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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • Student Loans Targeted to the Poor



    By Agustín Zamora

    Mariclere Alvarez was halfway towards a communications degree at a private university in Mexico when her parents told her they could not pay for her education anymore because of financial difficulties. Alvarez would have dropped out had it not been for FINAE, a Mexican financial institution that provides college loans to low-income students.

    “I felt relieved because I had the option to continue studying,’’ said the 26-year old Alvarez, who is one of more than 5,000 students since 2008 who have received loans from FINAE, one of Mexico’s first for-profit student loan companies.

    The company, which received support from the IDB, is helping Mexico make higher education more accessible, as a growing number of low-income students are flocking to private institutions because of the limited capacity of the public university system. About 70 percent of the country’s college-age population comes from families earning less than $3,000 a year.

    College enrollment in Mexico increased from 2.5 million students in the 2006–07 academic year to over 3 million in 2010–11, according to

    government data, and private schools now account for a third of the country’s total university enrollment.

    However, low-income students face several obstacles when they enroll in private universities. First, their families may not earn enough to afford tuition, which can range from $1,500 to $15,000 a year. Second, the quality of education varies widely. Finally, the degree they receive may not be in high-demand fields or may not be recognized by future employers.

    FINAE’s business model, based on partnering with accredited universities, is helping students overcome these barriers while allowing the company itself to reduce the risk of default. FINAE currently partners with 10 institutions in 24 states that account for approximately 30 percent of enrollment in Mexico’s private universities. These institutions help process applications, share some of the costs related to a possible loan default, and market the loans. Alvarez, for example, learned about the FINAE loan program through her university.

    FINAE finances between 20 and 100 percent of tuition fees. The loans require that students maintain higher than average grades and pursue a degree in a field where there is demand in the job market. An important feature of the loan program is flexibility: the company has created alternative repayment plans, allowing students to choose the option best suited for their economic situation.

    Low Default Rates

    The FINAE methodology has reduced drop out risk and, as result, has helped the company keep default rates lower than the market average. That’s particularly important considering Mexico has an overall college dropout rate of 38 percent, the highest among OECD countries. Moreover, through the selection of the universities and programs FINAE finances, it also ensures that the degree obtained by the student is recognized by the market, boosting a graduate’s chances of finding a job and being able to repay the loan.

    Besides making higher education more accessible, FINAE’s loans also help students establish formal credit histories, which will help them access a variety of financial services in the future, from bank accounts to mortgages and business loans.

    The IDB has approved around $12 million in loans and guarantees to FINAE since 2010, paving the way for the company to raise additional resources from third-party investors and increase lending from $2.2 million in 2010 to over $18 million in the second quarter of 2013. Nearly half of FINAE’s clients come from families earning less than $2,520 a year. Approximately 70 percent of loan recipients are the first in their family to earn a college degree.

    Moreover, guarantees provided by the IDB have made it possible for FINAE to securitize its loan portfolio by issuing its first education bond to local retail investors in Mexico in 2013. This operation has not only helped FINAE raise more resources to fund its expansion but also helped create a new asset class that channels funding from the capital market to students largely from the base of the pyramid. Funds raised through this transaction are expected to finance higher education for 40,000 Mexican disadvantaged students over a period of seven years.

    By scaling up its operations, FINAE was able to turn a profit for the first time in 2012. For every $1 invested in FINAE, an estimated $3.15 of social value has been created, according to Shaerpa, an organization based in Holland hired by FINAE to measure its social impact. The calculations took into consideration the average cost per student and the monetary benefits to multiple stakeholders, such as expected income after graduation as well as the increase in university revenues stemming from lower student dropout rates.

    FINAE’s experience shows that making higher education accessible to the poor is more than just doing good. It’s good business.

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