exclude VAT.)
The bank requires someone to stand surety for your loan if you are a full-time student, a part-time student earning less than R5 000 a month, or a minor (under the age of 18 years). If you are doing a degree or a diploma, your sponsor should earn a minimum of R3 000 a month; for other courses, he or she should earn a minimum of R5 000 a month.
Ross Linstrom, the media spokesperson for Standard Bank, says: “When assessing a customer’s eligibility, the surety’s income, expenditure and employment are taken into consideration to determine the ability to stand as surety in the event of a default. We also take into consideration the surety’s conduct on other credit products, where applicable.”
Linstrom says the interest rate is variable and moves in line with the repo and prime rates. A positive feature of the bank’s student loan, he says, is that the interest rate works on a sliding scale, “decreasing by one percentage point each year the student comes back for refinancing. This is used as an incentive for students to progress.”
Once the student starts working and the loan is in repayment mode, Linstrom says, the instalment is fixed. If there are interest rate changes, they will affect the term of the loan, rather than the monthly amount you pay. Repayments begin six months after the completion of the studies and could run up to five years.
Interest rate: varies according to risk.
Bank charges: R500 initiation fee and R48 monthly administration fee. No new initiation fee for subsequent years of study. (Charges exclude VAT.)
ADVICE FOR STUDENTS
First National Bank has the following advice for students who apply for a study loan:
• Make sure you apply for your student loan early, well before registration, so that you have adequate time for planning if you need to find alternative sources of funding. Remember that the loan will be based on your parent’s or sponsor’s risk and credit profile, because he or she will be the principal debtor.
• Make sure you communicate with your sponsor, to ensure that he or she plans well in advance and budgets for the money needed to pay the monthly interest instalments.
• Only borrow what you need for your studies. If you have another source of funding, such as financial aid, a bursary or scholarship, or upfront savings, use those sources first.
• Budget carefully, knowing that, for each new year of study, you may need additional funding. You will need to apply for a new loan for each new year of study. Careful planning and budgeting will help you to avoid a situation where you need more funds to complete your studies, but you or your sponsor cannot afford to borrow further.
• Consider working part-time, so that you can cover some of your expenses. This will help to reduce the amount you need to borrow, or contribute to paying off your student loan.
• If you can afford to pay more than the required monthly instalment on your student loan, you should do that. The more you pay and the quicker you settle your loan, the more you save on interest.
• Make sure you understand the terms of the agreement, including:
– The total cost of the loan;
– The monthly repayments expected of you or your sponsor;
– Whether the interest rate is fixed or variable;
– The fees on the loan; and
– Whether you need credit life assurance.
WHAT A YEAR AT VARSITY COSTS
There are a number of factors to consider when calculating what it will cost each year to send your child to university: tuition fees, accommodation, registration and examination fees, books and equipment, sports club membership, day-to-day living expenses and transportation. And bank on your budget for these expenses escalating each year by more than the inflation rate as measured by the Consumer Price Index (CPI) – education inflation may be as much as three percentage points above CPI, according to StatisticsSA figures. (All figures are annual.)
• Tuition. Full-time first-year fees for university degrees range from about R25 000 to R64 000* a year, depending on the degree and the university. The University of Cape Town is among the most expensive universities in South Africa, with first-year fees of about R46 000 for a Bachelor of Arts degree up to about R64 000 to study medicine (MBBCh). Stellenbosch University represents the middle in terms of fees – you’re looking at R33 000 for a BA and R52 000 to become a doctor. Lower down on the fees scale is the University of the Free State, where it costs about R25 000 for a BA and R41 000 for first-year medicine.
• Accommodation. Many universities now charge separately for residence accommodation and meals. This means a range of choices, from self-catering to full board and lodging, with in-between options such as having two meals a day, five times a week. For accommodation only, you’re looking at about R25 000 upwards, depending on whether or not the student is sharing. Add another R20 000 for food, at least.
• Books and equipment. Books and computer software, to say nothing of a laptop computer, will probably push up your bill by between R10 000 and R20 000, depending on the course.
• Living expenses and transport costs. Even if your student child is living at home, there are his or her expenses for clothes and entertainment, among other things, as well as for getting to and from varsity or college.
• Total. For a child living at home and doing a BA, you would probably need about R50 000. On the other hand, if he or she is in residence at one of our more prestigious universities and studying medicine, the annual cost could well be in the region of R150 000.