Can student loans solve ASUU's funding problem?

Strikes have become a constant theme in Nigeria.

Just last month, the power sector’s staff union called a strike action and shut down the national electric power grid—the strike was suspended a couple of days after. In the education sector, strikes aren’t so short-lived. Students who attend public universities are familiar with nationwide strikes typically led by the Academic Staff Union of Universities (ASUU).

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Students’ degree tenures are often extended by two to three years because the universities are unhappy with the government—state or federal. For the past 22 years (since 1999), universities have gone on strike in all but six years. In fact, in 2020, what started as a two-week warning spiralled into a nine-month strike—the longest yet. Just this week, reports show that the Federal Government has taken legal action against ASUU as students of Nigerian federal universities have been unable to learn in classes for the past seven months.

The strike tactic has a very long history. The purpose is to take a collective stand when all other methods of resolving grievances have failed—generally a final alternative to getting what you need or want.

In the case of Nigerian public universities, strikes are usually because of dissatisfaction with funding—either for infrastructure rehabilitation, paying salaries, or improving students’ welfare. The current strike demands also include an additional item: issues with the government’s move to implement a new payroll system.

To understand the scale of underinvestment in education in Nigeria, World Bank data shows that 22% of the global number of out-of-school children are in Nigeria. Last year, only 5.6% of the ₦13.1 trillion budget was allocated to the education sector. According to official records, that’s the lowest allocation to the sector since 2011. Meanwhile, the government continues to spend on an inefficient fuel subsidy. This year, without considering state expenditure, the fuel subsidy will be two times more than what we spend on education, healthcare, works, and housing.

Unfortunately, this means we end up in a situation where public universities are not properly funded. By their nature (i.e. being public), these universities cannot charge students the full cost of the tuition. Universities’ main source of revenue is typically tuition fees. However, this can only work for private institutions as public fees are highly subsidised. An undergraduate course in economics costs about £9,000 annually in the UK. In a private university in Nigeria, the cost is ₦937,500 annually. Available data suggest that Nigeria's most expensive federal university costs ₦81,500, in annual tuition fees. 

So, not only are Nigerian public universities capped when it comes to charging for the services they provide, but their primary funding source (the government) can be unreliable in making payments. The resulting impact is that public universities in Nigeria become prone to strikes, which leads to the loss of valuable academic time as students’ progress with their degrees is stalled during the industrial action period. This presents even more problems for our already growing unemployment problem as the quality of education is diminished, leaving students ill-equipped to meet the job market demands. On the other side of the equation, strikes also mean university staff forego salaries, which reduces their productivity and harms their earning potential.

So what’s the solution? Given all we have discussed, fixing the funding problem is one way to go. Since history has shown us that public universities cannot keep relying on the government to plug the funding gap, alternatives are important to consider. So it begs the question, can student loans solve ASUU's funding problem?

Financing as a solution

We begin by considering the fact that this question is not necessarily new. In fact, we have previously argued that the government has to relinquish control over Nigerian public universities for the strikes to stop. If this is done, we can assume that once universities can charge the full cost of tuition (instead of a subsidised fee), they can go beyond covering their existing costs and go on to make further investments. For example, they can eventually hire and train better teachers, who in turn can produce better-educated students, a revamp the Nigerian education system desperately needs. 

However, by receding state control, universities will likely end up charging higher tuition fees. Understandably though, opponents to this suggestion will draw on the fact that such a move will only end up excluding students who already struggle to meet the cost of their university education.

To solve for this then, we might consider what a student financing solution should look like. In other words, accessing credit to pay your way through university. The idea of credit assumes that what we cannot afford today, we can pay back with our future self—a wealthier self because of riches leveraged by previous debts taken. And arguably, no form of credit better embodies the promise of a future, richer self than student loans. According to Milton Friedman, the free-market economist and Nobel Prize winner for Economics, lending money for people’s education was not only a sound investment—borrowers were sure to get high-paying jobs that would allow them to repay the loan—but also smart economics since more educated people should increase the nation’s GDP.

However, the issue with financing or offering credit is you need someone to frontload the upfront cost. Side note: this is a similar problem I have discussed facing Buy Now, Pay Later operators who seek to offer shoppers the ultimate convenience to access a product and defer instant payment. However, to do this, BNPL players like Payflex (South Africa) and Carbon Zero (Nigeria) make full payments to the merchants (finance the purchase) and are reimbursed over time as customers make their instalment payments. 

This will matter as we consider how to build a student financing option for Nigerian students attending public universities.

The rise of student loans

First, let us consider the appetite for lending to students.

Here, I offer the US’ experience with the evolution of student debt since the 1950s as an illustration. Of course, this discussion comes with the caveat that both the US and Nigeria are completely different economies. However, it is worth paying attention to the evolution of student loans in other countries to get some indication of what is possible.

Student loans were not especially popular in the US in the earlier days. Back then, only around 83,000 students borrowed a total of only $13.5 million in 1958. Today, the outstanding student debt stands at $1.6 trillion for more than 45 million borrowers. This growth was largely spurred by the changes to student loans over the years, which influenced who had access and the terms students borrowed with.

Initially, students weren’t an attractive demographic to lend to. It’s not hard to see why. Young people tend to have little credit history and few assets that can be used as collateral. This made it difficult for financial institutions to see them as good credit risks. As a result, most private credit institutions stayed away, and others charged high rates.

Launching a student loan programme in Nigeria today is bound to face similar challenges. We already know that Nigerian banks don’t like lending. A useful metric to observe lending patterns is the loan-to-deposit ratio (LDR), which measures the proportion of loans banks give out compared to the volume of their deposits. According to the data from the Central Bank of Nigeria (CBN), between 2017 and 2020, LDR for Nigerian commercial banks dropped by 26%. 

In addition, with a 58% LDR, it is clear that Nigerian banks are not particularly prolific when it comes to lending. We trail South Africa (91%) and Kenya (76%), two countries in the Big 4 that Nigeria’s economic performance is typically compared to. Even looking beyond the continent, we could look at some of the countries in the BRICS, since they are arguably the gold standard for any developing country. Again, here, Nigeria trails behind Brazil (70%) and India (75%). The reason for low lending boils down to structural economic issues such as high poverty levels. This is further exacerbated by information asymmetries stemming from inadequate identity systems that make it hard for banks to differentiate between good and bad actors. 

So while banks are primarily responsible for credit provision, their risk aversion to lending to not just small businesses but also individuals means a more pragmatic approach to delivering student financing in Nigeria is needed. This will involve thinking about financing options outside of the commercial banks themselves.

Again, looking at the US, we can see what alternatives are available.

Some observers claim that competition between the US and the Soviet Union post-Cold War incentivised US policymakers to invest more in higher education. This resulted in a bill that introduced the federal student loan programme. However, as the loan programme grew, it began to weigh on the budget deficit. Loans were accounted for as spending, and so all disbursements contributed to the deficit before they were offset by future repayments. Recall this is a problem we highlighted earlier—for any credit arrangement to work, you need to have someone willing to frontload the initial cost of taking out the loan until it can be repaid.

To solve this, US policymakers settled on a guarantee scheme so that the government would guarantee loans made rather than issue loans directly. Going down this route was important because guarantees mean the government is liable to pay only if a borrower (the student) defaults. So the expectation is they should not weigh as much on the government budget in the way a direct loan would. 

This change in tactic also significantly increased the volume of higher education financing available. According to data sources, a total of $700 million in loans was authorised in the first year alone, which grew to $1.4 billion three years later. For context, the initial programme (when the private sector ran things) only authorised $17.5 million in its first year. On the one hand, you could argue this was a sign of the programme’s success—higher student loan amounts meant more students were enrolling to complete higher education degrees. The effect is arguably an increase in GDP if you follow the argument that a better-educated workforce is a more productive one.

Unfortunately, the flip side is that taking out a loan (even when it’s been backed by the government) still means you are expected to repay. Remember the myth of the future richer self post-education? Well, that doesn’t always turn out to be true.

Economists themselves have disagreed on the long-term benefit of tertiary education. Even with the promise of higher wages after you acquire more education, a trade-off still exists between the time spent acquiring said degree (and the cost) and the benefits you could have gained if you had just started your career earlier. Essentially, some degrees pay for themselves, but others don’t. Throwing a student loan into the mix further raises the cost of education, leaving many young graduates indebted even before getting their first job.

In addition, in the case of the US, observers note that student financing options can include multiple parties—the government, the lenders (banks), universities, and students—with different incentives. Banks can make money off the interest they charge on loans, the government has to step in in the event of a default, students flock to degrees they believe can secure them a better future, and universities can charge higher fees. At the end of the day, the person who ends up bearing the brunt of the divergent incentives is the person the student financing programme sought to support—the student.
 

So, what are we to make of this?

Make no mistake, student financing options are not objectively bad. On the one hand, it should lead to more people accessing quality and better-funded education. However, it is only good for people who can convert these loans into a high-paying job, which leads to a more fulfilling life (i.e. better income) and subsequently pays off their debt. Of course, all of this is set within the caveat that Nigeria will need a well-functioning labour market that can create the right kinds of jobs that will make it attractive for students to graduate into. Unfortunately, that passes the baton back to the government’s ability to create an enabling enough environment for the private sector to thrive and demand labour.

Universities have been feeling the squeeze, especially in light of high and rising global inflation. According to the UK university sector body, this has reduced tuition fees' value by nearly one-third in real terms. This signals that the funding issue is not just peculiar to Nigerian universities but is a conversation held in other parts of the world as well.

Poorly funded tertiary institutions will feel even more pressure to deliver training to students while grappling with long-running staff disputes over pay. Alternative higher education funding models must be considered to break this vicious cycle. In consideration of whether to go down the route of offering loans or not, a nuanced conversation shows that ultimately, depending on market forces alone to deliver better quality education is not the solution. At the end of the day, even with the best of intentions, multiple parties with different interests will mean that not all who participate will benefit.