Funding poor students could be the next big thing in microcredit and other innovative forms of microfinance that are so new that they don’t even have names.
Microcredit is put to many productive uses: as a cushion against the financial ups and downs of poor people whose lives are so uncertain and so fragile, as support for helping them launch or expand small micro-businesses, and to pay for unexpected “life events” such as funerals or weddings. None of these is a proven way out of poverty, whereas offering someone the opportunity to receive a college education or training as a skilled tradesman is a much surer path to a brighter financial future.
More than 850 million people worldwide lack basic education.[i] Of these, approximately 40 percent are out-of-school children and youth while the rest are illiterate adults. Many factors account for this including direct costs from school fees, tuition, books and uniforms, etc; opportunity costs from families forgoing the income their children would earn if they were working instead of being in school; and gender discrimination and other cultural norms.
Among those with a high school education, only 24 percent worldwide go on to receive a college degree or specialized technical training. This statistic drastically exaggerates the picture in the developing world where, for example, the figure is as low as 10.5 percent in India and just 7.5 percent in China. Lack of funding is often the underlying reason. For instance, if India is to achieve the worldwide average, more than 35 million Indian students will require funds.
Poor families understand that their children’s education can result in increasing their lifetime earnings and help their entire families escape poverty. Often as little as $100 to $500 can fund a year of education in a developing country,[ii] an expense most families still cannot afford. Loans for education are typically nonexistent, and when they do exist families fear being crippled by indebtedness from high interest rates. Yet there is compelling evidence from conditional cash transfer programs (where financial benefits are tied to school attendance) to indicate that properly structured incentives can dramatically improve school enrollment, attendance, and achievement[iii].
New models for funding education for poor children are being tried throughout the world. Below are two examples which together suggest the range of variations being explored. One is a nonprofit, the other a for-profit; one raises small amounts of money from desktop lenders, the other seeks institutional funds; one makes loans, the other equity investments.
Vittana, a Seattle-based nonprofit organization founded in 2008, raises loans for students in Mongolia, Nicaragua, Paraguay,Peru, and Vietnam[iv] through online, peer-to-peer lending. Peer-to-peer (person-to-person) lending allows individuals, mostly from wealthy countries, to identify college students to whom they would like to make a loan and then effortlessly arrange a transfer of funds.
Lenders give Vitttana $25 or more to fund a particular student. Once the total from all donations for that student are sufficient to cover his or her educational expenses (average: $655), the funds are released. Vittana sends money to microfinance institutions in the countries it funds which give the money to funded students.
Though Vittana is just a few years old, it has received more than a half million dollars from lenders in 30 countries, and it is growing at over 30% a month.[v] What accounts for its success to date?
- Vittana targets high-achieving students. Vittana’s microfinance partners screen loan applicants on the basis of students’ academic records.
- The screening makes sure the student loan is for enrollment in a program where the prospects for employment after gradation are good.
- Vittana reduces the risk of making loans to students who never complete their education by only funding those in a twelve month or shorter vocational program or who are in their last twelve months of college. Students with more than twelve months of school remaining are less likely to complete their education.
- Vittana highlights “high-achieving, deserving” students on its website in the hope that visitors might be inspired to help out.[vi] Its search engine allows a lender in Lima, Ohio, to find someone and easily invest in someone they want to support in Lima, Peru. This peer-to-peer model might reach millions (billions?) of potential small- scale lenders interested in supporting students in the developing world.
- Vittana seeks to mitigate risk from students not repaying their loans in several ways: by making loans to the children of microloan borrowers with good credit backgrounds; by having students’ mothers or other close relatives co-sign for the loan; and by instituting a year long interest-only “grace” period after the student graduates from his or her program.
By funding only the “last mile” of students’ education and identifying candidates whose employment prospects are bright, Vittana achieves a 95% loan repayment rate. Its graduates make, on average, two to three times their previous incomes.
Finding successful and efficient MFIs is crucial for Vittana to gain scale and fine-tune the loan product to specific regional circumstances. MFIs are fully responsible for marketing the loan, finding suitable borrowers and managing the customer relationship. Moreover, Vittana conducts random audits of their partners to ensure that individual lenders’ money is well spent.[vii]
To cover the costs of developing and administering their student loan programs, Vittana’s microfinance partners charge students minimal interest, typically 10-15 percent per year. They receive no funding from Vittana, and every dollar that Vittana sends from lenders goes towards students’ education. Neither Vittana nor the initial peer lender charges interest, and peer lenders are repaid when students repay their loans.
Vittana recently made a 2010 Clinton Global Initiative commitment, Vittana/Africa: Bringing Student Loans to Africa. Vittana, in partnership with leading microfinance institutions, will fund African students’ post-secondary education, aiming to fund the last of mile of the education of 10,000 students by 2015. Students will gain employable skills in fields including nursing, law enforcement, and IT.[viii]
Lumni is an international company that helps finance the college education of poor students. Operating in Chile, Columbia, Mexico, and the United States, Lumni creates and manages social- investment funds that allow low-income students to pay for college and its funders to receive financial (and societal) returns.
Lumni attracts capital from foundations, funding agencies including the Inter-American Development Bank, and wealthy individuals. It uses this money to fund a portion of a student’s college tuition and fees, but not all. In exchange, each student commits to pay a fixed percentage of his or her income for 120 months after graduation. The percentage varies from student to student based upon a number of factors including the student’s grades, job, the amount of funding received from Lumni, and the amount of funding from other sources.
The Lumni model shifts risks from students to investors. Students earning more money after they graduate repay more every month (remember: repayment is based on a fixed percentage applied to a student’s income), and loan repayment amounts will rise, too, as a student earns more over time. A typical situation is a student who receives $16,000 over four years from Lumni and repays at 4-8 percent of his or her income after graduation. This is approximately equal to repayment of the principal at an 8.5 percent annual interest rate. The student’s obligation is complete at the end of 120 months, even if his or her total repayment is less than the amount s/he received. Lumni also allows students to work in activities like the Peace Corps without worrying about repayment. Under this design, students face little risk of overly burdensome debt payments, providing peace of mind for debt-averse populations that are most in need of funding.
Investors are repaid, with interest, which essentially makes their financing of students’ education an equity investment: The more students earn after graduation, the greater the investors’ financial return.
For its part, Lumni offers career coaching, networking, and technical support to students after graduation. Lumni receives a fee for raising and managing the fund.
Lumni has raised and obtained commitments of more than $15 million from more than 100 investors. Lumni has financed nearly 2,000 students to date, nearly all from low or very low-income backgrounds where funding recipients are the first family members to attend college.[ix] In addition to the dual financial and social return from their investment, contributors are helping prove an efficient, sustainable new system for giving students access to college without the burden of a traditional student loan.[x]
Parvati Patil, a Masters in Public Policy graduate from the University of Michigan, brought these ideas to my attention and did the initial research for this paper. She and I both contributed to this post. Her blog is available at http://tenmarks.wordpress.com/
[i] UNESCO, Education For All Global Monitoring Report, 2009 http://www.unesco.org/new/en/education/themes/leading-the- international-agenda/efareport/reports/2009-governance/ (accessed on December 11, 2010)
[ii] John Hatch, Expanding Microcredit Services to Young Adults: Research Findings, Rationale, Blind Spots, and Recommendations, 2004
[iii] Alain de Janvry and Elisabeth Sadoulet, Conditional Cash Transfer Programs: Are They Really Magic Bullets?, 2004 http://are.berkeley.edu/~sadoulet/papers/ARE- CCTPrograms.pdf (accessed on December 11, 2010)
[iv] FAQ Vittana, http://www.vittana.org/faq (accessed on December 8, 2010)
[v] Making the Grade, Economist, http://www.economist.com/node/16996791 (accessed on December 8, 2010)
[vi] Huffington Post http://www.huffingtonpost.com/2009/10/29/huffpost-game- changers- whn337128.html?slidenumber=G6ny07MYCRM%3D&slideshow#s lide_image (accessed on December 8, 2010)
[vii] Next Billion, http://www.nextbillion.net/blog/2009/11/20/vittana- student-loans-and-a-new-generation-of-microfinance (accessed on December 12, 2010)
[viii] Organizational Partners http://www.vittana.org/partners (accessed on December 11, 2010)
[ix] About Us, Lumni http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)
[x] Lumni, http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)