Parthenon Report Student Financing


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Parthenon Report Student Financing

  1. 1. T HE PARTHENON G ROUP Boston • London • Mumbai • San FranciscoMarch 2011 Financing Indian Higher Education By The Parthenon Group P R E PA R E D F O R T H E E D G E 2 0 11 C O N F E R E N C E
  2. 2. Agenda T HE P ARTHENON G ROUP Expanding the Affordability of Tertiary Education Lessons Learned from Student Financing in the USA Holes in India’s Current Student Financing System Conclusions 2
  3. 3. Education and economic growth are critically intertwined T HE P ARTHENON G ROUP Tertiary Enrolment Ratio vs. Income, 1980-2008 1 100% 2008 80 USA 2008 tio UK ross Enrolment Rat 60 1980 4 2 40 Gr 2008 Brazil 20 1980 2008 India 3 1980 1980 0 0 10,000 20,000 30,000 40,000 50,000 60,000 $70,000 PPP adjusted GDP per CapitaSource: World Bank 3
  4. 4. Current projected economic growth implies the need to expand tertiary enrolment by 8.9M seats by 2016 T HE P ARTHENON G ROUP Enrolment Forecast for Indian Higher Education, 2004–2016F 30M CAGR CAGR (04-10E) (10E-16F) 8.9M 24.9M 8% 8% Unmet 20 Demand Number of Students 5.8M 16.1M 10.2M 10 Higher Education Enrolment 0 2004 Incremental 2010E Incremental 2016 Enrolment Enrolment GDP/Capita (US$ PPP Adjusted) $2.1K $3.6K $5.7K Gross Enrolment Ratio 11.6% 6% 15.8% 5 8% 22.3% 3%Source: MHRD; Global Insight; Parthenon Analysis 4
  5. 5. Lowering the affordability threshold is animportant component in expanding and equalizingeducational access T HE P ARTHENON G ROUP Distribution of Household Income ouseholds India Brazil USA/UK As more households As India’s income are able to afford Percent of Ho distribution moves quality tertiary higher, a larger % of education for their its population can children, seat capacity afford tertiary in the system plays a education key role to sustain P enrollment growth Household Income Student financing has the ability to move the affordability threshold backwards Affordability Threshold y For Tertiary Enrolment 5
  6. 6. Given lower government appropriations, Indian institutions fund a larger percentage of their operations from tuition than USA institutions T HE P ARTHENON G ROUP USA vs. India Government Expenditures Revenue Per Student On T ti O Tertiary Education as % of GDP 2009 Ed ti f GDP, By Source of F d 2008 B S f Funds, 2.0% 100% venue Other Revenue ations, Investment Income, Other Rev 1.7% 1 7% 80 1.5 60 1.0 Tuition/ Tuition/ Fees Fees 40 Govt Appropria 0.5 0.3% 20 Tuition/ Fees Tuition/ Fees 0.0 0 USA India USA India USA India Public Sector Private SectorNote: Indian tuition data is for engineering courses (BTech)Source: NCES; BEA; Parthenon Survey of Higher Education Institutions in India; UNESCO 6
  7. 7. Today, tertiary education is less affordable in India than in the USA for every income bracket T HE P ARTHENON G ROUP Average College Tuition as % of Household Income g g by Income Quintile, USA vs. India, 2009 100% 80 In the US, tuition represents only 5% of top quintile households income, while in India tuition represents 11% 60 of top quintile household income 40 20 India USA 0 Income Quintile 5 Income Quintile 4 Income Quintile 3 Income Quintile 2 Income Quintile 1 (Highest) (Lowest)Source: U.S. Census Bureau; NCES; BLS; NSS 7
  8. 8. Broad financing options in the USA help facilitate tertiary education access for low income students T HE P ARTHENON G ROUP USA and India Adult Population with Higher Education, by Income Quintile, 2008 100% USA Adult Population with Higher Education 84% Indian Adult Population 80 with Higher Education 67% 60% 60 46% 45% 40 20 17% 4% 2% 1% 1% 0 Income Quintile 5 Income Quintile 4 Income Quintile 3 Income Quintile 2 Income Quintile 1 (Highest) (Lowest)Source: U.S. Census Bureau; NCES; BLS; NSS 8
  9. 9. Indian students primarily rely on family funds to pay for education, implying that many low-income students cannot afford to attend college T HE P ARTHENON G ROUP Indian Student Survey Responses: Source of Financing for Higher Education 100% Scholarship & Other Funding Scholarship & Self (savings) Other Funding 80 Loans No 60 Self (job) Self (savings) Parents/Family 40 57% Out Of Pocket Even those students who took out loans Parents/Family financed 57% of the 20 total cost with family Yes money, savings, and job-related income 0 Did Not Take Out a Loan Did You Take Out a Loan? Took Out a LoanSource: Parthenon student survey (N=205) 9
  10. 10. Three broad options are available to increase access to tertiary education in India T HE P ARTHENON G ROUP Use Capital Markets Subsidize Institutions Subsidize Students to Fund C t F d Capacity Expansion it E i to Increase Affordability t I Aff d bilit to Increase Affordability t I Aff d bilit • Facilitate private investment in • Provide direct financial support to • Provide aid directly to students in tertiary education in order to institutions so that students can pay the form of loans and/or grants to increase capacity; this will help p y p tuition that is less than the cost of attend an institution of their balance demand and supply education choosing Brazil UK and USA USA • In 1996, Brazil deregulated its • The UK provides significant funding • The USA provides students with tertiary education system and to institutions and limits the tuition extensive financial aid options. opened its doors to private they can charge students to a small These options include grants investment. As a result of this % of the cost of education. The (mostly directed toward low-income action, tertiary enrolment has government is currently considering students), and government-backed grown three fold since 1997 (2M three-fold alternatives to this system due to its loans (available to all students) students). to 6M) large burden on taxpayers These funds make up a significant portion of overall tuition • The USA provides funding to many institutions in order to subsidize the tuition they charge students but students, schools are free to set their own tuition levels Discussed at Requires Significant Potential Effective Option for India 2010 EDGE Conference Government Expenditures (in combination with private investment)Source: World Bank 10
  11. 11. Agenda T HE P ARTHENON G ROUP Expanding the Affordability of Tertiary Education Lessons Learned from Student Financing in the USA Holes in India’s Current Student Financing System Conclusions 11
  12. 12. There have been three significant periods of tertiary enrolment growth in the USA since 1955 T HE P ARTHENON G ROUP Total USA Tertiary Enrolment by Control of Institution, 1955-2008 25M Student Financing Reform Capacity Expansion Capacity Utilization (1955-1975) (1975-1995) (1995-2008) CAGR = 7.5% CAGR = 1.2% CAGR = 2.3% CAGR 20 ( 95 08) (95-08) Private Sector 15% Total Fall Enrolment 1965: Higher Ed Act of 1965 – 15 authorized many of today’s student Independent financial aid programs, including the Sector Educational Oppo tu ty G a t ducat o a Opportunity Grant Program (Pell Grants) and the Guaranteed Student Loan Program (Stafford Loans) 10 Public Sector 5 0 1955 1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008 % Private 0% 0% 0% 0% 0% 1% 2% 2% 2% 3% 6% 8% Govt Spending on Tertiary Ed y 0.4% 0.7% 0.9% 1.4% 1.5% 1.5% 1.4% 1.5% 1.5% 1.5% 1.7% 1.7% as % of GDPSource: NCES; World Bank 12
  13. 13. There have been three significant periods of tertiary enrolment growth in the USA since 1955 (continued) T HE P ARTHENON G ROUP Student Financing Reform Capacity Expansion Capacity Utilization (1955-1975) (1975-1995) (1995-2008) CAGR = 7.5% CAGR = 1.2% CAGR = 2.3% USA Enrolment Growth vs. Growth in USA Enrolment Growth vs. Growth in Supply/Demand Illustrative Example Number of Institutions, 1975-1995 Number of Institutions, 1995-2008 3% 3% Gov’t Subsidy 2.3% Supply 2 2 Receive Schools Price 1.4% 1.2% Students Price Pay New 1 1 0.8% Demand Average g Annual Growth Average Increase in Demand Annual Growth enrolment 0 0 Number of Enrolment Number of Enrolment New Institutions Institutions Equilibrium E ilib i Quantity • GI Bill and similar government • Significant investment in the private • Enrolment growth in the private sector financial aid programs stimulated sector to expand capacity and build continues its strong trend as the demand in the USA by lowering the scale investment in capacity pays off effective price of educationSource: NCES 13
  14. 14. The development of a student financing system and investment in the private sector helped expand tertiary education access in the USA T HE P ARTHENON G ROUP USA Higher Education Enrolment g USA Higher Education Enrolment g Growth by Income Quintile, 1995-2008 Growth by Institution Type, 1995-2008 15% 4% 15% 3.4% 3.3% 3 GR Total 10 ment Growth CAG Enrolment Growth 2.2% 2 1.7% Enrolm 1.4% Enrolment Growth CAGR 5 1 Total Enrolment Growth 2% 2% 0 0 Income Income Income Income Income Private Sector Public Independent Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 Sector Sector ( g (Highest) ) ( (Lowest) ) Low-income 51% 28% 23% Students %Note: Low-income students represented as students below 150% of the federal poverty levelSource: NCES 14
  15. 15. Student loans are now a ubiquitous part of the tuition landscape in the USA T HE P ARTHENON G ROUP Components of Total Student Cost of Attendance by Institution Type in the USA, 2007-2008 (Direct government subsidies not depicted) $40K $37K Out-of-Pocket / Other 30 $28K Other Financial Aid Out-of-Pocket / Other 20 Other Financial Aid $19K Grants Grants Out-of-Pocket / Other Private Loans 10 Private Loans Grants Federal-backed Loans Private Loans Federal-backed Loans Federal-backed Loans 0 Private Sector 4-Year Colleges Independent 4-Year Colleges Public Sector 4-Year Colleges % Undergrad 92% 65% 53% with Loans % Financed 60% 36% 33% Through LoansSource: BMO Capital Markets Education & Training Report, 2010 15
  16. 16. Broad student financing, however, is not without its critics who have legitimate concerns T HE P ARTHENON G ROUP • Providing students with greater access to funding has allowed schools to Tuition Prices increase tuition as a means of keeping up with rising education costs and students’ willingness to pay. Since 1980, real tuition levels in the USA have more than tripled. • Greater government funding, in addition to an influx of private investment, has Quality Concerns helped f el concerns that some schools are moti ated more b profits than b fuel motivated by by student outcomes. • To deter this misalignment of incentives, the USA government has implemented Role of regulations to protect students and the industry (e g cohort default rates 90/10 (e.g. rates, Oversight rule). These rules limit which schools’ students are eligible to receive government funding and create extra compliance costs for institutions. They also make educational institutions partly responsible for their students’ repayment behavior, behavior by penalizing schools with a high percentage of students who default on student loans.Source: Commonfund Institute 2009 HEPI Report 16
  17. 17. Agenda T HE P ARTHENON G ROUP Expanding the Affordability of Tertiary Education Lessons Learned from Student Financing in the USA Holes in India’s Current Student Financing System Conclusions 17
  18. 18. Key factors for a successful student financingsystem T HE P ARTHENON G ROUP Demand for Student Loans Supply of Student Loans • Need – A sufficient number of students in • Availability of Capital – An adequate need of funding for school supply of funds is available to meet the demand from students • Wide Scale Availability – Loans are not limited to a sub-segment of the market; • Recourse – Sufficient recourse in the anyone can apply for these loans and event of non-payment so that it is difficult approval rates are independent of to get out of the obligation program or degree type Successful • Government Backing – Loans are • Awareness – Students are aware of their backed by the government to increase Student funding options, how to apply, and what attractiveness to lenders by reducing risk to expect Financing System S t • Competitive Market – N li it ti on C titi M k t No limitation • Consumer Protection – Regulations entry to or exit from the market, or any help standardize student loans and other constraint on competition; this protect the student; this ensures students ensures students get the best possible trust the system y deal • Ease – Students can easily apply for • Infrastructure – Data systems make it these loans and no collateral is required easy to track and process a high volume of student loans 18
  19. 19. There are significant issues with the current student financing system in India T HE P ARTHENON G ROUP Percentage of Students Q: What is the primary reason why students (in Taking Out Student Loans, USA vs. India general) do not take out student loans? 100% 100% Other Not Aware Loans Are Commentary Students Not Available from the Banks 80 Taking Out 80 Loans for • “Despite our best intentions, Education Complicated we have to be quite selective Process/ who we give the loans to Do Not Need to Challenging to 60 60 Take Out Loan because of the inherent risk. Students Not Access Taking Out Currently it i our hi h C tl is higher-end d Loans for customers who benefit the Education most from student loans.” Private Bank official 40 40 Students Taking Out Loans for Unfavorable Education Loan Terms 20 20 Need to Take Out Loan Students Taking Out Loans for Education 0 0 U.S. India Overall Reasons For Not Taking Loan Awareness, complexity of the application process , and loan terms are significant hurdles in IndiaSource: Parthenon student survey (N=205); IBA; BMO Capital Markets Education & Training Report, 2010; Parthenon Analysis 19
  20. 20. A significant percentage of students in India are unaware of student loan availability T HE P ARTHENON G ROUP Q: When you started at university, were you aware that you Commentary from Students could access a student loan? • “I figured that students in my program 100% would not be eligible for these loans. I wish someone had told me about this option earlier.” – BCom Student, a private university in Southern India 80 • “These loans are typically available y y only to students who have close 60 Yes family ties to a bank, which excludes me.” – BBA Student, a college in Northern India 40 • “Banks should advertise at colleges. That is the only way students find out about the availability of loans.” 20 – PGDM Student, a private college in Western India W t I di No 0 Awareness of Loan AvailabilitySource: Parthenon student survey (N=205); MHRD; Global Insight; Parthenon Analysis 20
  21. 21. Lack of standardization makes the loan application process complex, long, and difficult T HE P ARTHENON G ROUP Excessive Excessive Loan Lack of Coordination Paperwork p Processing Time g Between Parties • “The paperwork required to • “The application process • “It would be great to get the process the loan should be should be easy and information about student reduced and it should be a transparent. It took me a long loans from the university more user-friendly process user friendly time to confirm that I would prospectus. Currently banks for both students and family.” be getting a loan. During and universities are generally MBA Student, a private those weeks of waiting, I not connected at all”. BTech university in Northern India could not confirm to the Student, an engineering university that I would be able college in Western India • “Repayment should be made to enroll in the course.” course simpler and the paperwork • “Loans should be made BTech Student, private required to apply should be available to a wider variety of university in Southern India minimal...” BCom Student, a courses that students take. college in Northern India • “The student loan process Now only students from • “It would b very convenient ld be i t should be made easy. The certain streams can avail the if the loan application process process should be quicker loan facility. Universities could be streamlined and if a and banks should not stall if should be more proactive in list of all papers required was they are not willing to give a making loans available for all made known to the student at loan, as the case has been kinds of courses.” BBA with some of my close Student, Student a private university the beginning of the process. relatives.” BTech Student, an in Northern India Often people have to go back engineering college in to the bank multiple times to Northern India submit each and every paper. paper ” MBA Student a Student, private university in Southern IndiaSource: Parthenon student survey (N=205) 21
  22. 22. Current terms make student loans inaccessible to low-income students and less valuable to any student T HE P ARTHENON G ROUP Commentary from the Banks Average Student Loan Interest Rate Spreads Over Government Bond Yields, 2010 • “There’s a high mobility level of There s 6% students, including those who study 5.6% abroad. Right now we target 5.2% premium existing clients because it’s less risky. It’s difficult to find the right 5 clients. The biggest challenge with education loans is tracking loan payments.” – Private Bank official 4 4.2% 3.6% • “Our biggest challenge is a g gg g growing g 3 number of non-performing assets, especially among the smaller (under Rs 4 Lakh category) of loans. Because these smaller loans are 2 uncollateralized, students are more likely to default.” Private Bank official 1.3% 1 Aligning Incentives 0.3% 0 USA Federal USA Private India • The U.S. government was able to Student Loans Student Loans lower default rates on student loans Avg Default throughout the 1990’s by making 7% 3.5% 16 - 17% Rate educational institutions partly Avg Repayment 10-30 years 5-20 years 2-7 years responsible for the repayment Period behavior of their students.Note: Gov’t bond yields are based on 10 year bondsSource: Indian Banks Association; Reserve Bank of India; DOE; 22
  23. 23. India still faces significant challenges in satisfyingthe key demand criteria needed for an efficientstudent financing system T HE P ARTHENON G ROUP India Demand Factor USA Performance Description Performance Need Given the low tertiary gross enrolment ratio in India and the low income levels, there is a great need for student financing in India. Wide Scale Availability Banks claim not to give preference to students from certain economic backgrounds, however in reality loan availability is skewed toward students from wealthier families. Additionally, loans are available only for professional courses courses. Awareness ~20% of current students are not aware that student loans are available to them. Additionally, many students are unaware of the recourse associated with defaulting on loans. g Consumer Protection Student loans provided by banks have nominally standardized terms and conditions. Execution of these norms varies widely in reality. Ease Students have to shop for a loan directly with banks, the applications are very long, and collateral is often required. The process is complex, cumbersome, and not standardized. 23
  24. 24. India also faces significant challenges in satisfyingthe key supply criteria T HE P ARTHENON G ROUP India Supply Factor USA Performance Description P f Performance Availability of Capital Student loans account for a small share of banks’ loan portfolios and banks are willing to grow that share going forward. Recourse Population-tracking systems in India are not well- developed. A loan default is recorded in CIBIL and theoretically influences the student’s future potential to take out additional loans. However, this link is often missed due to the lack of a unique identification number. Government Backing Student loans are not backed by the government. Competitive Market In India, participation of private banks in the student loan market is still very low. Infrastructure The data systems currently in place to track borrower information are underdeveloped. Banks cannot always track students over the entire course of the loan, which limits potential recourse. 24
  25. 25. Agenda T HE P ARTHENON G ROUP Expanding the Affordability of Tertiary Education Lessons Learned from Student Financing in the USA Holes in India’s Current Student Financing System Conclusions 25
  26. 26. Multiple stakeholders play critical roles inimproving India s student financing system India’s T HE P ARTHENON G ROUP Banks • Create streamlined student loan applications so that potential applicants are not scared off by the complexity of the process and/or the time required to apply • Work with educational institutions to create a better flow of information so that borrowers can be tracked over the course of their education and post-graduation Government G t Educational I tit ti Ed ti l Institutions• Create a better information infrastructure (e.g. • Work with banks to make the loan application unique identification numbers) so that process more closely aligned with the school individuals can easily be tracked over time application process Efficient• Facilitate the flow of private capital into the Student • Improve back-end data systems in order to country by creating a competitive market for Financing provide banks with accurate student data lenders System • Focus on improving student awareness of• Regulate the criteria banks can use to student loans, and the benefits/drawbacks loans approve/deny a student loan in order to ensure associated with these loans certain students are not discriminated against• By creating rules that penalize educational institutions with a high percentage of students g g who default on loans, institutions will have an incentive to educate students on the dangers of default 26
  27. 27. Appendix T HE P ARTHENON G ROUP 27
  28. 28. USA performance on demand factors T HE P ARTHENON G ROUP Demand Factor USA Performance Description of USA Performance Need Average post-secondary tuition, room and board is ~$17K per year, while the median disposable income per capita is ~$33K. With a gross enrolment ratio near 80%, a significant number of students in the USA need funding funding. Wide Scale Availability Student funding is available to all citizens regardless of sex, age, type of degree pursued, or type of institution attended. Awareness Most prospective students are aware of the availability of student funding. Those that are not aware typically find out when they apply to school. Most students are also aware of the recourse associated with defaulting on a loan. Consumer Protection Government-backed student loans have standardized terms and protections. Private student loans are not standardized and do not offer the same protections as federal loans. However, laws such as the Truth in Lending Act are in place to protect consumers against predatory lending. Ease Many students only need to fill out a short, standardized form (FAFSA) to be eligible for student funding, after which the student’s yp y g institution will typically take care of coordinating the loan with the lender. 28
  29. 29. USA performance on supply factors T HE P ARTHENON G ROUP Supply Factor USA Performance Description of USA Performance Availability of Capital With the exception of the credit crunch in 2008 and 2009, there is almost always funding available for student loans. One of the factors responsible for this availability of capital has been lenders’ ability to securitize student loans. Recourse There is a well-established credit market in the USA that penalizes students for defaulting on student loans. Those who default have a very difficult time getting any other type of loan until the loan is paid off. Government Backing The majority of student loans are backed by the government, which prevents the need for collateral or a cosigner. Private student loans are not backed by the government and so a cosigner is often required. Competitive Market Lenders are free to enter and exit the USA private student loan market. They can set their own loan terms, but they must abide by certain consumer protection regulations that prohibit terms that are considered “predatory”. Only certain lenders are certified to originate/service federal student loans and more recently the USA loans, government has begun issuing these loans directly to students, cutting out the middleman. Infrastructure Social security numbers exist as unique identifiers for all USA citizens. Lenders, educational institutions, and the government can use these numbers to freely share information about students and to track students over time. 29
  30. 30. The USA implemented several regulations to better align schools’ incentives with student outcomes schools T HE P ARTHENON G ROUP Summary of Recent Regulatory Activity in the USA Gainful Employment FFEL Loans and Cohort Default Rates 90/10 Rule (Pending Regulation) Direct Lending Programs • Established maximum • Requires institutions to • Pending regulation to • The government began threshold for cohort default generate at least 10% of establish a maximum debt- transitioning student loans rates (CDRs) on student their revenue from non- to-income ratio for to direct lending only (and cription loans federal funding sources graduates on a elimination of FFEL programmatic basis program), despite evidence – 25% for 3 consecutive • Institutions whose 90/10 o the effectiveness of of t e e ect e ess o years or 40% f 1 year for metric exceeds 90% risk ti d i k • I tit ti Institutions or programs th t that Desc Federal loans with loosing federal funding exceed the ceiling would • Institutions whose CDRs intermediaries in producing suffer the loss of federal exceed these limits loose repayment funding federal funding • High default rates indicate a • Students with “skin in the • The USA Department of • Eliminating the “middleman” low-quality institution that is game” are more discerning Education would be able to (third party loan providers) Rationale not delivering on its promise consumers and thus ensure prevent institutions from will save taxpayers $4B a of quality job placement quality through their preying on students and year, which the government selection of a particular saddling them with debt by can reinvest in aid to institution establishing “debt caps” studentsSource: US ED; New America Foundation; Library of Congress; Career Education Review; CCA; NASFAA; NAICU; FinAid; Career College Central; Chronicle ofHigher Education; Inside Higher Ed; Deutsche Bank; William Blair 30