Fintech, Student Debt and a Free Lunch

In education, as in all economic life, there is no such a thing as a free lunch.   Or is there?

The international debate on higher education access and affordability creates a long wish list of what can or should be done, largely depending on a specific country’s development stage. In the wake of the Covid-19 pandemic, which is wreaking havoc on fiscal budgets across emerging markets and will hamper the ability to expand higher education through traditional borrowing, what will be the role of non-traditional and fintech options for students and institutions?

Figure 1 provides comparative figures on the level of outstanding student debt as well as access to banking and private sector credit, highlighting a few things: one, the massive student loan overhang in the US largely due to higher average tuition and relatively high enrollment rates. Two, a lack of private credit and traditional banking assets available to students and their families in emerging markets. Three, widely differing levels of fintech activity and funding, led by large markets such as the US, China, India and Brazil.

Figure 1: Debt, Credit and the Fintech Opportunity

How fintech gets involved, and where, largely depends on what reforms are on the table and what challenges exist to implement them.

At one end of the spectrum, the US (and to an extent the UK) has staked out maximalist positions on higher education reform while confronting a growing debt overhang for generations of students. This wish list would include:

  • Making community college free.
  • Driving towards a 100% college enrollment rate among high school grads (but first a 100% high school graduation rate).
  • Dramatically improving persistence (100% college graduation rates, 2 and 4 year).
  • Optimizing graduate employment outcomes (full gainful employment, not gig) across all majors, schools and institutes.
  • Eliminating student debt for everyone who did/does not get free college, in perpetuity, ideally means-tested.
  • Maximizing long-term income potential of the population to pay down national debt (!)

At the other end, most Emerging Markets (EM) have limited educational and financial resources and immense pressure on increasing the level of highly skilled labor, particularly in young populations in South Asia, Africa and parts of Latin America. The focus in these parts of the world are mainly:

  • Building more university capacity with better quality outcomes.
  • Keeping public universities relatively inexpensive, or free, despite pressures to raise tuition rates.
  • Encouraging private investors to build higher education capacity when government does not have financial capacity.
  • Establishing larger government-run financial aid programs.
  • Reducing pressure on families and kids that often forces them into debt to improve their child’s K12 education (before they can enjoy “free” college).

A common denominator here, whether for the US market or anywhere else in the world, is funding, and specifically who pays. [1] I won’t recite the economic trade-offs except to say that any discussion about education equity and work outcomes must center on available resources (current and future), how they are financed, why they are allocated, the supply cost structure, and the intended (and potential unintended) consequences of every choice. But one thing is clear: the traditional approach to optimizing student access and affordability with respect to higher education is failing.

Moreover, there are clear opportunities for cross-border collaboration and investment as the world emerges from a pandemic that is worsening educational outcomes and the financial capacity to remedy them.

Figure 2 lists a number of fintech companies around the world that provide solutions to the education sector. One of the more striking conclusions here is that despite global needs most fintech companies are focused almost entirely on their domestic markets. There are a few exceptions–Flywire, which works with internationally mobile students, and some very limited expansion for large companies such as Sofi–but most competitors are parochial and inward-focused: a suggestion of just how much market opportunity around the world is being ignored.

Figure 2. Representative Fintech companies operating in the education sector

When introducing this investment theme back in 2017, I concluded that today’s US and European fintech firms have a unique opportunity to extend their competitive presence to education consumers globally. My view has not changed; in fact demand factors are even more clearly outlined across emerging markets. What has changed is the rise of local fintech competitors and an increasing opportunities for cross-border acquisitions and partnerships.

A few areas to consider.

Managing student debt payoff and future income. College debt has largely been a US and UK problem but it exists in other countries outside of the traditional student loan system where a combination of credit profiles, low income and less developed financial systems have limited capacity. As noted in Figure 1, there is around $2 trillion in formal student debt and many more billions from the shadow financial markets. In terms of tapping into prospective income, the future potential of large, young populations and labor markets look promising. Potential solutions include more innovative peer-to-peer and consumer loan structures; efficient student loan processors; new credit scoring systems; Income Sharing or Enhanced Agreements; secondary loan portfolios; money management platforms for recent graduates; and financial education starting at younger ages.

Accelerating global access to college/skills training. Our 2020 Global Edunomix Survey continues to highlight the massive global gaps in educational achievement and access, labor market pressures, productivity, and various human capital measures–and this was before the pandemic. There are more demographic pressures on the horizon. India, for example, will need to employ 300 million additional workers to its existing workforce by 2050 and they won’t be tilling the fields. Where to employ them, how to train them, who will pay, how to create a productive use of an impending youth bulge are important questions that will consume Indian policymakers and fintech investors in the years to come. Overall there is a significant role for fintech in the skills sector, outside of higher education, and in cooperation with employers. A persistent trend of global underemployment, even for higher skilled workers, will create greater scope for creative solutions. So will financial innovations focused on international education.

Enhancing overall financial capacity. This is, of course, a persistent structural problem in many parts of the world where traditional banking is absent for education and consumer use. Fortunately, the adoption of digital cash and mobile first banking has been a necessity in many emerging markets and has set up early ventures that use technology intermediation. In Asia, investment is pouring into AI, data science and consumer behavior algorithms as applied to student markets, which is one reason why so many fintech start-ups are amassing in the region. More generally, digital and mobile first markets are well established across other regions, from Latin America to India, and ripe for alternative finance.

There are other, more fanciful possibilities along the frontier–perhaps a globally recognized cryptocurrency designed specifically for education use (some institutions are already accepting Bitcoin and other education crypto-coins), or a true global platform for international student financing?–and the more concrete challenges of local financial regulation, consumer adoption, and execution risk in any international expansion. But the market is primed, and virus economics is going to drive it.

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  1. A recent article by John Warner on higher education’s response to the pandemic concludes with the following: “Colleges and universities do not have revenue problems. That’s the stuff of business. Instead, they have funding shortfalls. Decades of failing to invest in this infrastructure have left us in a difficult spot, but we have no choice but to navigate out…Either we will see a rebirth of the collective understanding that higher education should be considered a public good, or we will see it become a luxury good for an increasingly shrinking population of the lucky few.” Article here. Yes, colleges have “funding shortfalls” but without any discussion of cost and outcomes it is difficult to expect the “public” to back the public good concept.