It works - Repaying students outperform projections

 
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In 2015 Brighter Investment supported the first high potential students in Ghana. The deal is, we pay for their higher education, and after graduating students repay our investors a percentage of their income, typically 25% for 6 years. Initially our projections were based on data from research and partners. For example: partner universities provided us with dropout rates, the government with unemployment estimates, employers with average earnings, academic research with historic income fluctuations and financial journals with historic exchange rates. Based on this data, we have been able to make reasonably accurate projections for our investors' ROI, much more accurate than most other startups.

However, as our model was unproven, we based our projections on conservative values for these relevant variables. For example, we pick high-potential students for our program, but estimate their future earnings based on the earnings of average graduates. We only support degree programs that offer our students with the best career potential, but our unemployment estimate is based on the government unemployment figure for the average degree.

Now, 2,5 years into the program, we can show that our first graduated and repaying students are indeed performing better than our conservative projections and are proving the validity of our investment model: This post describes how the ROI projections for our first investors, while remaining conservative, have been revised upward.

 

Our three student cohorts

The 2015 cohort of 24 students was funded through a crowdfunding campaign. Investors that invested in 2016 together supported 54 students in the 2016/2017 academic year. Investors that invested in 2017 supported 99 students in the 2017/2018 academic year:

 
 
 Table 1: Current study progress for your cohort and all Brighter students.   1) After graduating, students perform national service (a mandatory internship) and take 3 months on average to find their first job. 2) One student in the 2015 cohort has earned a MasterCard scholarship to study for her Masters in the US. She is using the repayment break clause in her contract to do so. 3) Continuing students from one cohort are also part of the next cohort (i.e. 3rd year students in the 2016 cohort are 4th year students in the 2017 cohort).

Table 1: Current study progress for your cohort and all Brighter students. 

1) After graduating, students perform national service (a mandatory internship) and take 3 months on average to find their first job.
2) One student in the 2015 cohort has earned a MasterCard scholarship to study for her Masters in the US. She is using the repayment break clause in her contract to do so.
3) Continuing students from one cohort are also part of the next cohort (i.e. 3rd year students in the 2016 cohort are 4th year students in the 2017 cohort).

 
 

For the 2016 cohort, 49% of the students are pursuing a science degree (mostly applied sciences), 27% of the students are pursuing an engineering degree, 13% an IT related degree and 11% a business related degree (accounting, finance, business etc.). For the 2017 cohort these numbers are: 38% engineering, 40% science, 12% IT and 10% a business related degree.

 

Key Performance Indicators

Different variables are used for the model that projects the investor ROI. For the most important of these variables, we compare the conservative values used for the initial ROI projections, the real values as observed to date, and the values we used for the updated projections for our investors as presented in the next two chapters:

 
 
 Table 2: Relevant Key Performance Indicators for university graduates with changes since your investment.  4) 0 graduates are unemployed at the time of writing this blogpost, but 1 student from our first cohort has extended his internship as we agreed his assignment would benefit his future career prospects and improve overall ROI. 5) Students are occasionally late with payments, but no students have stopped repaying.

Table 2: Relevant Key Performance Indicators for university graduates with changes since your investment.

4) 0 graduates are unemployed at the time of writing this blogpost, but 1 student from our first cohort has extended his internship as we agreed his assignment would benefit his future career prospects and improve overall ROI.
5) Students are occasionally late with payments, but no students have stopped repaying.

 
 

Unemployment: Our estimate of 10% unemployment among university graduates is based on 2015 Ghanaian government statistics. None of our college or university graduates are currently without a job, but one student from our first cohort has extended his national service as we agreed his assignment would benefit his future career prospects and improve overall ROI. The 10% unemployment rate for Ghanaian graduates is likely to be an overestimation for our graduates because 1) graduates with higher levels of education are less likely to be unemployed, and 2) we only support degrees in high demand. That said, we expect future unemployment to be closer to the forecasted 10% than the current 0%.

Dropouts: Based on data from our partner universities, our projections estimate 6% of our students will drop out before completing their degree (0.7%/semester). To be cautious, the updated projection below is based on the realized 0% dropouts to date but assumes 0.7% dropouts per semester for the remaining semesters.

Failed semesters: Following the same logic as for dropouts, the projection uses the realized 1% for all past semesters (one student had to redo a semester), and the original estimate of 3% for all future semesters. In time we expect to prove that our stringent student selection process results in fewer dropouts and failed semesters than the university averages that our current estimates are based on.

Transaction loss: Another factor that is important for investor ROI is the cost of exchanging your investment to Ghanaian Cedis before it is disbursed to universities and students. As the full investment has been almost completely deployed, the final transaction loss for investors comes in at 0.9%-1.4% lower than originally forecast. For these cohorts there won’t be a loss on exchanging repayments from students back to investor currency, new investments going the opposite direction ensure we won’t have to physically exchange currencies for investor distributions.

Non repayment: This number represents the percentage of students we expect not to repay according to their sponsorship agreement with us. Not because they can’t for lack of an income, because that would mean they don't have to repay, but because they consciously try to take advantage of the program. To be conservative, our projections have always been based on 15% of students that we support for 4 years to not repay what they owe.

Salary levels: Our salary research from last year suggested that wages for graduates with the degrees in the 2016 cohort had increased by 4.4% on average. Our working graduates earn 1.1% more than we initially projected. We’ve decided to use the lower of these two metrics for this update. Our next update should provide further insight as the group of working students will be larger and we’ll have the results for this year’s salary research.

 

Projected returns for 2016 cohort investor

Our 2016 cohort was the first cohort that was financed by investors. Based on the updated KPIs from the previous chapters we can rerun our financial projection. The results provide an updated best estimate of future distributions for investors in the 2016 cohort:

 
 
 Original projections for September 2016, time of the investment for the 2016 cohort. Depicted are distributions for a $10,000 investment

Original projections for September 2016, time of the investment for the 2016 cohort. Depicted are distributions for a $10,000 investment

 Updated May 2018 projection of future distributions for a $10,000 investment in the 2016 cohort.

Updated May 2018 projection of future distributions for a $10,000 investment in the 2016 cohort.

 
 

The presented figures are projections from a Monte Carlo simulation based on our best estimates of relevant variables. Results are likely to be different from the presented numbers and will change over the years.

  1. Dip in projected distributions in 2020: As discussed in chapter 1, the group of fourth year students in the 2016 cohort is smaller than the other years. In 2020, the majority of students in the cohort that graduated in 2017 will have completed their repayments. This means that in 2020, the bulk of repayments will come from students that are currently in the fourth year of their degree. Consequently, we expect repayments, and thus distributions, to be lower in 2020 than in 2019 and 2021.

  2. Higher total distributions: As presented in chapter 2, we are performing better than initially projected in almost every category. This means that projections for your future distributions have been revised slightly upwards from our initial projections. 

  3. Larger spread of possible returns: The higher projected returns come with a wider 95% confidence interval as indicated by the black bars. This larger uncertainty in returns stems from two factors: 1) the continued high inflation in Ghana and the volatile Ghanaian Cedi. Our investment model is based on the premise that there is a strong enough correlation between inflation and exchange rates on the one hand, and wages on the other, to provide a hedge against your investment losing value due to inflation. Historic data confirms this correlation, but also implies a larger variation in outcomes at higher inflation rates. This historic volatility is apparent in the widening confidence interval. 2) The second factor is that our salary research has showed an increasing spread in reported salary levels for most degrees we researched. Since we didn’t fundamentally change our research methodology, we believe this larger income difference is real and it introduces a larger level of uncertainty in our projections. Anecdotal evidence suggests that (part of) this income spread results from the high inflation and whether or not employers are adjusting paid wages to it.

 

Projected returns for 2017 cohort investor

Based on the updated KPIs, updated values for expected graduate earnings, and actual values realized to date, we have also updated our projections for the 2017 cohort:

 
 
 Original October 2017 projection of future distributions for a $10,000 investment in the 2017 cohort.

Original October 2017 projection of future distributions for a $10,000 investment in the 2017 cohort.

 Updated May 2018  projection of future distributions for a $10,000 investment in the 2017 cohort.

Updated May 2018  projection of future distributions for a $10,000 investment in the 2017 cohort.

 
 

The presented figures are projections from a Monte Carlo simulation based on our best estimates of relevant variables. Results are likely to be different from the presented numbers and will change over the years.

  1. Lower distributions in 2018 and 2019, reason 1: Out of the students that you invested in, the first ones will graduate in July 2018. After that, they will have to do a mandatory internship and find a job before they start repaying. The small amount of distributions we originally projected for 2018 were based on small repayments from the 0.7% of dropouts per semester described in chapter 2. 0% instead of the projected 0.7% of dropouts in the first semester will increase future repayments. However, it also reduces 2018 repayments, and thus 2018 distributions. If we don’t have any dropouts in the next semester either to make small repayments, the 2017 cohort will likely not have anyone repaying in 2018. This will  eliminate distributions in 2018 but improve overall ROI.

  2. Lower distributions in 2018 and 2019, reason 2: The second reason distributions in the first years are lower than projected, is the distribution of the cohort. Instead of a perfect 25/25/25/25 distribution for students in their 1st, 2nd, 3rd and 4th year, the distribution of students in the 2017 cohort is 24/26/31/17. Less 4th year students results in slightly lower distributions in the early years, and slightly higher distributions in the later years. We aim for perfect student cohorts, but have to make tradeoffs between selecting the best students, selecting diversified degrees, and a perfect distribution over the 4 years of higher education.

  3. Higher total distributions: As presented in chapter 2, we are performing better than initially projected in every category. This means that projections for your future distributions have been revised slightly upwards. In the first years the increase is smaller, or even slightly negative as described in the previous section. In subsequent years, the higher repayments from a larger percentage of successful students becomes clear in the projections.

  4. Smaller uncertainty: Out of 12 years, or 24 semesters, 1 semester has passed and no longer holds any uncertainty. This means that future distributions and ROI have become slightly more certain. The black bars in the graph represent the 95% confidence interval of our projections and as a consequence of the reduced uncertainty have become slightly shorter.

 

Conclusion for investors

Based on the data presented in this update, the resulting most likely ROI for our investors in the 2016 and 2017 cohorts has been projected to be 9.5%, slightly higher than the 9% projected at the time of investment. The first students have found jobs and started making repayments, these will result in the first distributions paid out to investors in October.

As described in chapter 2, current projections are based on conservative estimates for key variables, and actual realized performance is only used in our projections to describe passed semesters. If current student performance is an indication of future performance, and dropout-; unemployment-; and default-rates remain low, an ROI in excess of 12% can be expected.

It is now possible to invest in our 2018 cohort. Please visit www.brighterinvestment.com/investors for more info.