How income-sharing helps fund studies for poor students

31 Oct 2017

Despite economist Milton Friedman proposing purchasing a share of someone’s earning prospects in 1955, the idea has only taken off in this century, with social enterprises, crowdfunding initiatives and universities now offering access to education in this way.

With this in mind, Lumni, which is one of a growing number of social enterprises aiming to help poorer students, works by finding investors to fund education for a promised share of their future income.

One success story is 26-year-old Christopher Linares, who now works as an investment analyst for a private equity firm specialising in mining that manages multi-billion-dollar transactions.

But less than three years ago, he was an impoverished student, wondering how on earth to find enough money to pay for the final year of his university degree in Arequipa, Peru.

That was where Lumni stepped in. Without Lumni, Linares would not have his current job.

“I’m pretty grateful for what they did for me,” he told the Thomson Reuters Foundation.

Such income-sharing agreements are paving the way for less fortunate students to get on in life.

Study now, pay later: the rise of income sharing https://t.co/1IUz7vzkRr pic.twitter.com/nQRHP2GxlD

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Education for all

Lumni was set up in 2002 and now offers services in Mexico, Colombia, Peru, Chile and the United States.

The company aims to make higher education available to students from low-income backgrounds who could not otherwise afford to join the lucky few who can pay.

Linares studied mining engineering at Peru’s top university, the Pontificia Universidad Católica del Perú – it cost half of his mother’s annual income.

His story is typical, given that the annual fee at the University of Chile is between a third and a sixth of an average annual salary of a middle-class family in the country, according to a report by the World Bank.

Lumni’s students are assessed on their potential to complete their studies and get a job in their chosen field. They must have a sound credit record and be high academic achievers. Lumni makes its money charging administration fees for its services.

Felipe Vergara, the Colombian founder of Lumni, told the Thomson Reuters Foundation his enterprise has enabled 10,000 students in five countries to gain higher education and get a job during the last 15 years.

Vergara’s own family was able to pay for his education, and after stints working in Brazil and France, he completed a business degree and joined a blue-chip consulting company.

“Some of my friends were very bright but didn’t have the means to have higher education,” he said. “I was less bright and I did have the opportunity. I felt that this was unfair.”

He found investment – Lumni says the investors prefer not to be named – to fund a pilot with six students in Chile. All graduated successfully, found jobs, and paid back their debt. Now every year, 1,500 other students have the same experience.

Students pay a percentage of the salary they go on to earn, depending on the level of income.

Success rates are high, with 97 percent graduating.

And the rates for defaulting on repayment are low, with just two to seven percent of students in the five countries Lumni covers failing to repay.

“If you provide a scholarship, there is no payback from the student. When the students pay back you can use this to fund more students,” Vergara said.

“It’s a better system than loans because it is less risk for students,” he added.

Additional reporting by the Thomson Reuters Foundation