Kiva Innovations: As demand for education spikes, micro-loans may be the answer

May 8, 2012

By: Ian Matthews

Raise your hand if you (or your parents) have an outstanding student loan. Okay, now put your hand down -- people are starting to stare.

Probably about two-thirds of you raised your hand if you went to college in the United States. That means that two-thirds of you are accustomed to the excruciating realization that, after years of monthly payments, your balance never goes down.

Now, imagine for a second what you would have done if student loans didn’t exist. Would you have worked a part-time job? Gone to a cheaper school? Not gone at all?

After high school, we all have a choice to make. Often, it’s a delicate balancing act between exalted dreams and financial realities. Student loans give our dreams a leg up, allowing us to explore our interests and maximize our potential.

But in the rest of the world, financial markets for education are lacking and sometimes nonexistent. Few teenagers have the collateral they need to borrow money against their future earnings, but the price of education continues to climb across the globe. Now more than ever, we need newer and better cost-sharing mechanisms to help more young people go to college.

Governments have a reason to invest

In my last blog on higher education, I explained why many countries have invested in education to encourage economic development. The logic is clear: A more skilled, knowledgeable workforce expands institutional capacity, increases economic activity and improves overall living standards. On top of that, developing countries tend to treat education as a matter of both pride and necessity -- simultaneously shaping the next generation of domestic writers, experts and civil servants.

This attitude has led to a rapid expansion in public education spending since the 1950s, and student enrollment has skyrocketed accordingly. During the 1990s alone, worldwide enrollment jumped from 68.6 to 110.7 million and doubled in developing countries from 29.3 to 58.3 million.

Still, limitations exist. This expansion has been curtailed by governments’ inability to respond to increasing demand for education. In Africa, student enrollment has risen 16% annually since 1991 while aggregate expenditures on education have increased only 6% on average. The result: A reduction in resources per student and declining quality of teaching and learning.

None of this has slowed demand. By 2015, it’s estimated that the number of college-eligible students will triple in at least 10 countries on the continent -- including Tanzania, Ethiopia and Rwanda -- representing a significant challenge to already packed public universities.

The stop-gap solution

For now, governments are asking families to pick up the slack. Students that are able to find spots at post-secondary schools are encountering tuition fees for the first time -- or sharp increases in their existing tuitions -- not to mention the mounting costs of student room and board, computers and books.

Cuts to government social spending, paired with the rising cost of living, has led to protests in many developed countries and a systemic loss of trust in public institutions in their developing neighbors. These trends have also degraded the rationale behind public education in the first place: equity.

In Malawi for example, the majority of public funding for education is, paradoxically, funneled to the top 10% of income earners. They’re the ones who can pay for tutors and better secondary schools to increase their kids’ chances of scoring well on entrance exams. The net result is that wealthier students get accepted to and benefit from free tuition at public universities, while only a small sliver of the poor can hope to get in, much less afford it.

Increasingly, private universities and charter schools offer viable alternatives to those left out of the public system. In many cases, these institutions have proven more agile to changing circumstances by offering functional curricula and more egalitarian admissions policies. Nevertheless, high costs continue to marginalize students from remote regions and lower income brackets.

One of Kiva’s Field Partners, Strathmore University in Kenya, is seeking to bridge this gap by offering loan programs to vulnerable and underserved students. Kiva’s flexible, risk-tolerant capital is ideal to offer longer-term, cost-effective loans to students who wouldn’t otherwise be able to afford a private education. Now Kiva lenders have the ability to help students pay for tuition, computers and other necessary school expenses.

So far so good, but the crisis in education financing is widespread and complex. Other innovative cost-sharing mechanisms are vital if universities are going to keep up with rising demand and ensure that poorer students don’t get left in the back of the class.

In the meantime, Kiva is thrilled to be contributing to the emerging market for education financing, and we plan to aggressively expand our higher education portfolio. Stay tuned in the coming weeks when we will announce and profile a new partner that offers very unique loans based on the fundamentals of work-study programs.

If you are interested in becoming a strategic partner please contact our Community Service team by emailing contactus@kiva.org.

Ian Matthews is an intern on Kiva’s Strategic Initiatives team, looking for new partners and loan products to extend opportunities and access to even more people around the world. Ian has an MSc in Global Politics from the London School of Economics and Political Science and has previously done field work in Honduras. Send him your feedback on this blog series at blog@kiva.org.
photos courtesy of Brad Ruggles, Lester Public Library, Earlham College