It seems that every week a new headline appears about the crisis in student loan debt. It has been called “the next housing bubble,” with more than $1 trillion in outstanding student debt and more than 7 million loans currently in default in the United States alone.
These negative headlines obscure the vital role of student finance in widening access to education, at a time when tertiary degrees are still the greatest predictor of lifetime employability and earnings. Moreover, markets with burgeoning middle classes and increased demand for higher education, such as Vietnam, South Africa, Brazil, Morocco, and India, urgently require expansion of access to finance. What we need is innovation in student finance alongside its expansion.
In 2013, the International Finance Corporation (IFC), a member of the World Bank Group, conducted a major study of student finance innovation with The Parthenon Group, a global strategy-consulting firm for the education sector. Here we explore five of the most compelling findings from the study.
Student finance is a new frontier for impact investing.
Heavily subsidized government programs and banks with high barriers to access have traditionally offered student lending, but this paradigm is shifting. Non-banking financial institutions (NBFIs) are developing innovative models that offer fair terms to students and attractive returns to investors, enabling sustainable expansion of access to loans.
For example, South Africa’s Eduloan is an NBFI founded in 1996 that has provided more than 720,000 loans. A debenture educational bond sold at market rates to socially responsible investors generates the capital to fund its loans. To provide a return to investors and make the program sustainable, Eduloan secures a 5-10 percent tuition discount from universities while the student borrower repays the full amount. Every year, Eduloan enables 50,000-80,000 students to access tertiary education.
Brazil’s Ideal Invest is an NBFI with an asset-backed securities fund that the company has structured to carry the loans to maturity. It has distributed more than 40,000 loans since 2006. Its interest rates, partially subsidized by partner universities, combined with reasonable default rates, deliver healthy returns to investors and have supported the company to expand to more than 200 universities.
Finally, Trustco Finance in Namibia is a microfinance institution that offers student loans. Trustco’s 40,000 active students are enrolled at the Institute for Open Learning (IOL), owned by Trustco Education, which has increased enrollments from 2,500 students when Trustco acquired IOL in 2007. Trustco boasts low default rates and secures repayments through direct payroll deductions, offering foresight of revenues and a steady expected return. This also enables Trustco to raise a bond on the South African Stock Exchange that will dramatically expand access to loans and, in turn, access to education and skills development.
Student lending is a “push” product in most developing economies.
Most emerging economies are still nascent student lending markets in which consumers are unaware of financing for education, if it even exists. The implication for lenders is that they must educate in the basics. For example, Ideal Invest is currently developing an online “one stop shop” where students can learn about a range of financing options.
Moreover, lenders must invest heavily in outreach, whether at university campuses, through traditional and social media, or through promotions with major retailers. For example, Trustco invests millions in television campaigns, print marketing, and door-to-door sales. Ideal and Eduloan, likewise, invest significantly in sales and marketing, with large teams dedicated to raising awareness of the availability of financial support.
Educational institutions have a vital role to play in raising awareness of student loans.
Perhaps unsurprisingly, in markets where student lending is relatively little known, the first port of call to reach prospective borrowers is their college or university. For this reason, the successful models we studied cultivate close working relationships with tertiary institution partners, even co-locating at university campuses and on websites to enable students to enroll for loans while enrolling in their degree programs.
Trustco, for example, promotes its loans simultaneously with promotions for IOL courses. Ideal offers a bespoke tool on partner university websites that enables students to automatically assess their loan eligibility and likely monthly repayments. Eduloan has 37 branch offices at universities in South Africa and works closely with financial aid offices.
Universities are incentivized to support student-lending companies—even offering discounts on tuition (Eduloan) or subsidized interest rates (Ideal)—because they can fill marginal seats that would otherwise remain empty.
Student-friendly design of lending products drives success.
Beyond effective marketing and strong partnerships, the best programs also design their products and services carefully and have iterated them over time—from loan enrollment to disbursal through to repayment.
Enrollment: Trustco allows students (most of them from Namibia’s many remote, sparsely populated rural areas) to enroll for the loan program and IOL courses simultaneously and easily. Its door-to-door salesforce uses handheld devices to immediately assess prospective borrower credit-worthiness and pre-approve loans.
Disbursal: Eduloan pays the students’ tuition directly to the university, and offers a pre-loaded debit card that students use to purchase textbooks, buy food, and even pay rent with designated partners.
Repayment: Ideal finances students’ education through successive small loans for each semester. Monthly repayments are half of what normal tuition payments would be, with double the degree length to repay. This simple, transparent design support is designed for families whose cash flow may not enable them to take long-term loans. The payment flow also supports Ideal to extend more credit to borrowers with a track record of repayment.
Effective private sector student lending programs focus on employability-related programs.
Student loans are only successful if the borrower can achieve a higher income after completing their education, increasing their ability to repay on time and in full. Lenders therefore have a vested interest in identifying “employable” degrees that will meet market demand. The borrower groups for Eduloan and Trustco are civil servants who are guaranteed an income post-matriculation. Ideal has iterated a proprietary credit-scoring model that allows them to screen out candidates whose degree choice makes them less employable.
A significant remaining design challenge is how to extend student loans further toward the base of the pyramid (BoP). To be sure, all three of these programs already reach a disadvantaged population with few other finance options: Brazilians earning less than $400 a month, Namibia’s rural poor, and South Africans earning less than $450 a month. Good data, including good labor market information and statistics on employability rates, will drive further outreach to the BoP. For example, Eduloan tracks declined applicants over time to see if it can refine assessment of prospective borrowers, and Ideal Invest’s credit score includes an evaluation of metrics, including expected income and probability of completion.
Outreach methods are also important. For example, Trustco uses radio, which more than 50 percent of the population relies on for local and national news, as a primary channel, leveraging both advertisements and radio talk shows.
Crowdfunding is also beginning to gain traction within student lending, with models such as Vittana and Kiva Zip widening access. Eduloan, observing this trend, is developing Educonnect, a platform for lenders to donate to the Eduloan Foundation, which would disburse funding to select individuals.
These innovations are consistent with an ongoing push by these NBFIs to drive profit and sustainability while achieving impact. Given the need for access to education in emerging markets, expansion of programs like these, coupled with partnership from innovation-oriented investors, would deliver significant impact.