We consider the interaction between human capital accumulation and inequality in South
Africa. We start by discussing three alternative theoretical frameworks that relate inequality
and investment decisions in post-secondary education; namely the ‘perfect credit markets
hypothesis’, the ‘imperfect credit markets hypothesis’ and the ‘social externalities
hypothesis’. Each of these suggests different policy implications. We then consider which of
these seems to have the most validity in the South African context, by presenting some
original analysis as well as considering some of the related literature. Our findings suggest
that South Africa is indeed in an ‘inequality trap’ situation and that credit markets do not
work well. There is some evidence that social externalities compound the effects of the
imperfect credit markets. We conclude with a discussion of possible policy directions. These
include information on eligibility to tertiary institutes of education, awareness campaigns
regarding public financing options, subsidization of application and registration fees and
efforts to improve school quality at the primary and secondary levels