A new way to finance education: Pay part of what you earn
Instead of taking out a college loan, students pay back the cost of their education using a portion of their earnings after graduation.
Would you sell a stake in your future for a college degree? Oregon just joined a number of private companies making the idea a reality, and the solution could mean more underprivileged youth get the education they need to get ahead.
College graduates can earn 84 percent more over a lifetime than those with a high school diploma, but most poor youth can't afford the hefty price tag. Crowdfunding higher education may inspire a brighter outlook.
In July, Oregon legislators passed a bill that would allow residents to pay for a college education without undertaking a traditional loan, according to The New York Times. Students would agree to pay back the cost of their education by promising a percentage of future earnings after graduation.
Though Oregon is the first US state to attempt to institutionalize the idea for its in-state students, private companies have been helping the idea gain traction for years, matching competitive students and "impact investors" pursuing both social and financial returns.
Pave and Upstart, both recently launched companies in the US, have raised millions using the unique crowdfunding model, "promoting equity-like investments in young folk," says The Economist. But Lumni is among the first to target low-income parts of the world.
And according to the International Labor Organization, unconventional ways of financing ever-increasing costs of education couldn't come sooner: 73.4 million young people--12.6 percent--are expected to be out of work in 2013, an increase of 3.5 million over the last five years.
With operations in Peru, Chile, Colombia, Mexico and the US, Lumni seeks underprivileged students who may otherwise lack the financial resources necessary to pursue higher education. Like Oregon's new legislation, Lumni asks students to repay their "loan" with a percentage of future earnings for a given term. And, like traditional student loans, those payments don't begin until after graduation.
Armed with a freshly acquired college degree, Lumni-financed students can establish greater financial stability by accessing higher earnings, but they're also free from the growing risk of default that often results from accruing interest and rigid payment terms under traditional financing arrangements. With income-based repayment, no income means no payments.
But what if a Lumni-financed graduate becomes the next Mark Zuckerberg? It’s clear that under income-based repayment, students with greater total income will make larger payments to their investors. The Economist notes that Upstart caps total payback at five times the amount invested, yet few other programs offer such caps. For this reason, the most financially successful graduates will pay much more for for their college degrees.
And tinkering with the future of our youth always raises concern. Lumni's average term of repayment – 10 years – is a long-term financial commitment that students may not have the resources and experience to assess. As promising prospects and financial incentives drive an expanding pool of profit-seeking investors, it will be equally important that companies like Lumni ensure the financial education and protection of the students so they make the best decision for their futures.
Still, the idea of social financial agreements has sparked the interest of many youth and investors. Lumni has helped fund more than 2,000 students and holds more than $15 million in financial commitments from over 100 investors. Because students pay a percentage of earnings, investors have a great incentive to ensure the success of investees' postgraduate futures, which promises larger returns.
For this reason, many companies like Lumni are beginning to witness investors adopting a more active approach, often providing additional resources and professional advice to students as they advance their professional careers. According to The Economist, a student using Upstart reported that one of her investors sent her subscriptions to study materials she needed to get into law school.
The fundamental difference between Oregon legislation and social investment companies is where the the students' payments end up. Oregon plans to establish a state fund to collect payments, which would fund higher education for future generations.
Companies like Lumni direct payments back into the pockets of investors as return. Yet, as economics professor Nancy Folbre notes in the New York Times, obtaining larger payments from higher earners can improve educational opportunity and ideally help reduce income inequality. Both the Oregon legislation and social investment companies are successfully capturing this key component.
Though well-deserved skepticism toward Lumni's model remains, the untapped potential of financing higher education by offering complementing terms of repayment could create radical change. In a world of growing inequality and mounting barriers to education, it may require this sort of unconventional innovation and creative thinking to uncover an approach that offers a more promising future for youth across the globe.