Microloans for Education Financing

Is there a better way to fund American colleges? There might be.

For the last few years many college administrators and politicians have complained that the funding model for higher education is broken. But fixing it has been a big mystery.

According to an opinion piece by David Bornstein in the New York Times, however, there are other ideas. As he writes:

Is it possible to finance higher education the way we finance start-up companies?

That’s the approach taken by a social enterprise called Lumni that has raised $17 million to finance the education of a wide array of students in Chile, Colombia, Mexico and the United States. Lumni offers “human capital contracts” to people like Jairo Sneider, who grew up in a low-income, single parent family in Colombia.

Sneider’s dream was to attend college so he could become a nurse and serve his community. To do so, he needed $8,500 — a sum that is close to the average annual income in Colombia. The problem is that financial aid and student loans are far less abundant in Colombia than they are in the United States. Sneider, who was unable to provide collateral or a cosigner, had little hope of getting a loan from a traditional lender.

Under the Lumni plan, people like Sneider get the cash they need for college, and agree to pay 14 percent of salaries for roughly 10 years. According to the article:

Although this might sound similar to a loan, an “income contingent” repayment plan like this is far less risky for a low-income student like Sneider. If he has trouble finding a job or switches careers and earns a lower salary than expected — very distinct possibilities — his payments will drop automatically. The terms are, in fact, determined based on his expected earnings. If he ends up earning the average salary for nurses in Colombia, he will end up paying the equivalent of an interest rate of 17 percent, which is the average rate in the country for a student loan. And if he ends up doing better, he will pay more, and Lumni will share in his success.

This might not be the most efficient way to get lot of people through college, since its dependant on institutions like Lumni rather than, say, the commitment of the state to improve education rates. Still, it’s an alternative that seems to be working.

Lumni, at least, works on the small scale. The company has no expanded to California, where it gives similar loans to low-income students in the Golden State.

While there’s a pretty limited record of success for programs like this, it seems to make sense. Poor people are reluctant to take out extensive loans to finance higher education. When they do they can get into financial trouble. This solution is relatively simple. Students pay a small percentage of their income to service their loans for a specific period of time, no matter how high or low their income is.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer