Financing Higher Education for Underprivileged Students - ISFAP Presentation

1. RMB Global Markets: Hedge Policy Framework ISFAP PRESENTATION TO THE HUMAN RESOURCES DEVELOPMENT COUNCIL Re-imagining financing of higher education for poor and “missing middle” students–a public-private partnership SIZWE NXASANA MARCH 2016

2. Key Strategic Objectives of the Model-Support Programme 3 • of the HRDC Strategy Page 2|CONFIDENTIAL

3. Executive summary Page 3|CONFIDENTIAL

4. Some background on the current position In 2013 983 698 students were enrolled in SA universities. Approximately 150 000 students enrol per annum. Current student numbers estimated at c. 1.2 million. In 2016 Government made available an additional R4,582 bn to fund 71,753 unfunded and underfunded NSFAS qualifying students increasing funding to approx. R15bn. • NSFAS loan terms: • Open to learners who pass the means test. • Loan repayment triggered on completion of studies, conditional on annual salary of R30 000. • Students who pass all their subjects receive a dispensation of up to 40%. • Started operations in 2000. • Preceded by TEFSA, established in 1991. • Number of students supported grew from 83 251 in 2000 to 186 150 in 2014 academic year. • Total amount available in 2014: R7 billion. Page 4|CONFIDENTIAL

5. ISFAP – required changes to current NSFAS scheme rules • & process Page 5|CONFIDENTIAL

6. ISFAP – required changes to current scheme rules & process (cont) * Given that students only start repaying once they reach a threshold salary, the actual recoveries has been expressed as a percentage of the first five of the preceding seven years’ loans extended. The calculation underestimates the recovery percentage by the loan portions converted into bursaries Page 6|CONFIDENTIAL

7. Concept structure – Project ISFAP new student funding vehicle Ikusasa Student Financing & Aid Plan (ISFAP) Max R600 000 Loans Origination Disbursement NSFAS Originator, administrator, collections agent Servicing Provision of adequate but sustainable funding All funding Max R120 000 Potential 40% bursary Collections Grants/ Subsidies Min R150 000 DHE DBE, Provinces, SETAS etc. Administration Bursaries Public Private Partnership Page 7|CONFIDENTIAL

8. How will the ISFAP work for students Student payments Students Grocery stores Banks Housing providers Counsellors Monitoring agent Universities Improved collection capability by utilising both PAYE system & private sector collection capabilities Lower dropout rates, increased employment Study fees Oversight & admin Books Verification of students & information ISFAP Accommodation Admin systems & processes Food Service providers Continuous monitoring, preventative action, remedial steps, student support Should CAS become operational, ISFAP will plug into the system Page 8|CONFIDENTIAL

9. Outline of the funding model ISFAP Returns: commercial Tenor: 5-7 years Credit risk above expected losses Private sector bursaries Banks Financial institutions Individuals Bank loans Senior funding, potentially listed R Senior funding – 5-7y (institutions & banks) Loans Returns: commercial or lower Tenor: 10+ years Credit risk above 22.5% Senior funding – 10y+ (DFIs) DFIs, Foundations, etc Senior LT funding (Partial grants/subsidies) Social impact bonds Returns: outcome dependent Tenor: 5-7 years Social impact bonds BEE Codes Loans Grants/ Subsidies Loans Returns: outcome dependent Tenor: 5-7 years Credit buffer up to reasonable expectation Grants, subsidies – no repayment or specific returns Grants/subsidies DHE, DBE, Provinces, SETAS, etc. Loans, grants/subsidies, bursaries Bursaries Page 9|CONFIDENTIAL

10. Projected net new funding required Numbers as per ISFAP Blueprint Funding Model Page |CONFIDENTIAL

11. Grant/Loan Application Process

12. Proposed CAS to be integrated in origination process Matriculants DHET Central Application Service Apply for university Adults • Also provide useful data/analytics: • Household income • Credit information and analytics • Other demographics (originating schools, subjects offered, etc) • OHD students • Preferred universities ISFAP New CAS likely to be introduced from April 2018 (implementation in the 2019 academic year) Universities Page 12|CONFIDENTIAL

13. Promote and Incentivise Occupations in High Demand (OHD) Page 13|CONFIDENTIAL

14. Family verification will be processed by ISFAP • Student verification will be managed by the banks in the transactional account opening process. • A regular small amount will be required in the transactional account to keep it active, and the mobility of students needs to be catered for Verification Process

15. This process must be internal to ISFAP, ring-fenced, and strictly governed ISFAP will calculate the household means with reference to 5 outside parties as depicted in the diagram Means Test Process

16. Three main hurdles that the student needs to pass in order to repay the loan: • Graduating (not dropping out) • Gaining employment • Retaining employment and repaying the loan • Loan allocation needs to recognise this and maximise loan repayment probability • Loan to bursary rule at graduation needs revisiting Loan Repayment Calculations

17. ISFAP will centrally make the decisions regarding who is accepted for funding together with the terms, conditions, and the grant/loan/bursary make-up of the funding This conceptual model reduces the future burden of debt for the poorer households, and also distributes the loan according to higher repayment ability segments (later years of study). Grant/Loan Matrix

18. It is recommended that ISFAP has a centralised decision engine within which the decisions are tabled. • Change in Decision Philosophy: • Current: The university decides how much the students receive within their university allocation. • Future: The new decision philosophy at ISFAP will be that the lend/grant/bursary decisions are made independent of the University allocation. The objective function will be more sophisticated in order to optimise the effectiveness of spend in order to: • Maximise OHD courses • Offer higher grant to loan ratio to lower household means test students • Offer loans to higher repayment ability forecast students • To offer the correct amount to cater for the full needs of the student. (fees, accommodation, books, living expenses) Decision Philosophy

19. It is recommended that ISFAP has a centralised decision engine within which the decisions are tabled. • Key discussion points relating to new Decision Philosophy: • Can we move away from University allocation? • Total funding under ISFAP is proposed to be increased (R10bn to R20bn) and therefore the chances are high that each university will see an increase in students with fees funded by ISFAP • One of the decision system requirements is to be able to run simulations through the decision strategy to give an estimate of the amounts to be funded by university. • If there is a constraint in funding - who gets declined? • Lower the top threshold of R600k household means tested students. (e.g. R500k) • Decline lower quality students.  • Decline non OHD’s. • Total loan/grant amount offered adjusted to household means. Decision Philosophy

20. Payments made via banking systems • Direct to Universities for fee’s • Direct for accommodation • Student Transactional Account for: • Books • Food • Other • Further control can be added (requiring work in banks) Payments and Control

21. Plan to reduce dropout rates & improve returns for all stakeholders through Social Impact Bonds Page 21|CONFIDENTIAL

22. How the ISFAP Social Impact Bond will work Increased employment DFIs, Foundations Private individuals Private sector Investors OHD-focused teaching Upfront funding for an agreed period • Return on investment • dependent success (based on predetermined targets) of stated social outcome • Lower dropout rates • More OHD-focused graduates • % of OHD students employed • Better loan recoveries Qualifying students Intermediary Decreased dropouts Better loan recoveries Universities Funding Payment based on improvedoutcomes Funding Government Service providers Outcomes funder Performance management ISFAP SIB Remedial steps Independent verification Performance management Page 22|CONFIDENTIAL

23. Social Support

24. ISFAP – can it work? (the Thuthuka Bursary Fund case study) Direct costs covered Study fees Books Accommodation Food Allowance Indirect costs covered • Administrative costs • Orientation& induction • Mentors • Workshops • Tutors • Academic staff costing • Administrative staff costing • Skills for Commerce • Presentation Skills • Induction life-skills course Page 24|CONFIDENTIAL Source: Thuthuka Bursary Fund

25. Summary of lending philosophy changes

26. Functional Components

27. Implications of ISFAP on Public Policy and Laws Note: There are further funding opportunities available, that if taken up could require further amendments to policy and laws – these are being reviewed

28. Concept structure – key considerations – corporate governance arrangements for the “SPVs” Page 28|CONFIDENTIAL

29. Workstreams created Page 29|CONFIDENTIAL

30. Proposed Project ISFAP Timeline 2016 2017 2018 • Distribution of Blueprint • Stakeholder consultation • Legislative and regulatory changes • Start development in May 2016 Implement ISFAP in pilot sites Full rollout

31. CONCLUSION Project ISFAP New partnership to fund more poor students Page 31|CONFIDENTIAL