Students face enormous financial pressures, from day-to-day expenditures to loan repayment, and these pressures come with real risks that stay with students well beyond graduation. Approximately $5 billion student loans were past due in Japan, and in the US, student loan debt has reached a high of over $1 trillion.
However, the following three actions could be game-changing in alleviating the financial pressures students face:
1. Shifting financial risk:
If we can shift financial risk away from students or their families to others invested in their future – such as a pending employer, the government, or the educational institution – we can then decrease the amount of debt students take on themselves. Further, educators would be more incentivized to develop curricula and approaches that promote student employability because the institution would be directly invested in each student’s success.
Case study: West Africa Vocational Education (WAVE) charges students only a small upfront fee, recouping the additional cost of enrollment after the student is placed in his or her first job. At that point, WAVE charges both the student and employer an additional fee calculated as a percentage of the graduate’s first month’s income. WAVE is incentivized to deliver high-quality and relevant programs because its revenue is contingent on employment, but its programs also need to be cost-conscious since revenue also depends on the employee’s salary level. WAVE could scale up its operations rapidly with access to more working capital.
2. Reducing financing needs:
Approaching the issue from the demand side, we could reduce students’ need for education loans in the first place. This intervention includes designing and sharing products to help youth and their families better manage their cash flow to cover educational costs, cost of tools for job seeking, as well as programs that create work-study opportunities for students to earn income while they are in school.
Case study: At 2iE, an international, nonprofit post-secondary institution based in Burkina Faso, students are offered a variety of low-cost, pay-as-you-go options. Tuition fees can be paid in four installments, without fees. Additionally, students can complete courses when their finances allow, and then aggregate these courses into a degree over time.
3. Improving loan offerings:
For students who do still need to access loans, finance providers are improving education loan products to better meet student needs. These tailored loans require no or limited credit history or collateral, have longer terms and grace periods, and are often offered at more competitive rates.
Loans could also provide funding to entrepreneurs, education or training institutions, as well as to support employment matching services.
Case study: At the loan screening stage, for instance, the Entrepreneurial Finance Lab is working with banks and other finance providers to combine non-traditional data – such as insights from psychometric testing that evaluate personality, intelligence, and character – with analytics and modeling to deliver a highly predictive credit score that does not rely on traditional credit histories.