How to Pay for Quality Higher Education

 Higher education is accessible in India. Scratch that. Worthless degrees are quite accessible in India. How do we change that and ensure that quality higher education is accessible to most in India.

Let us do the numbers. NEP2020 has set a goal of 50% GER in a little over a decade. As of now, the total number of people in India in the age group of 18 to 23 are over 12 crores. 50% GER would mean that there are 6 crore people doing higher education. If we assume that quality education would cost about Rs 5 lakhs per student per year, the total money to be spent is Rs. 30 lakh crores. That is pretty much the entire receipts of the central government in a year, and this is the money needed only for higher education. Clearly, it is not possible to have free high quality university education for all in India. A vast majority of Indian youth is dependent on private sector to get college education and cannot afford this level of costs.

Note that the current solution to this problem is to provide quality education to a few who can do well in various entrance exams for a few top government institutions and to provide quality education to a few who can afford a few institutions in the private sector. Many of the resourceful people go abroad to get that quality education. Everyone else gets poor quality education. How do we change this.

We need to work on two sides. One, reduce the cost of providing quality education. And two, do some financial jugglery to match the expenses with the income flows. All universities have an incentive to reduce their costs and become more competitive. So I am not going to talk about that in this blog. Suffice to say, we need to use technology for this - online education, simulators, virtual labs, and so on. But the interesting problem is to enable a student from under-privileged background to get quality education in private sector.

The tuition and other expenses of the student can be borne through five channels:

1. Government subsidies
2. Private philanthropy
3. Cross subsidy through resource generation by the university
4. Payment through current incomes and savings by the student/family
5. Delayed payments (in some sense, like loans) 

Let us discuss how we can innovate in all these five channels to ensure that a much greater number of people in the country have access to quality education. Note that dependence on only one channel may not suffice when the gap between costs and income is very large.

The first issue is how government subsidies can reduce the burden on students. As we have said in the beginning, our current public finances do not allow every student to be financed for quality education. But it is certainly possible to expand the current support. As of now, government provides scholarships to students from under-privileged backgrounds (even if they study in private institutions), and also some scholarships for board toppers, etc. It is definitely possible to expand this to more students. May be government can provide graded support like top 5% in all boards get a scholarship of Rs 2 lakh per annum, next 5% getting Rs. 1.5 lakh per annum, and so on. There can be other models. If you need additional help, the government can have schemes like the graduates will have to work for the government for X number of years after graduation, or will have to serve in rural or less popular geographies, and so on. Support from government will reduce dependence on other channels of funding, particularly payment through savings/incomes and payment through loans.

The second channel of support is private philanthropy. A large number of US universities have huge endowments that goes into billions of dollars with Harvard at the top with 50 billion USD of endowment. Princeton gets 55% of its alumni donating regularly. We need to create a similar culture of giving gifts to educational institutions in India. Government can help in this. The tax incentive needs to be rationalized. Currently, donations to IITs and other central government institutions get 100% tax exemption, but donations to universities like JKLU only get 50% tax exemption. This discrepancy should go and all educational institutions should get 100% tax exemption. In US, it is very common for industry to match individual donations. This needs to be encouraged in India too. Companies should be able to match donations by their employees through their CSR kitty (perhaps even otherwise). The process to support education through CSR funds should be smooth. At JKLU, we get a majority of our funding from such donations (and not tuition money), and hence able to keep our fees reasonable, but we are a rarity. Most universities manage their budget only through tuition income.

The third channel of resource generation by the university is an interesting one. The most common thing is research funding by the government (and sometimes by industry too). In India, the overhead on research project is so little that every research project is a loss to the university. Of course, it is much better to do research through government support than to use tuition income in research. But the government really needs to increase the overhead very substantially. This will encourage all universities to do better research and if not cross subsidize tuition, at least not use tuition money for research. The other common revenue stream is continuing education programs. Unfortunately, till now, only management schools have been able to generate substantive revenues through this route and that too only a few privileged ones. But I think if universities really focus on this, they can get a decent revenue stream through this route. Other revenue streams institutions have tried include setting up research parks, having commercial establishments on campus, generating and leveraging IPRs, etc. But frankly, this channel hasn't really helped reduce tuition burden in any substantive way in most institutions. Of course, all universities have a bit of cross subsidy through the system of scholarships. But scholarships are meant for a variety of reasons like academic performance, performance in sports and so on, and therefore, means-based scholarships can cover only a small number of students.

The fourth channel is of payment through savings and current incomes in the family. In this channel, the innovation that can be done is to provide well paying campus jobs to students, particularly in the vacation period, but even part-time during the semesters. For example, at JKLU, we provide some campus jobs at a rate of Rs. 200 per hour only to financially needy students. The government can introduce small savings scheme which are meant to be encashed only at the time of college education and are attractive in terms of rate of interest and income tax applicability.

There is another way to self-finance education which somehow is not taken positively in India. What is the need to do a 4-year program in four years. It would be of immense educational value to the student if s/he takes a semester off, works in industry and returns to the university. This would provide a deep insight on what is the need of the industry, what does the student likes and dislikes, and on return to the university, can take electives accordingly. This system is of value to everyone, but for someone with poor financial status, this can earn moneys to sustain education and have less dependence on other channels like loans.

The fifth channel of delayed payment is what most people talk about to enable quality education to financially weak families. And the most common instrument for this is a loan. But there are other possibilities as well that we will talk about a little later in this article. The system of education loans has serious limitations.

The first limitation of an education loan is that of a guarantee or a collateral. Students from under-privileged backgrounds aren't able to provide either a collateral or a guarantor. And hence banks are often reluctant to offer loans to those who need them the most. Government has mandated that upto a certain amount, the education loans need not have any collateral or guarantee. But in the absence of these, getting repayments from even well-to-do become an issue sometimes.

The second limitation is that students who do not get a good enough job struggle to repay the loan and that stress keeps on growing. In fact, in some cases, the graduating students feel compelled to take up jobs that they won't like only because they are paying better. If a student wants to work in social sector (NGO) or if someone wants to go for higher studies, the loan repayment becomes a bigger challenge.

A related problem to repayment is the concept of EMI - the Equated Monthly Installments. Payments in terms of EMI makes no sense for a recent graduate and that too in a medium or high interest economy. A recent graduate typically starts with a low salary and after a couple of years of experience starts climbing the corporate ladder with higher pay. In the initial part of the career, the EMI is extremely difficult to pay and defaults happen, while it would be much easier to pay the same amount when the pay has doubled. The EMI concept requires the borrower to pay the entire monthly interest and some part of the principle. On the other hand, if we allow the borrower to pay only the real interest (interest rate minus inflation), then the loan amount is essentially remaining the same for the first few years while the capacity to pay is improving and hence the person will be able to pay it much more easily.

If I have a loan of Rs. 10 lakhs when my income is Rs 5 lakhs, the lenders have a certain risk. Assuming that the inflation is 5%, the rate of interest is 11%, and my income increases by 10% in a year. If I pay 6% (or Rs. 60,000 in the year), I have a loan of Rs. 10.5 lakhs next year while my income is Rs. 5.5 lakhs, the lender's risk has actually come down as my capacity to pay even the increased amount has improved. So we need to have an Increasing Monthly Installments or IMI instead of EMI.

In terms of collateral, one possibility is to use the degree certificate as collateral. For this to happen, there will have to be a tripartite agreement between the student, university and the lender. The university will not provide the degree certificate to the student till the loan is paid off. Yes, any time, the student takes up a job, the new employer can directly ask the university to verify the degree status. In fact, if we can make it a legal requirement for all large employers to seek either a copy of the degree or a copy of the loan agreement, and if there is a loan agreement, the employer agrees to deduct an agreed upon amount and pay it to the bank, this will further reduce the risk of default.

There are other possibilities that various fintech startups can explore. For example, it is not necessary that the loan is to be sanctioned at the time of admission only. A nimble player can have an agreement with a university that the university will share all data (anonymized for privacy reasons) of placement in an honest fashion (which many universities will refuse, but universities like JKLU would love it, and I am sure others will fall in line when their students are disadvantaged in the loan market). The university will also share the current transcript and any other relevant details of the loan applicant. Let us assume that this loan application is being made after the first year of college. Now, the lender can make a much better guess about the potential earning of this student after graduation and hence can sanction loan based on potential.

In fact, universities can help further by delaying the payment of first year tuition. One can seek tuition later in the program, say after the first year. Now, the student can be evaluated by the potential lender, an amount can be sanctioned based on that potential and the university can be paid first year fee and the future fees at that time. It is already happening for very short term courses like six months courses. The provider provides education without asking for upfront payment. At the end of the course, if the student gets a job, there will be lenders who can sanction loan which is paid to the education provider. (Check: Masai School.)

We mentioned earlier that there are possibilities of delayed payments other than loans. One of the prominent ones emerging in the world is an income sharing agreement or ISA. Under an ISA, the student agrees to pay a certain fraction of his/her income to the lender after the graduation. The agreement would typically mention a minimum income level below which no payment will be made. It will also mention the period for which this agreement is valid. And in case the student gets a very high salary, the agreement would typically state the maximum amount of money that the student will have to pay. So different people will pay different amounts depending on their incomes but noone will pay an inordinately large amount. Of course, the details will depend on what the two parties agree with and what the law permits in that jurisdiction.

Many people (and governments) are uncomfortable with ISAs because it seems unfair that different people are paying different amounts and that the person with the best jobs are effectively paying a very high rate of interest. It is possible that if someone does not understand the implications of the agreement or was forced by his/her circumstances to sign such an agreement, s/he will end up paying a very large sum in case of an excellent job. But if there can be legal safeguards to avoid exploitation such as model ISAs, this is an interesting model of financing higher education.

Yet another way of delayed payment is through differential taxes. This is like an ISA between a student and the government. The government can say that everyone seeking substantial government subsidy (like studying in a university well funded by the government) will pay, say, 2% extra income tax for a pre-defined period of time. Again, this would mean that if the income of the person is below the taxable limit then the person does not pay this extra amount also.

So the take away is that there are a large number of models for financing higher education. A poor country like India should not think of a single model like loan. A combination of several models is what is most likely going to work for us.