NN52, August 2015

Financing Education & Skills: Emerging Models of Private Financing for Higher Education
Pages 97-99


Key words: private financing, co-funding, employers, loans, risk-sharing, pay-as-you-go, disruption

Summary: While governments play an important role in funding education, students and families still need access to additional financing. Innovative financing mechanisms that tap into the top economic beneficiaries of an educational investment – students, their future employers, and the educational institutions – provide promising sources of sustainable financing for education.

In Africa, demand for higher education is growing at 15% per year; however, the shortfall in education financing suppresses access to education and ultimately constrains economic growth. Looking ahead, 65% of youth will aspire to attain a secondary school education by 2030, up from 46% in 2010 (AfDB, OECD, UNDP, UNECA, 2012).  The total cost of school fees for these 380 million students seeking secondary education will be $1.5 trillion between 2015 and 2030. In addition, the tuition costs for the 30 million students pursuing post-secondary education between 2015 and 2030 will be $270 billion.1 Addressing finance-related challenges for students and their families will be particularly vital in the coming years given the vast number of youth expected to pursue higher education.

While governments play an important role in funding public secondary school fees, students and families still need access to additional financing. Often, the public education system requires them to pay for a portion of fees and/or other academic expenses. Further, uncertain economic growth (AfDB, OECD, UNDP, UNECA, 2014) and increased competition for government funds (Brookings, 2013) may limit governments’ funding capacity or make it more volatile, thereby increasing students’ need to access other funding sources. Given the limited government funding available for post-secondary and vocational education, students pursuing tertiary education and/or vocational training also need to secure financing for both tuition and other educational costs. Finally, the high personal, economic, and social returns that can be unlocked as a result of higher education suggest that there is latent demand for education, which can be realized by improving access to education financing.

In order to tap into and further develop sustainable financing sources for education, we should look to the top economic beneficiaries of that investment, that is, the students, their future employers, and the educational institutions. Many models have already emerged in which these stakeholders – including students, current or future employers, educational institutions, or even financial institutions – are working to overcome financing challenges. Employers or educators chiefly help by sharing the financing risk with students through partial payment of training costs or deferred tuition payments, respectively. Students can alleviate their own financing burden through income earned from work and/or their prior savings, often achieved in collaboration with a partnering school, company, or financial institution.

In the employer-financed model, employers assume the financing risk by paying for some or all of the students’ tuition. When a future employer shares financing risk with students, they not only lower students’ financing barriers to pursuit of higher education, but can also incentivize educators to develop curriculum and approaches that promote student employability. For example, in South Africa, Harambee2 provides work-skills training to disadvantaged youth. Employers work directly with Harambee to define their recruitment needs and pay placement fees that cover a small portion of students’ training costs. In another model, Bridge International3 provides direct training to its employees and bears the entire cost of the program, but if a teacher leaves prior to the expiration of the contract, she/he repays the organization for a portion of the training costs.

In the educator-led model, the school assumes a greater portion of the risk by allowing for deferred tuition payment that is contingent on students finding employment. Educators are only repaid, by the student and/or employer, once the student secures a job. For example, West Africa Vocational Education (WAVE)4 charges students only a small upfront fee. After the student is placed in their first job, WAVE charges the student and employer an additional fee, both calculated as a percentage of the graduate’s first month’s income. WAVE is incentivized to deliver high-quality and relevant programs because revenue is contingent on employment. WAVE can scale up its operations rapidly if it has access to a much larger working capital facility through banking institutions. Insurance providers such as HUGinsure5 can de-risk such transactions for banks, while holding WAVE accountable for performance through its insurance premiums.

Another approach to addressing student financing challenges is to decrease students’ need for education loans. This intervention includes products to help students better manage their cash flow to cover educational costs, as well as programs that create opportunities for students to earn income while they are in school to offset education costs. Some financial institutions offer tailored education savings products to help students and their families decrease or eliminate the need for loans when they enter school. These savings accounts offer attractive terms, and often have additional incentives such as direct linkages to partner schools and enhanced savings if certain criteria are met. For example, United Bank for Africa (UBA) offers a “U-Care Savings Account6 to parents saving for their children’s secondary school education, and allows parents to make direct payments to registered schools through the account.

To offset educational costs, some educational institutions have set up businesses to employ students part-time. These businesses help cover students’ tuition costs while enabling students to develop critical work-readiness skills. For example, the Maharishi Institute (MI) in South Africa created and now runs Invincible Outsourcing, a call center that employs MI students and pays MI directly for students’ services to offset school fees charged. Students also receive a $30 monthly stipend from Invincible Outsourcing7 for expenses. Fundación Paraguaya,8 a global non-profit operating in 20 countries, has created the Self-Sufficient School model to serve low-income rural students at the upper secondary level. The schools support students to run microenterprises on campus, which generate income for schools to reach sustainability.9 Even more pioneering “pay-as-you-go” education financing models would eliminate the need for a large upfront investment (that can only be paid off over many years); instead students could learn skills in smaller units over longer periods of time, and pay tuition incrementally. Thus, students from low-income families can finance their own education rather than relying on government funding, which is already spread too thin.

A number of these emerging models addressing the financial barriers to education are being tested in developing economies. These models proactively engage and team up with the ultimate economic beneficiaries, that is, those who have a vested interest in ensuring access to high quality education, and in particular, with a view towards employability. However, these promising approaches are not yet at scale, from a regional or global perspective. Going forward, financiers interested in the education space can help advance the reach and depth of these programs.


Notes

1 Based on 20-24 year-old cohorts by level of educational attainment from 2010 to 2030 in 5 year increments. Assumes cumulative number of 20-24 year olds with secondary and post-secondary school through the period 2015 to 2030, and average school length of 6 years for secondary school and 3 years for post-secondary school. Based on average annual school cost US$650 for secondary school and US$3,000 for post-secondary school (data source: Aid for Africa, How much does school cost, 2014)

2 http://www.harambee.co.za

3 http://www.bridgeinternationalacademies.com

4 http://www.wavehospitality.org

5 http://www.huginsure.com

6 http://www.ubagroup.com/countries/ng/personalbanking/savingsaccounts/08

7 http://www.invincibleoutsourcing.com/education.html

8 http://www.fundacionparaguaya.org.py/?lang=en

9 Center for Education Innovations, Financially Self-Sufficient Schools, 2014


References

AfDB, OECD, UNDP, UNECA (2012) African Economic Outlook, Promoting Youth Employment

AfDB, OECD, UNDP, UNECA (2014) African Economic Outlook, Macroeconomic Prospects

Brookings (2013) Financing for Global Education

To cite this article:

Vussonji, D. (2015). Financing Education and Skills: Emerging Models of Private Financing for Higher Education. NORRAG News, 52, 97-99. Retrieved from: http://www.norrag.org/fileadmin/Full%20Versions/NN52.pdf