Income-Based Finance Could Teach Education a Lot about Markets

By Bisbey, Allison | American Banker, June 1, 2016 | Go to article overview

Income-Based Finance Could Teach Education a Lot about Markets


Bisbey, Allison, American Banker


Byline: Allison Bisbey

Should engineering students get more, or more attractive, financial aid than poetry students?

Many colleges charge similar tuition for different degrees. And the federal government charges the same rate of interest for a given type of loan regardless of the school the borrower attends, or his or her field of study. Interest rates on private loans may vary according to a borrower's current creditworthiness, not future earnings potential.

But what if financial aid, or even tuition, could be priced based on the outcome -- a student's ability to land, and keep, a job?

That is what income-based finance has the potential to do, according to Tonio DeSorrento, founder of Vemo Education, which advises colleges and universities on ways to better align the cost of financial aid packages they offer with the value delivered.

The idea is not new; it is used in some Latin American countries and is being piloted in the United States by some nonprofits. But many of these programs market directly to consumers. Vemo is partnering with colleges and universities, which have their own funding and plenty of potential borrowers.

Purdue University announced in November that Vemo was advising it on a plan to create funds that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments.

There is an obvious appeal for borrowers: If they earn less than they expect, they can be sure that their payments won't be overly burdensome.

Eventually, DeSorrento said, this kind of financing will provide information that schools can use to market their programs and to make them more competitive.

An edited transcript follows.

Where has income-based finance been tried before?

TONIO DESORRENTO: In Latin America, by Lumni, and in the U.S. by a couple of funded companies that tried in the peer-to-peer space. I'd argue they are different concepts from what we are doing today. We're not recycling people, products or platforms. It's all from scratch, all applied differently, at scale, in the school channel. There's one other funded originator [in the U.S.], Cumulus Funding in Chicago. They are doing great. They have a different product, a substitute for short-term/high-interest loans.

Why work with colleges, as opposed to going directly to consumers?

Education is about developing human capital, and income-based finance is an investment in human capital. The use of proceeds is well-aligned with interests of investors; both hope to raise an obligor's income. American higher education isn't oriented on employment outcomes, which makes it a less certain investment opportunity in some cases. But college itself is a huge driver of the economy; it delivers a lot of value. Good things happen for graduates, regardless of course of study.

The most valuable way to use income-based finance is to help other good things to happen in higher education. If we can help a college with recruitment or retention, then this pays for itself, the scale is there, the sky's the limit. We're not competing with private student loans. We might help people do that [compete with private loans], but the best use [of income-based finance] is solving problems aside from dropping a student's [effective] interest rate. At root, the value in Vemo for a school is to cause an alignment in cost of education and value delivered.

Will income-based finance replace or supplement student loans?

When we go to a campus, we're not going to displace a single dollar of federal student loans. Most campuses, at the undergraduate level, have tuition far in excess of federal loan limits; students need either private loans, or sometimes emergency loans from their schools. We help find capital and connect the sources of capital that they [schools] already have with students. …

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