Funding Your Students

 

 

 

A guide to the funding landscape for education providers. 

 

Introduction

 

Education and training is crucial but the cost is unaffordable for most. For education provider this means they need to find ways to subsidise or defer the cost of their course to expand their addressable market.

There are a range of government and private sector funding options available, however the mechanics and pros and cons of each of these are often opaque. This article attempts to shed light on the different options.

We are not unbiased observers. We provide the infrastructure that enables many UK higher education providers to offer their course in exchange for a future payment, including pioneering the UK’s first “royalty” style payment option. This has given us broad exposure to how education providers are funding their students and their confusion over which funding options are available. As well as contact with the UK’s Department of Education and Treasury.

This article is an attempt to provide practical insights into the various schemes available. If you notice something that is incorrect please let us know so we can update it.

 

Government funding options for education providers

Student Loan Company

What is it?

Funding for education that provides upfront funding directly to universities in exchange for students repaying a share of their income until the amount of funding is repaid plus any accrued interest.

Introduced to increase university participation and make this education pathway affordable for everyone. Now the Department of Education has more nuanced aims, as many universities would not survive if this funding was removed, and many UK towns are dependent on the economic benefits that the university provides. This means the scheme not only supports the students and the universities, but all of the local businesses reliant on student’s as their customers such as cafes, gyms, student housing and supermarkets.

Covers undergraduate fees and a maintenance loan. In England this was typically between £8,400 and £13,348 for the 2023/24 academic year. Students can utilise this option if studying at an eligible UK university. These Universities then have to accept a cap on the fees they charge. Some universities who don’t accept the fee cap can still be partially funded through this scheme.

Able to be used for Masters level degrees with a maximum paid of £12,167 for courses in the 2023/24 academic year. This funding can be used for course fees or living expenses and universities for which it can be used are not subject to a fee cap on their post-graduate courses.

Doctoral level degrees are similar to Masters-level degrees, however the amount paid was £28,673 for the 2023/24 academic year.

The Conservative party had planned to extend this to non-university courses in January 2026 by enabling individuals to borrow up to £37,000 to be spent on a wide range of courses called the Lifelong Learning Entitlement.

 

Pros

Significantly increased university participation across the UK, from 14% of 18-21 year olds in 1980 up to 36% in 2023.

Decreased income inequality. Especially in prior years when the income premium from an undergraduate degree was higher, this scheme was a key pathway out of poverty for many.

 

Cons

Poor financial value for the taxpayer. Setting aside the benefits of a more educated population, this scheme provides very poor taxpayer value. Tranches of the debt were sold to asset managers for less than 20p per £1 owed in some cases, and on average the IFS predicts less than 50% of the amount borrowed is actually repaid.

Race to the bottom. The poor financial value can somewhat be explained by the incentives of this scheme for universities. The university gets paid based on the number of students enrolled each semester with no regard for the graduate outcomes they deliver. All universities then charge the maximum undergraduate fee and volume wins over quality. In fact, delivering a course with more premium outcomes but that costs more to deliver becomes infeasible because of the fee cap. As an example, we were approached by a university who had this exact issue in a biomedical subject that had great employment outcomes but high “consumables” costs.

This is somewhat true at the postgraduate level except there is no fee cap and the ability to recruit students is largely driven by performance in rankings. These rankings are largely driven by the increase achieved in income by the course across the cohort. While still open to gaming as they use graduate self-reported data, and notifications requesting alumni to inflate their surveyed salary is common – it is still a much better alignment of incentives.  

The extension of this scheme to non-university courses presents a large risk of exacerbating the above problems. A university has to go through a rigorous process to be eligible for government funding, something a level 4 course in astrology (yes this is a real course) will not be subject to. Taxpayers fronting the fees for these courses upfront and then pursuing the graduates who will likely be earning very little afterwards is an ill-thought through policy.

A portion of the market excluded as the current high interest rates on student loans make this option undesirable to some and forbidden for religious reasons for others. The structure of the repayment also puts additional strain on those who repay, whereby graduates who earn more will pay off the loan quicker and will pay less in total. While those who earn less and are less able to repay will accrue more interest and pay more in total.

 

Education provider perspective

Undergraduate scheme

Cashflow

Excellent

Paid in full upfront.

Demand

Very good

Opens access for most domestic students.

Profitability

Poor

Pricing limited and the cap has fallen significantly in real terms.

Incentives

Very poor

Poor alignment between student desire (career prospects) and university.

Efficiency

Poor

A high and inefficient administrative burden of collection costs

 

 

Post-graduate scheme

Cashflow

Excellent

Paid in full upfront up to the cap.

Demand

Good

Partially funds many applicants but excludes the major international student market.

Profitability

Excellent

The cap is fully funded but pricing can be freely set.

Incentives

Good

Rankings drives lead generation which focuses on outcomes.

Efficiency

Poor

A high and inefficient administrative burden of collection costs

 

Alternatives

A clever alternative was proposed to the Treasury recently by Peter Ainsworth. Universities would receive the amount collected from their students by the student loan company and be able to borrow money from the UK Treasury to fund the cashflow deficit.

This would mean that taxpayer funding needs to be repaid by the university, and the university is then exposed to their own graduate outcomes. If the university performs as expected it will recoup enough to repay the treasury loan. If it performs better than expected it will get more than the amount it needs to repay. If it performs worse, it would receive less.

The treasury funding can be on favourable terms and if a university was unable to repay the Treasury could decide on the next steps. One iteration of this scheme was also the loosening of the cap on prices. This would enable those universities which were able to demonstrate strong graduate outcomes being able to raise their prices. Likewise, those who performed poorly would be required to rethink how they operated and forced to improve.

There are some vocations where there is a strong societal need and a shortage of staff such as nurses and teachers. Ideally, I think these courses should have higher salaries that aren’t government capped, and then wouldn’t need to be subsidised. However, as we are only looking at education policy, there is a strong argument to be made that these courses should be fully subsidised, removing the administration cost burden of tracking and collecting repayments.

 

Skills Bootcamp Fund

What is it?

An initial £100m fund to increase homegrown UK IT talent in the UK.

 

Pros

The scheme provided upfront cash flow to many existing IT training providers across the UK, enabling them to expand capacity.

 

Cons

The eligibility criteria and assessments of “bids” justifying course costs and the percentage they should get paid at each milestone were vetted by OFSTED. Yes the same organisation best known for rating primary schools was now tasked with assessing how well IT training providers taught cloud, data science or cybersecurity skills. As you can imagine, this lead to a bureaucratic application process, opaque acceptance criteria and a low correlation between the best providers and getting the most funding.

The funding was in tranches based on milestones per student: course start, course completion, first job interview in IT sector, multiple interviews in IT sector or IT job acceptance. This led many providers to optimise to obtain graduates job interviews whether or not they were suitable or would even led to jobs was not relevant. Many students were then left without employment and the treasury was left no closer to achieving its aim from these students.

The funding was time bound. Which meant if the student took longer to finish the course or get a job, then no funding would be released. Leading to education providers optimising graduate services for those students they could most easily place.

No selection criteria. Students would be placed via a central department for work and pensions service. This meant that at least a portion, up to 60% of the course fee, was paid by the time the individual completed the course. This led to a race to the bottom, where providers would accept any applicant sent to them, water down the course to ensure completion rates where high and strip out costs to enable them to run and strong margins even at 60% of revenue. Anecdotal evidence suggests this tactic cannot last long term as review periods kick in, however in a harsh macro-economic climate some VC / PE backed providers eager for short term results have pursued this strategy.

 

Education provider perspective

Cashflow

Fair

Paid in tranches.

Demand

Good

Provides course demand directly from the DWP.

Profitability

Poor

Course pricing subject to OFSTED approval, will usually receive only 70-90% of bid fee as not all students will be placed within timeframe.

Incentives

Fair

Alignment to attain job interviews, but not to achieve career goals.

Efficiency

Poor

High and inefficient administrative burden of collection costs

 

Alternatives

We extensively discussed a different model with the Skills fund stakeholders, unfortunately it was not adopted. As those rolling out the scheme told us that the goal of the scheme was to provide IT training to hundreds of thousands of UK students per year. They believed that this meant designing a scheme that would encourage the large technical colleges to start providing IT training. While the more nimble private sector firms declared a preference for our scheme, they didn’t believe the colleges would invest in the courses unless there was a “safer” guarantee of their course fee revenue. Ultimately it appears that most of the funds have gone to the private sector firms, and the full fund has not been deployed as efficiently and quickly as desired.

We proposed the £100m be put into a fund that would fund £200m worth of training. Students would be able to select the course of their choice and agree to pay a small percentage of their salary for three years after they completed the course and earned above a minimum income level – like a royalty.

Education providers would be able to set the percentage of salary a student needed to pay back freely based on the merits of their course. The Skills fund would then pay a quarter of the course fees to the education provider upfront, and another quarter once the student completed the course. The Skills fund would receive the first repayments made by the student until 120% of the amount paid out to the education provider was recouped. All remaining payments made by the student would then go to the education provider.

The education provider was then incentivised to get the student a good job because premium education that had higher graduate outcomes would benefit the amount they were repaid. The skills fund would be able to double its impact and make it a perpetual rather than one-off benefit, and the administration cost burden would be far lower.

You can read the full paper here.

 

Apprenticeships

 

What is it?

Apprenticeships are designed to provide practical training, including learning in the workplace. This is funded by a 0.5% tax on large corporates payroll bill. Designed to provide a steady pipeline of junior talent for UK corporates.

Over the last 3 years there has been £1.1bn of the fund unused and returned to the Treasury each year.

 

Pros

Significant funding available given the size of the levy.

Reduces income inequalities by providing a fully funded route to employment.

No burden on smaller companies who are less able to pay but allows them to use the scheme if excess funds exist, which there always has been.

 

Cons

Fund underused as the list of approved training providers is locked, many excellent education providers are unable to get onto the list. Over the last 3 years there has been £1.1bn of the fund unused and returned to the Treasury each year. Anecdotally I have heard that the most persistent lobbying for the list to remain closed has come from the largest beneficiary of the funding – Multiverse. Many education providers are forced to attempt to purchase a firm already on the list, making having gone through the bureaucracy in the past a valuable asset.

Poor quality of training as the list of approved training providers is locked, rather than having a performance-based review where new providers are added and poorer performers removed. As the course is “free” for apprentices the quality expectation is lower, leading to very little oversight of or competition amongst these providers.

Doesn’t address unemployed. Funding is typically only available for those already employed.

 

Education provider perspective

Cashflow

Excellent

Paid upfront.

Demand

Excellent

No cost to applicants.

Profitability

Excellent

Relative freedom once approved.

Incentives

Very poor

Little competition or oversight.

Efficiency

Good

Relatively efficient claims process.

 

Private finance

Balance sheet lenders

What is it?

A private firm pays the course fees on behalf of a student.

Typically the education provider will make their student’s aware that this option exists (called “signposting”) and will also have an arrangement to be paid the course fees directly. Often the course fees paid by the finance provider will be discounted (typically by 10-20%). 

For example, a course may have fees of £10,000. A student can take a loan out from the finance provider for £10,000 at a market rate of interest. The finance provider will then pay £8,500 to the course provider.

The repayment type varies by student but can encompass future earnings agreements, interest free payment plans or interest-bearing payment plans.

Major providers in the UK are:

  • Prodigy – provides interest bearing loans for top tier university degrees.
  • Lendwise – provides interest bearing loans for a range of courses.
  • Knoma (currently not operational) – provides short term interest-free payment plans.
  • com (currently not operational) – provides future earnings agreements.

These providers all borrow money from wholesale lenders, typically at rates of 11-14% above central bank interest rates (SOFR). This means they need to charge considerable interest to borrowers, even taking into consideration the discounted fee paid to the education provider.
The exception to this is Prodigy, who is able to access cheaper finance due to the size and length of its operations.

All of these firms are very selective about who they are able to provide finance to, typically using broad brush “credit scores” which don’t work well for less wealthy younger people who haven’t extensively interacted with lenders in the past. Anecdotally, the approval rate across these firms (excluding Prodigy) is between 5 and 35%.

There is also another pool of lenders with recourse (for example Premium Credit Solutions), who essentially lend to students but require the education provider to refund them for any borrower who doesn’t make a repayment and passes responsibility for pursuing the delinquent borrower to the education provider. We have spoken to many education providers who initially trialled this model, but was then left with significant refund liabilities and an pool of delinquent borrowers they were not able to deal with.  

 

Pros

Students who have a track record of earnings are able to finance their courses.

The lenders are highly incentivised to restrict lending to only those who are likely to be able to earn enough to repay after graduating. This extends to their selection of which education provider’s courses to lend for.

In many cases the education provider has some “skin in the game”, by offering a discount to their course fee that will be variable in future based on the repayment performance of their students.

 

Cons

Most students are rejected due to broadbrush credit assessments that don’t work for those whose income is likely to be significantly different in the future, post-graduation, compared to the past.

High wholesale financing costs need to be passed on to the student.

 

Education provider perspective

Cashflow

Excellent

Paid upfront.

Demand

Poor

Most applicants rejected.

Profitability

Fair

Usually need to accept a discounted rate.

Incentives

Excellent

Incentives are aligned.

Efficiency

Excellent

Relatively efficient claims process.

 

Finance as a service

What is it?

An infrastructure provider provides the loan to the student but pays the education provider their course fees only when the student makes repayments. This provides much better terms to the student and much higher acceptance rates.

There are only two regulated providers of this service in the UK:

  • StepEx – fully FCA regulated, provides payment plans and future earnings agreements to both UK and EU applicants.
  • EdAid – fully regulated, provides payment plans to UK applicants only.

There are also a number of unregulated providers that operate in a regulatory loophole called “supplier agreements” or “the 60F” exemption in reference to a law that enables a retailer to let customers pay for their products in instalments over a period of less than a year with no interest.  These providers are only able to offer instalments over a short period and with limited legal enforceability so the firms issuing them have been known to resort to more nefarious enforcement tactics. Few if any reputable education providers use these organisations. UK legislation has been proposed to require these unregulated firms to comply with many existing regulations, which is likely to also require them to operate under the umbrella of a regulated firm in future. This legislation is expected to be enacted shortly.

This option is most popular with course providers where the incremental cost of an additional student is minimal, for example courses delivered online or theoretical courses such as business and law, that don’t require practical consumables.

The typical structure for this form of finance is to offer students the ability to defer most of their course fee but retaining a small upfront charge. This upfront charge is also collected via the finance as a service provider (FaaSp).

For example, course pricing options might look like:

  • £10,000 upfront
  • £500 upfront + 36 monthly repayments of £264 [payment plan]
  • £500 upfront + 10% of income for the first 36 months that earnings exceed £25,000 p.a. up to a maximum of £15,000 [future earnings agreement].

The FaaSp will be responsible for all compliance and collections activities and is the counterparty to the student. EdAid provides fixed 36-month terms for payment plans only. StepEx enables customers to customise the repayment period to suit their student demographic. Longer repayment terms also enable the funding of more expensive courses such as MBA programmes.

 

Pros

Provides access to the most students possible, massively increasing the education providers addressable market. Payment plans provided by a FaaSp will almost always be more widely available then through a balance sheet lender because the “expected cost of capital” is lower, defined by the education providers deferred fees rather than a commercial wholesale lender. StepEx uniquely uses an underwriting model that is bespoke to the student market and based on probability distribution correlations rather than “one-size fits all” credit scores, which makes the product even more accessible for those who are likely to repay. The structure of future earnings agreements (FEAs) makes them able to be provided even more widely, as the risk of financial distress is minimised, with lower earnings leading to lower or no repayment obligation.

Fully aligns the incentives of students and education providers. When using FEAs students and education providers both are incentivised to optimise a student’s career prospects. With education providers getting paid more if a student earns more and less if they earn less.

Typically, interest-free, which opens access to groups that would otherwise be excluded and also makes the calculation of the total amount to be repaid simpler. StepEx encourages education providers who wish to charge a higher amount for deferred fee payers, to do so via offering a discount for upfront repayment instead of trying to add an interest rate.

 

Cons

Cashflow implications of this form of finance are significant when first implementing the solution as the majority of fee revenue is deferred. This is completely mitigated in the future when repayments are being received from multiple previous cohorts – but bridging this gap can be challenging. Most education providers set a limit for the number of places available per cohort (functionality that is available with StepEx) and ramp up the number of places available over time to mitigate this. 

Understanding barrier of FEAs is also significant. Many students opt for a payment plan because it is easier to understand even though it is likely to be a worse option for them. StepEx now provides landing pages for all their partner education providers to mitigate this education barrier.

 

Education provider perspective

Cashflow

Poor

Majority of course fee is deferred. Although mitigated in future.

Demand

Excellent

Most applicants accepted.

Profitability

Excellent

Able to set a higher course fee for deferred option (only with StepEx).

Incentives

Excellent

Incentives are aligned.

Efficiency

Excellent

Payments made monthly.

 

Conclusion

 

Multiple financing options exist for education for the many applicants who cannot afford to pay upfront. None are perfect, and the best fit for your organisation is likely to be a mix of options that meet your cashflow and profitability needs while also maximising your addressable market and demand for your course.

Shameless plug: If you would like to learn more about how StepEx can provide your students with a financing solution please contact us on info@stepex.co or book a call directly with our team here.

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