Gladys sits near the window in the small Itá office, earnestly discussing the loan that she received to finish the certification program that allows her to teach nursing. She is 28 years old and dressed inconspicuously in sweatpants and a ponytail. Despite her casual appearance, her voice carries a tone of imposing strength and authority.
“Education is the foundation of humanity,” she says. “Without education, there is no future. How will you help your country, your community, your family if you don’t have an education?”
For Gladys, there was no alternative to pay for her certification. “I could not ask my parents for support, and I did not have the economic capacity. To finish and receive my degree, a loan was the only way.” So, Gladys took out a loan from Vittana, a partner of Fundacion Paraguaya.
Vittana uses a peer-to-peer system to raise capital for small student loans. The organization specializes in providing loans for students who would otherwise be unable to afford higher education. So far, Vittana has provided more than $1,800,000 in loans to over 2900 students in Paraguay, Peru, Nicaragua, Mongolia, Vietnam, and other countries. Fundación Paraguaya was Vittana’s first partner, and continues to provide loans for university, vocational, and technical studies as well as for continuing education and training. The average loan is $610, and the student must start making payments immediately. For this reason, students typically work at least part-time to cover the cost of their installments. Other players in the micro student loan market include Qifang, an organization that raises money to loan to Chinese students; XacBank, which is based in Mongolia; and Kiva.
According to a 2010 article in the Economist, the challenge associated with student microloans is the risk. Students from rural areas have no credit history, and there is no group lending model. For those of you who are unfamiliar, the group lending process, which is widely used in the distribution of small business loans, reduces the risk of lending to those with little or no credit history and minimal collateral by lending to groups of borrowers (also referred to as a solidarity groups). The group provides a loan guarantee and must compensate for any member who cannot pay on time. Additionally, the group offers support to fellow borrowers as well as peer pressure, encouraging individuals to take the process seriously and to work hard to make their installments.
Jason, a Vittana fellow who is helping the organization to conduct an impact assessment this summer, told me that Fundacion Paraguaya tries to reduce its risk by requiring students to have a certain level of income or a cosigner. The organization also targets the children of existing microfinance clients, who understand the loan repayment process and have successfully repaid loans in the past.
Thinking of my own student loans, I can’t help wondering whether this type of microfinance product is a good idea, especially in light o of Andhra Pradesh and the controversy surrounding extensive lending in the microfinance space. In America, the majority of students are over indebted. Furthermore, in the deteriorating job market, many have returned to school to pursue expensive graduate degrees that may or may not increase their marketability and/or get them a promotion. In fact, many people joke that the master degree has become the “new undergraduate degree,” required for many jobs but not necessarily effective in increasing one’s salary or enhancing the perception of one’s professional skills.
At the same time, many, including myself, would not have had the opportunity to pursue higher education without student loans. There are, of course, ramifications to wantonly distributing credit left and right. Responding to the incessant demand, college tuition continues to increase, and student loans have undeniably contributed to America’s debt crisis. However, access to credit has opened doors for those who cannot pay out-of-pocket for advanced degrees.
Please let me know what you think. Is education a right? Is it smart to transfer our student debt model to the developing world?