Business, Education

How will the recommended Income Contingency Loans model work?

President Jacob Zuma released the Report of the Commission into the Feasibility of Fee-Free Higher Education and Training in South Africa on Monday.

The report recommend that all tertiary students in South Africa be given access to State guaranteed bank loans, which they would only pay back once they start earning a certain income.

It recommends all students studying at both public and private universities and colleges be funded through a cost-sharing model of government guaranteed Income Contingency Loans (ICL) sourced from commercial banks.

What is the ICL and how it works?


ICL is an arrangement for the repayment of a loan where the regular (e.g., monthly) amount to be paid by the borrower depends on his or her income. This type of repayment arrangement is mostly used for student loans where the ability of the new graduate borrower to repay is usually limited by his or her income.

How will the ICL model work?

  • Repayment only begins when the student reaches a certain threshold income.
  • Payments only continue until such a time as the loan is paid off.
  • The repayment period could be set to a maximum period so as ensure that payment does not impact on retirement accumulation.
  • Students could be allowed to settle the loan more quickly should they be able to.
  • Those who emigrate could be required to pay off the loan before leaving.
  • Loan is made available to all students (private and public universities).
  • No means test.
  • The financing of every university student is achieved through a bank loan at a rate favourable to the student. Whether such financing should extend to the full cost of education will depend solely on the choice of the borrower and his need for such an extension.
  • Collection and recovery of the loan will be undertaken by SARS through its normal processes.
  • The State can guarantee the loan or, better still, purchase the loan, so that the student becomes a debtor in its books. Professor Fioramonti, in his model, proposed the inclusion of the banks as lenders to students, with a government guarantee, so as to cover the cost for the initial years.
  • No student is obliged to repay a loan unless and until his or her income reaches a specified level. At the lowest specified level, the interest rate is at its lowest but will increase in accordance with specified increases in income growth.
  • If the loan is not repaid within a specified number of years, the balance can be written off.
  • The State will repay each student loan to the bank at a given date (for example, five years from the first advance).