Private Financing Grows to Become Global Phenomenon in Funding Rising Costs of Higher Education

Washington, D.C., Aug. 7, 2007—In recent years, public funding has struggled to keep up with the growing costs of expanding or revitalizing higher education systems around the world. As a result, private finance (e.g., households, businesses, and philanthropists) now plays a vital role in increasing global opportunities for countries, institutions, investors, and most importantly, students who recognize the social and financial benefits of obtaining a postsecondary degree.

The Institute for Higher Education Policy’s (IHEP) Global Center on Private Financing of Higher Education (GCPF) released a report that explores the growing importance of private capital to nations where governments seek additional resources to share the rising per student costs and increasing enrollment rates. The report, The Global State of Higher Education and the Rise of Private Finance, also provides an overview of international good practices and lessons learned from individual countries where the business of tapping into private finance as a supplemental funding source has increased in the past two decades.

Private VS. Public Contributions

• Public finance continues to remain the senior partner in higher education; however, private finance is an important junior partner. Of all expenditures on higher education in 53 countries (among them are Australia, Korea, Poland, and the United States) in 2002, 63 percent came from public sources and 37 percent came from private sources on average.
• In some countries with growing middle-income populations (e.g., Argentina, Chile, and Jamaica), data from 2003 show that the average share of private expenditures stood at 43 percent, while public expenditures stood at 57 percent. In this group of countries, private finance came much closer to playing the role of an equal partner in financing higher education.
• In advanced industrial countries, private finance plays a smaller but growing role; it accounted on average for only 23 percent of higher education finance in 2003, with public money covering the other 77 percent. Among these countries there is a great deal of variation, with private financing of higher education ranging from more than 50 percent in the United States, Australia, and Japan to less than 10 percent in Austria, Denmark, Turkey, Norway, and Portugal.

The Rise of Private Finance

• The single most important driver behind the rise of private finance is the explosion of private demand for higher education caused by two factors: demographics and economics. Demographic trends are raising private demand because even more people are obtaining a secondary degree, qualifying even more people for higher education. Economic trends have brought about an increase in the private returns to higher education, increasing the amount students are willing to invest in their own education.
• Higher enrollment and graduation rates at the secondary level have created pressing demands on universities around the world. The number of students enrolled has increased in almost every region of the world. Latin America saw the greatest gains between 1999 and 2004, with the percentage of youth enrolled rising from 62 to 72 percent. In Central Eastern Europe in the same period, that figure rose from 81 to 88 percent.
• Globalization and technological innovation have brought about major structural changes in the world economy. One of the most prominent features of this restructuring is the emergence of the knowledge economy as the primary driver of economic development in many countries. People with more education are better able to take advantage of a globalized, knowledge-driven economy.

“This is an extraordinary time as various financing options become available to individuals whose lack of finances formerly made it impossible to access higher education,” said IHEP President Jamie P. Merisotis. “The popularity of private financing has grown so tremendously that it now serves as a critical supplement to public funds. The result is expanded opportunities for those who understand that education is now a necessary part of having a successful life and strong global economy.”

Recent Innovations of Private Funding

• University-industry collaboration—with the United States as the front-runner—brings the university to center stage in technological innovation. Other nations have also made great strides in university-industry collaboration, helping entrepreneurial universities diversify their revenue streams through fees, royalties, and equity investments.
• Philanthropy, combined with private finance, now involves innovative ways of making a contribution such as establishing risk-sharing facilities to provide loans on subsidized terms to students and parents—an initial cash reserve must be given to cover any first losses. Another example of a new development in philanthropy is the spread of American-style endowment campaigns in many countries of the world.
• Securitization, a financial technique originally developed in the housing market, facilitates the issuance of student loans and the payment of tuition fees. It bundles together groups of similar assets that support a regular payment stream—in this case, student loan payments or tuition. Securitization also allows investors to transform illiquid assets such as student loans into tradable assets. This process allows markets to place a price on the risk of default and sell this risk to willing investors via a bond issuance.

Established in 2006, the GCPF addresses the growing role of private financing as an option for access in postsecondary education across the world. The exclusive, global-focused center serves as a central repository of comprehensive data and trend analysis of private sector funding, which includes private loans, scholarships and other philanthropic aid, bond issues, and public and private partnerships. The report, The Global State of Higher Education and the Rise of Private Finance, is the first publication issued by the GCPF.