The Value Of Private Financing, Here And Abroad

Using private funds to finance higher education is on the rise globally. In "The Global State of Higher Education and the Rise of Private Finance," the Institute for Higher Education Policy (IHEP) examines why private finance has grown at such unprecedented rates both here and abroad. Even in socialized countries, where higher education historically has been supported by public government funds, private finance has been growing to fill the gap between public funding and rising tuition. Examining how private financing is progressing in other countries provides us with an opportunity to re-examine our own public-private partnerships in higher education. While the debate over private financing usually boils down to savings to taxpayers vs. savings to borrowers, there are broader, more comprehensive benefits and costs to using private financing that must be considered.

Private Financing Used Abroad

Higher education, once an exclusive privilege of developed nations in North America and Western Europe, has seen a dramatic transformation over the last two decades as other nations have been turning out increased numbers of college graduates. Global demand for higher education shows no signs of slowing down, either. According to the IHEP report, enrollment ratios have increased in every region of the world recently, except in North America and Western Europe, where enrollment numbers are already comparatively high.

Developing countries like China, India, and Indonesia are following the example of more developed countries by enrolling more students. China, for example, more than doubled its college enrollment between 1998 and 2004. India and Indonesia have also doubled their enrollments since the 1990s.

While countries around the world recognize the economic and social benefits of an educated workforce, however, most are unable to provide the necessary funding to subsidize the entire costs for their citizenry, according to the report. As a result, more countries are tapping private monies to make higher education more accessible.

Private financing is being most utilized in post-communist countries, where private universities have sprung up to help meet the demand of college students. But the report also finds that even in socialized countries, where the government has traditionally shouldered the entire costs of higher education, private financing is being used at an increasingly rapid rate.

The United Kingdom first introduced tuition in 1998 and has since implemented a student loan system that relies on private capital.
Austria and Germany have begun charging tuition for higher education and have seen increases in private financing, by more than 30 percent in Germany since the mid 1990s.
Russia has also accepted private financing for students who do not pass a state-sponsored exam, which would entitle them to full higher education subsidization.
Hungary, Australia, Italy, Mexico, and Sweden have all seen private financing grow by at least 90 percent from 1995 to 2003.

There are some countries that still refuse to allow private financing into any part of the higher education system. Nordic countries like Norway and populist countries like Venezuela are still shouldering the entire financial burden of educating their citizenry. Ireland is one of the very few countries where growth in private financing in higher education has decreased in recent years. Still, these are the exceptions and not the rules. Almost universally the use of private funds to pay for college is on the rise.

The Benefits And Contributions Of Private Financing

While the IHEP report does not tell us whether full public sponsorship of higher education is better than partially subsidized higher education, it does provide evidence that private financing provides several positives for developing nations. The report lists the following benefits of private financing in higher education.

Private financing fills a gap left open by lack of public funds to keep up with the costs of higher education. There is more demand for higher education globally than the supply of public funds to cover the costs. Students that utilize private finance to fund their educations see significant returns on their investments by going to college.
Private financing spurs additional public funds. Many countries "with the highest growth in private spending have also shown the highest increase in public funding of education," according to the report. "This indicates that increasing private spending on tertiary education tends to complement, rather than replace, public investment.
Private financing frees up public capital to be used for other social welfare programs where private financing is less realistic.
Private financing increases a country’s economic competitiveness by meeting the needs of the labor market. "State-led, supply-side expansions of systems of higher education have contributed to phenomena such as taxi drivers with PhDs," the report states.
Perhaps the most ironic benefit listed in the IHEP brief is that private financing can actually reduce corruption. In some places private schools are kept from growing and placement into public universities is rationed by the government in hopes of increasing the demand for higher education. Bureaucrats will then sell limited spaces in higher education to families that can pay the most. In those cases the report notes that private finance "can help bring supply and demand in higher education closer to equilibrium." However, the report also notes that private finance is not a panacea for corruption as recently demonstrated by the loan scandals here in the U.S.

What This Means For The U.S.

The U.S. is ahead of the curve when it comes to using private financing for higher education. Unlike most countries, the U.S. has been using private financing for decades. While the IHEP report shows how private financing is helping other nations to educate their citizenry and increase their standards of living, it begs the question, is the U.S. at a juncture where it can leave private financing behind?

The immediate answer is no. Even with significant increases in student aid from the College Cost Reduction and Access Act, average costs will still exceed student aid for many students, which means student loans will still be a mainstay of federal student aid.

At the forefront of tapping private funds for student aid, the U.S. has been exploring new ways to make more private funds available to students in both the FFEL program and in private, alternative loans. For example, student loan securitization is a tool almost solely used by the U.S., according to IHEP. Securitization bundles groups of similar assets that are then converted into tradable assets and sold to investors. Securitization as a finance mechanism was originally used in the mortgage industry but has since been used in financing student loans. Securitization is complicated, but generally reduces funding costs to a lender, frees up capital to make additional loans, transfers or shares the risks of making loans to investors, and presumably passes savings on to potential borrowers.

The U.S. also leads the way in university-industry collaboration, spearheaded by schools like the Massachusetts Institute of Technology and the University of California at Berkeley, which have found self-sustaining income from patents and partnerships with private, outside entities.

In the U.S., private financing usually refers to the student loan industry. Private financing is used in the Federal Family Education Loan (FFEL) program and in private, alternative loans. Only time will tell whether the recent increases in student aid will slow the growth of the private loan industry. But the debate about the virtues of the Direct Loan program vs. the FFEL program continues to rage throughout the industry, with intermittent flare-ups from time to time.

Expanding The Debate

The debate often boils down to which program saves taxpayers and borrowers the most money, and both points are hotly contested. But little credence is given to other benefits of private financing in higher education. The IHEP reports points to other questions that could be asked in the debate.

Does private higher education financing fill a gap left open by the lack of public funds to fully subsidize higher education?
Does private financing - loans made in both the FFEL and private loan market - spur increases in public funds?
Does private higher education financing free up public capital that can be used for other social welfare programs?
Does private higher education financing actually stymie corruption? Or does the involvement of private firms increase the chances of corruption?
Can the resources of private firms be better leveraged to more fully assist with higher education access and help students successfully pay back their loans?

These questions are not as easily answered, mostly because little data is collected on the secondary benefits of FFEL and private loan participants. While the primary benefits are readily apparent in the dollars that are lent to students, secondary or residual benefits have not been quantified industry-wide.

Even in their unified voice against the $20 billion subsidization cuts, loan providers as a group have not offered specific, industry-wide statistics about the secondary benefits that they provide.

How many students really end up qualifying for borrower benefits offered by lenders and how much are students really saving through borrower benefits?
Exactly how many borrowers were successfully kept out of default by loan providers or guarantors last year?
How much is spent by FFEL providers in offering training to the financial aid community?
How much do guarantors and lenders spend on college outreach and access initiatives, including time and money spent on initiatives such as College Goal Sunday, Gear Up, and Upward Bound initiatives?
How much do FFEL providers spend on default prevention materials, technological infrastructure, and other outreach activities in helping borrowers avoid defaults?
How much do FFEL participants provide in higher educational research and the development of new technologies to ease the student aid process?

Perhaps these questions have not been answered because they have not been asked. In the end, examining how private financing is progressing in other countries provides us with an opportunity to re-examine our own public-private partnerships in higher education. To really make a fair assessment of their contributions it is important to have tangible aggregate data that quantifies their other contributions to the industry.

It is also important to ask the extent which these questions apply to the Direct Loan program, and how that program measures up on similar yardsticks.

At the NASFAA Annual Conference, NASFAA Chair Michael Bennett encouraged NASFAA members to continue working with business partners.

"Over the years, many of us have worked closely with our business partners, educating them about our processing, developing services and tools that help students and families," said Bennett. "We've spent time together, watched our families grow, and many of our business partners were school members first and leaders in our industry."

The best way to work with our business partners may be to demand additional information about their contributions to students beyond the amount of funds they provide.

Determining the appropriate amount of savings to taxpayers is vital. Leveraging the most amount of savings for students is as equally important. But the debate over the role of private financing in higher education is more complicated than those two points alone. Examining the total benefits and costs of private finance in higher education is needed before a rational determination about its appropriate involvement in higher education can be made.

By Justin Draeger
NASFAA Assistant Director for Communications

Posted 09/19/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.