Saturday, November 26, 2011

Can private student loans lead to learning?

I've written here, here, here, here, and here about opportunities for social entrepreneurs to support student learning and make a profit on education. By noting these opportunities I don't mean to suggest that only the market can improve higher education.  But there are ways for creative folks to improve learning and make a living at it; opportunities that are currently being missed.

Here is another--loan money to students to pay for education.  Of course I know that this is an old idea, and  I of course understand that the federal government does most student loan lending, having taken over control of the industry only a few years ago.

Student borrowing is currently at the leading edge of the critique of higher education, with story after story of students borrowing huge sums of money and either not graduating, or graduating and being unable to repay their loans.  These stories share two characteristics--students who borrow at high rates, and who make bad educational decisions.

And the stories are right: student loans are expensive--the going rate being 6.8%, and the rate for PLUS loans and other private loans often being higher.  You can borrow money much less expensively for many things--a house and a car, for example.  And savers park money in accounts--be they savings accounts, money markets, treasuries, or other bonds--that pay a much lower interest rate, simply because they want secure returns in an uncertain market.

So here is the market opportunity: establish an organization, modeled on micro-lenders like the Grameen Bank, that loans money to students, advises them on how to succeed in school, and teaches them how to succeed in managing their money.  (The LDS Church does this on a small scale in the developing world through its Perpetual Education Fund.)

There is plenty of space between the rates that savers get on their savings, and the rate that the government charges on loans, to set a loan rate that is both more affordable and profitable.  And there is plenty of space in the market to attach training to these lower-cost loans, so that borrowers successfully move to graduation and support each other in pursuing employment, repaying loans, etc.  This is, after all, the micro-lending model: groups of borrowers support each other, and in so doing also improve loan repayment.

Who will be the first to enter?  Credit unions could, since they maintain close relationships with local communities, many of which are also home to community colleges.  Crowdsourced loan and donation organizations like that raise money for social enterprises could move into this space.  And microlenders have the experience and models in place to move quickly as well.

1 comment:

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