1. T HE PARTHENON G ROUP
Boston • London • Mumbai • San Francisco
March 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. 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. 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 Capita
Source: World Bank 3

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. Lowering the affordability threshold is an
important component in expanding and equalizing
educational 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. 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 Sector
Note: Indian tuition data is for engineering courses (BTech)
Source: NCES; BEA; Parthenon Survey of Higher Education Institutions in India; UNESCO 6

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. 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. 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 Loan
Source: Parthenon student survey (N=205) 9

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. 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. 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%
Gov't 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 GDP
Source: NCES; World Bank 12

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 education
Source: NCES 13

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 level
Source: NCES 14

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 Loans
Source: BMO Capital Markets Education & Training Report, 2010 15

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. 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. Key factors for a successful student financing
system 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. 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 India
Source: Parthenon student survey (N=205); IBA; BMO Capital Markets Education & Training Report, 2010; Parthenon Analysis 19

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 Availability
Source: Parthenon student survey (N=205); MHRD; Global Insight; Parthenon Analysis 20

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
India
Source: Parthenon student survey (N=205) 21

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 bonds
Source: Indian Banks Association; Reserve Bank of India; DOE; Finaid.org 22

23. India still faces significant challenges in satisfying
the key demand criteria needed for an efficient
student 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. India also faces significant challenges in satisfying
the 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. 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. Multiple stakeholders play critical roles in
improving 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. Appendix T HE P ARTHENON G ROUP
27

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. 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. 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” students
Source: US ED; New America Foundation; Library of Congress; Career Education Review; CCA; NASFAA; NAICU; FinAid; Career College Central; Chronicle of
Higher Education; Inside Higher Ed; Deutsche Bank; William Blair 30