Here’s an interesting innovation that is taking place in Latin America: A company is paying for the college education of thousands of students in exchange for their commitment to pay back a small percentage of their salaries when — and if — they get a job.
Lumni, an education investment fund that describes itself as “a pioneer in human capital financing,” has already paid for the university studies of 7,000 young people in Chile, Colombia, Mexico and Peru. It has also started a pilot program with 27 students in the United States.
The big question is whether it is a great alternative for the millions of students who can’t afford a good higher education, or a risky deal that, without proper regulation, could turn students into modern-day indentured servants.
Unlike with bank loans, students who get a job after graduation under the new income-share agreements only pay a fixed percentage of their income — typically between 10 and 15 percent — for a period that most often doesn’t exceed six years. The students’ obligation is complete at the end of the mutually agreed period regardless of the sum they paid, company officials say.
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There is no collateral, no co-signers, no interest payments, just a business contract between Lumni and the students. If students don’t pay their obligation back, Lumni can go to court to collect on its debt.
“We don’t lend money, we invest in students,” Lumni co-founder Felipe Vergara told me. “With us, students can reduce their risk of not finding a job or not earning a good salary after graduation.”
Some students who don’t get well-paying jobs after graduation end up paying back less money than they got, but most end up paying more, because they get better jobs, Vergara says. That way, Lumni can remain profitable and attract new investors, he added.
The company, which was conceived about 10 years ago in Colombia, plans to reach a cumulative total of 30,000 students over the next five years.
Why not encourage companies to donate scholarships, rather than invest in these so-called income-share agreements? I asked Vergara.
“If you ask a big corporation to make a donation for college scholarships, they may give you money to help 10 students. But if you offer them a profitable investment in students’ education, they will pay for 100 or 200 students,” he responded.
Some education experts see these pay-forward financial vehicles as a great solution for Latin America, in part because very few banks in the region provide affordable student loans.
“In a region where fewer than 20 percent of students graduate from college, any innovation that expands the funding opportunities for disadvantaged youths is welcome,” says Gabriel Sanchez Zinny, author of Education 3.0: The struggle for talent in Latin America. “It's very difficult to dramatically expand education in the region just relying on philanthropy.”
Others are more skeptical, noting that some of the most developed and highly educated countries, such as Finland, not only offer free education but often pay students extra money to remain in school. In a global economy that is increasingly driven by knowledge, it’s governments’ responsibility to invest in students’ college education, they say.
Fernando M. Reimers, a Harvard University professor of international education, told me that “Lumni makes an important contribution, and its financial model based on graduates’ income is innovative. But like any innovation, it has its risks. And the risk for students is using the money to pursue studies that won’t result in wage increases big enough to justify the debt they are incurring.”
He added, “These risks could be significantly reduced by providing precise information about the salaries earned by graduates of various fields of study, and by consumer protection programs to educate students about the real financial commitment they are making.”
My opinion: Sure, for-profit investment funds for college students pose risks. Without proper regulation, young people without the right guidance could be lured by unscrupulous investors into signing unfair contracts that could bind their incomes for many years. (Last week’s Miami Herald series on dishonest recruiting tactics by some for-profit U.S. colleges is a good reminder of this danger.)
But in a region where many students cannot even afford to study in free-tuition state universities, let alone private ones, because they need to work, and where low-interest student loans are a rarity, income-share agreements are an idea worth pursuing. With proper regulation, Lumni-styled companies could help millions to finish college across the Americas.