Introduction
Business and related fields are some of the most popular subjects in universities across the world, particularly at the graduate level. According to employability standards, business graduates are among the most marketable and highly paid professionals. Furthermore, business touches on almost all areas of life and every aspect of contemporary society (Chesbrough 355). Notably, even students studying other careers outside the business and finance disciplines have better chances of getting competitive jobs if they have university qualifications. Students encounter business finance early in their education life when making important decisions on obtaining funds for their university education. Just as in the world of business, students have to choose between various options to finance their education.
Regardless of the importance of business finance in education and career, many students have acknowledged a deficiency of adequate information on the most beneficial option of financing their education. Hence, a significant number of students choose debt financing after obtaining government loan, which they pay with an interest margin after school or when they secure jobs. They fail to realize other potential and beneficial options such as equity because they lack the necessary information about those choices. Therefore, in the current project, I propose a study to investigate the perceptions of students about the effectiveness of equity compared to debt financing models in university education financing.
Bottom of FormProblem of the Study
Business finance subjects are among the most common, and probably the most important in higher learning. However, many students fail to understand what they entail, especially when making critical decisions such as how to access financing to support their university studies (Slaughter, Slaughter, and Rhoades 42). University education requires considerable resources, especially tuition funds and other students’ needs. Learners access financial support from various sources, including government loans with fixed interest, payable after school and once an individual becomes employed. The loans become a considerable burden for students since they have to repay immediately they get jobs. For years, a considerable percentage of their salary is deducted to pay the loan plus the interest (Browne 3). It would be more appropriate if students access a more cost-effective source of finances such as the equity model. However, most of the students have inadequate knowledge of such options since government loans are easily accessible and more prevalent. It is necessary to support students to learn business finance to understand the differences between debt and equity financing to make informed decisions when deciding on the option to take.
Rationale for the Study
Considering the importance of business finance, the avoidance of the subject in making choices on university funding can have adverse effects on the prospects of students, especially considering the period spent repaying the loan. Hence, it is critical to understand the reasons for the gap in knowledge about the availability of the equity options compared debt models in obtaining education financing. The study will provide essential data on the number of students who do not understand the business financial aspects and the reasons for the lack of knowledge. The information will assist programs to support students to improve their decision-making in university education funding. Hence, the outcome of the study will help in developing programs that would assist students to make informed choices about the appropriate sources of financing, especially when joining the university to lessen the burden of debt, during loan repayment.
Research Questions
The main research question of the study is:
- What are the perceptions of students about the effectiveness of equity compared to debt financing models in university education financing?
Other research questions include:
- What are some of the reasons some students choose debt as opposed to equity financing?
- What are the effects of the lack of knowledge that leads to the choice of debt rather than equity financing?
- What are some of the ways of supporting the students to make informed decisions on education financing?
Key Definitions
Perceptions of Students: The concept defines the feelings of students about the topic of study.
Core Business Classes: The concept defines the main subject where a student receives core content credit in the final results.
Business Finance: The concept defines a subject involving the management of money and assets, especially in the business world. It covers the potential for profit and minimizes loss through effective management of financial risks.
Debt Finance: The concept defines a mode of financing where the lender fixes the interest and the loan repayment period.
Equity Finance: The concept defines a model where an investor lends funds to be recovered later through contractual payments made by the beneficiary, depending on the earning or profitability level.
Literature Review
The chapter is a review of the previous literature on the topic of debt versus equity in financing higher education. The analysis identifies the gap in research to be filled through the proposed study. The gap forms the basis for the research questions to be answered using the collected data. From the review, research shows that topics are greatly explored in the world of business, but not much has been done on the subject of financing higher education. The chapter covers the idea of business finance, the options available in funding university education, equity versus debt financing options, and gaps in research
Business Finance
Since financing higher education takes a similar perspective as business financing, the ideas of equity and debt should be considered from the same view. Business finance is critical in the achievement of its goals and objectives. From the same perspective, education financing is crucial for students to achieve their educational objectives. Since it is part of the general scientification of business research and education, the business finance discourse changed from a mere description of a business financial operation towards a mathematical model that focuses on the valuation processes in the market within which they operate (Whitley 172). Business finance is, “the study of how these financing and investment decisions should be made in theory, and how they are made in practice” (McLaney 4). Business finance provides the necessary information for decision-making in the world of business such as funding choices available to a firm to finance its operations.
Businesses seek financing from alternative sources when they have inadequate funds to support their operations. One of the sources of finances available to a business includes obtaining loans from financial institutions, such as banks. The process ensures that the activities of the business are legally and adequately funded (Bojadziev 47). The financing process begins from the initial stages of the business during its formation. Once the development and operation stage is financed, the firm moves to other stages of the business growth to prevent any financial management risks. Notably, business financing can occur during any stage of development as long as there is a shortage of funds to run effectively and achieve the company’s goals and objectives (Burns and Dewhurst 23). From a similar perspective, the needs of students for education require considerable financial resources for the learner to get a meaningful education. Consequently, the student should seek out various sources of finances for their higher education.
Financing Higher Education
Individuals completing their high school have to contemplate their choices as they pursue higher education and obtain a university degree. According to Browne, the degree improves their chances of getting meaningful long-term employment (3). However, in some cases, students face the challenge of getting adequate finances to gain access to university education because the demands of the education usually surpass their resources of financial capability. Quality undergraduate, as well as graduate programs, can cost tens of thousands of dollars per year of school tuition fees (Christensen and Eyring 83). Additionally, students have to pay for accommodation and material costs to support their learning. Consequently, numerous programs and methods of financing are available to university students, which they can use to get financial resources for their education. In some cases, it makes sense for students to borrow funds and pay later after completing their education and being employed.
While the controversy surrounding the question of borrowing to finance university education exists, many students have no other choice of accessing programs they desire to get their dream careers. The United States government has a loan program that is accessible to qualifying students when joining the institutions of higher learning. The federal government funds Direct PLUS Loans to students seeking financing for their education. The loan program by the government has a fixed interest rate of 7.9%, without any relax credit conditions (Santiago and Brown 21). The student access the amount of loan that is up to the attendance cost. Furthermore, they subtract any other assistance in funding given to the student in the current year (Browne 4). As long as the student gets the loan, it should be repaid upon completing education and getting a job. Hence, it would be critical for students to be knowledgeable about their choices when getting the loan to fund their education.
Equity Versus Debt in Financing Higher Education
Just as businesses access loans, students should understand the difference between equity and debt options to make the most suitable choice to support their financial needs. The equity option plays a vital role in reducing the financial risks and the interest rates during payment of a loan. When firms use the equity option, they are not required to pay considerable amounts of interests as would be the case of debt financing option (McLaney 219). In fact, “it should be remembered that most equity finance comes from businesses retaining profit (rather than paying it all out as dividends), not from issues of new shares” (McLaney 219). Hence, the risk for the business is considerably reduced when individuals use the equity option. The decision is informed by various factors, including personal dedication and effect on control. The alternative is among the least costly choice in business finance.
Compared to the world of business, students can choose to use equity financing to fund their education. Hence, using the option, students could borrow money for college that does not need to be paid with interest. Instead, their cost of education is covered by investors who later recover their finances from the contractual payments made by the beneficiary depending on the earning level (McLaney 219). The equity option includes ownership and a permanent transfer of funds with returns to the investor contingent on the future profitability. The model is not based on a fixed rate of interest such as in the case with the current student loans. The option does not involve many risks for the learners since the rate of repayment would depend on the prevailing financial status rather than the fixed interest. It is the most effective model for funding university education.
Although the equity model of business finance is seemingly the best in financing education, the debt option remains the most common in the United States. Business debt is an arrangement by the lender and the borrower in the form of financial agreement that is payable after a particular period. The arrangement includes an agreement on the amount of interest that should be paid on loan. In this approach, “neither interest nor repayments are matters of the borrowing business’s discretion” (McLaney 294). The borrower has to agree on the rate of interest the lender quotes or else miss the opportunity to get the loan. The borrower has to repay the annual interest from the borrowing amount, which is charged on the company’s profit. The payment of interest needs to proceed before the equity shareholders may participate (McLaney 294). Therefore, the debt option differs from the equity loan due to the associated risk in repayment. The borrower has to recover the investment plus interest, unlike the equity option that depends on the financial performance of the borrower.
The loan option in funding university education involves the same model in business finance. A good example is the direct PLUS loan offered by the United States Federal government to fund university education in the country. Just like in business finance, the students who get the loan have to pay a fixed amount of interest, 7.9% (Santiago and Brown 21). The amount of credit the student can access depends on the cost of the education, which is determined by the attendance cost. Schools have a financial aid office that plays the role of determining the amount of loan a student qualifies to begin and complete the university education. The existence of debt finance in the capital structure emphasizes the influence of the market forces, including profitability. In funding education, the lenders depend on the potential of the student to complete education and get profitable employment to repay the loan.
When comparing the two options, the equity financial model is the best for students since it does not start their employment phase with a debt. The loan and interest is a significant cause of financial challenges for new graduates who have to spend a considerable percentage of their salary paying the loan. The loan financial option views education as an investment that must earn returns after education. However, this is not always the case, and the student runs the risk of remaining indebted to the lender for many years. On the contrary, the equity model reduces the risk of repaying the loan with huge interest that causes a huge burden to the borrower. Hence, it is critical for students to use the most feasible option when obtaining financial aid for their education. Although the equity model is the most viable, it is also the least understood and used in modern financial arrangements.
Gaps in Research
While students are aware of the choice of getting a loan to fund their university education, they remain uninformed about alternatives such as debt versus grant when obtaining such funds. Furthermore, regardless of the extended use of equity financing concept in the world of business, the idea has not gained popularity in funding education. Consequently, students continue to use debts to finance their education, leading them to pay considerable interests once they are employed. The potential reason students consider this option is that the federal government started the funding programs based on loan in the 1970s and they have become commonplace. Furthermore, they have not been challenged even after research evidence showing the potential of equity financing. Students lack the necessary knowledge about the differences between equity and loan when seeking funds to pay their higher education. To develop an alternative option to fund higher education, additional research is critical to establish the current knowledge and the need for more information on the benefits of equity over debt financing.
Conclusion
The chapter includes significant information on business finance as the concept applies to funding of university education. It covers the idea of business finance, the options available in funding university education, equity versus debt financing options, and gaps in research, leading to the study question on the perceptions of students about the effectiveness of equity compared to debt financing models in university education financing.
Methodology/Proposal
The research study will answer the question, what are the perceptions of students about the effectiveness of equity compared to debt financing models in university education financing. The primary goal is to establish what is already known by students about their options in getting funds for their higher education. Since the research studies the perceptions of students about the topic, the study approach is qualitative ((Attride-Stirling 8). The researcher will collect data within the social settings of the students to establish their level of knowledge on the business finance topic. The research will also involve data collection to determine the reasons behind lack of information about the equity model as the most effective compared to debt financing. Thus, the researcher will collect data from a sample of university students who have just joined a higher learning institution and have benefited from a loan or equity to support their education.
The researcher will use the newly recruited students in the study. The main reason for engaging students who have just joined the university is because they are yet to learn about business finance in their courses and they have just signed for a loan or grant to enroll in the institution. The purpose for selecting loan qualifiers is to learn about the factors that informed their decision to get the loan as opposed to equity or any other source of funding. The research will purposively select the participants from one university serving the needs of students from diverse backgrounds. However, the institution should include students who access education through alternative funding, including student loans. The study will collect data from 20 participants, 10 males and 10 females to achieve gender equality. The participants will be updated about the nature and need of the study, and hence, sign an informed consent form, agreeing to participate in the study voluntarily.
The data will be collected using an interview schedule with a set of questions relating to the research question. The data collection instrument will be designed in such a way that the responses answer the research question. The researcher will use the same set of questions for all participants to get information on the same variables in the study. The interviews will be conducted at the university to determine the social narratives of students regarding the research question. The interview is the most suitable research method when investigating the perceptions of the students through personal narratives. The responses from the participants will be documented using an audio recorder for later transcription and analysis. The collected data will be analyzed using discourse content analysis that identifies common themes in the responses and categorizes them accordingly (Attride-Stirling 14). The results of the analysis will comprise the research findings. The methodology and data analysis approach will play an essential role in filling the gaps identified in the literature review.
Discussion and Conclusion
The study seeks to answer the question, what are the perceptions of students about the effectiveness of equity compared to debt financing models in university education financing. The study will use a qualitative design to collect data in the form of narratives from the participants. Considering the research seeks to understand the level of understanding and perceptions of students regarding the subject, the qualitative design is valid. However, the study has various limitations, including the population and sampling limitation. Qualitative studies that use interviews do not allow a large sample because they consume considerable resources and time. Furthermore, the study will be limited to a single university because the researcher cannot afford to move from one university to the next collecting data. However, the results are expected to be generalizable to other similar settings.
The study is based on some assumptions that the interviewed students will represent the perceptions of others at the same level in the university and across the country. Hence, the information that will be collected from the students will represent the perceptions of all other students. The researcher also assumes that the students understand the meaning of the concepts of equity and debt and minimal information about them will be provided during the initial stages of the study. It is assumed that the students will be willing to participate and respond to the questions truthfully.
The study will be authenticated by the use of a valid data collection instrument. The interview will be carried out using an interview schedule. The schedule will be constructed ahead of the study and used in a pilot interview to test it. Hence, by the time of its use, the researcher will have confirmed its validity in collecting the necessary data. The researcher will also base the questions on the research question, once again, proving the validity of the study. The requirements will be communicated to the subjects beforehand.
The study is important to the finance discourse community for various reasons. The findings of the survey will play a significant role in informing critical decisions by students regarding their options in obtaining funding for their education. The research plays a vital role in ensuring that learners make a decision from the point of knowledge and that they select the most cost-effective choice in borrowing to finance their university education. The study will also provide critical information to add to the current body of knowledge on funding of university education. The results will also enhance understanding to students before deciding on the funding model to make informed choices. The information might also lead to policy changes from the current focus on loans towards other options, including equity financing.
Works Cited
Attride-Stirling, Jennifer. “Thematic Networks: An analytic Tool for Qualitative Research.” Qualitative Research, vol. 1, no. 3, 2001, pp. 385-405.
Bojadziev, George. Fuzzy Logic for Business, Finance, and Management. Vol. 23. World Scientific, 2007.
Browne, John. “Securing a Sustainable Future for Higher Education: An Independent Review of Higher Education Funding and Student Finance.” 2010. assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/422565/bis-10-1208-securing-sustainable-higher-education-browne-report.pdf. Accessed 29 Nov. 2018
Burns, Paul, and Jim Dewhurst, eds. Small Business and Entrepreneurship. Macmillan International Higher Education, 2016.
Chesbrough, Henry. “Business Model Innovation: Opportunities and Barriers.” Long Range Planning, vol. 43, no. 2-3, 2010, pp. 354-363.
Christensen, Clayton M., and Henry J. Eyring. The Innovative University: Changing the DNA of Higher Education from the Inside Out. John Wiley & Sons, 2011.
McLaney, Eddie. Business Finance: Theory and Practice. Pearson Education, 2006.
Santiago, Deborah A., and Sarita Brown. “Federal Policy and Latinos in Higher Education.” Pew Hispanic Center (2004).
Slaughter, Sheila, Sheila A. Slaughter, and Gary Rhoades. Academic Capitalism and The New Economy: Markets, State, and Higher Education. JHU Press, 2004.
Whitley, Richard. “The Transformation of Business Finance into Financial Economics: The Roles of Academic Expansion and Changes in US Capital Markets.” Accounting, Organizations and Society, vol. 11 no. 2, 1986, 171-192.
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