The costs of university may have spiralled, but it still pays to have letters after your name. According to the Sutton Trust, a masters degree can earn you an average of £5,500 more per year than a bachelors alone.
But finding the money to pay for higher education is difficult, particularly for international students. Few governments are prepared to subsidise education beyond a certain level, or provide loans to study overseas, and many banks won’t lend internationally.
A private market which aims to plug the funding gap has existed for decades. In the 50s, Milton Friedman proposed the radical idea that students should enter into income share agreements, selling a percentage of their future income in exchange for university funding – an alternative to taking on debt.
Today, a number of platforms and financial instruments are emerging which allow retail investors to lend to the next generation.
One platform, Prodigy Finance, specialises in providing loans particularly to international students who have secured places on select masters courses at the world’s top 100 universities. The firm issues bonds on the Irish stock exchange which correspond to a specific university or an aggregate of universities, the world’s top 25 business schools, for example, which mitigates the risk associated with direct lending to a student. The assets can be traded freely, and investors receive a tax-free coupon once the loan has been repaid.
Prodigy Finance assesses students through a predictive scorecard which uses data about their academic background to estimate what their future salaries will be. “There is a higher interest rate for bonds of universities whose students tend to be paid lower salaries,” says Ricardo Fernandez, head of business development. “Interest is lower where the underlying assets are less risky, like Harvard for example.”
There are some less obvious advantages to funding students only on top courses at the best universities. “The community feel of an MBA, for example, can be leveraged,” explains Fernandez. This is because Prodigy Finance’s bondholders are often fellow alumni, and can rely on the strong alumni associations at top institutions to create a social pressure not to default.
Top students may be more than just a missed opportunity for lenders. According to Fernandez, it is a hole in the financial services industry. “International students have been unable to get loans in their home country or where they’re studying. Some of them had come from India or African countries and had been on very low salaries. Banks weren’t recognising that they would be taking the same jobs as British or American students after graduation, and would be earning $100-120,000 a year.”
Other platforms support direct peer-to-peer lending. One social enterprise, EdAid, is less selective about the courses borrowers want to study, provided they are accredited. “Our investors tend to fund people they believe in, or care about,” says founder and chief executive Tom Woolf. Students’ creditworthiness is determined by academic performance and the course they want to study, before family, friends, networks and potential employers are invited to invest. Loan repayments are 10 per cent of monthly net income, starting seven months after graduation.
But betting on one horse is risky. Borrowers could drop out, or struggle to find employment after graduation, so lenders may feel reassured that EdAid will help a borrower to find a job if they haven’t found one after this holiday.
Income share agreements
And what of Friedman’s income share agreement? One platform, Lumni, has been offering them in Latin America since 2002, expanding to the US in 2009. And more recently, Purdue University in Indiana has started funding them. Though opponents on the Left describe them as “indentured servitude”, institutional endorsement may lend them the legitimacy they have been lacking thus far.
Marco Rubio introduced a bill to the US Senate in 2014 calling for greater legal clarity around these agreements, like a maximum repayment period of 30 years, and an aggregate limit of no more than 15 per cent of income, but it has made almost no progress. If reasonable terms are set, they could potentially be less burdensome for students than interest-accruing loans. But their attractiveness for investors looks less certain.
Students who aspire to earn high salaries could pay a loan off quickly, so aren’t likely to readily sacrifice a percentage of their income which could far exceed the value of their principal. Lenders, in turn, may be less ready to agree to an income-contingent payment plan with those who are likely to be on lower incomes.