Thesis
Summary
According to the World Bank, higher education delivers the highest return of any educational level, creating significant value for both individuals and society at large. However, a critical challenge exists: over one billion young people across Africa, Asia, and Latin America are currently locked out of higher education due to financial barriers. The situation is particularly acute in sub-Saharan Africa, where 91% of youth are excluded from higher education opportunities.
Income Sharing Agreements (ISAs) have emerged as a proven, ethical financing model to address this challenge. The success of existing ISA programs is demonstrated through impressive metrics: an 87% graduation rate, 60% employment rate among graduates, and 7-9% historical yields for investors. This model shows promise in bridging the significant gap between educational potential and financial accessibility in the Global South.
Context
- Previous focus of development in Africa and LATAM
- Health and education attainment
- Employment
- Success, failures and challenges of past work
Impact of post-secondary education
What are the kinds of post-secondary education are there, what is their impact to private and public outcomes?
Funding models for post-secondary education
What models exist for funding post-secondary education? Which models have succeeded or failed, and what are the trade-offs of each.
Traditional Student Loans
Traditional student loans, exemplified by the U.S. model, are fixed-obligation debt instruments where students borrow a set amount and repay it with interest over a predetermined period, regardless of their post-graduation income. This model dominates in the United States, where federal and private student loans have created a $1.7 trillion debt market. While these loans provide immediate access to education, they carry significant risks: fixed monthly payments can become burdensome during periods of unemployment or low income, and default can have severe long-term consequences for borrowers' financial futures. The rigid repayment structure often disproportionately impacts lower-income graduates and can discourage students from pursuing lower-paying but socially valuable careers.
Publicly Financed Income-Contingent Loans
Publicly financed income-contingent loans, pioneered by Australia's HECS (Higher Education Contribution Scheme) and adopted by the UK, represent a hybrid approach where government funds education upfront and students repay based on their income. These systems typically feature income thresholds below which no payments are required, automatic payroll deduction, and inflation-adjusted balances rather than commercial interest rates. While highly successful in their home countries, these systems require substantial government resources and infrastructure, making them challenging to implement in developing economies. The Australian and UK models demonstrate that income-contingent repayment is viable at national scale, but their success depends heavily on robust tax systems and significant public funding.
Income Sharing Agreements
Income Sharing Agreements (ISAs) represent a market-based evolution of income-contingent financing that aligns investor returns with student success. Under an ISA, students commit to pay a percentage of their future income for a set period, typically with both income thresholds and payment caps. This creates a natural insurance mechanism: successful graduates pay more, while those earning below thresholds pay less or nothing.
Key features of the model include:
- Students borrow against future income without requiring collateral or credit history
- Repayments automatically adjust to earnings, protecting against financial hardship
- Payments only begin when income exceeds predetermined thresholds
- Ethical standards and consumer protections maintained through Global ISA Alliance
The model has demonstrated strong results in early implementations:
- 87% graduation rate among ISA-funded students
- 60% employment rate post-graduation
- 7-9% historical yields for investors while maintaining affordability
- Successful operations across multiple African and South American markets
Unlike government programs, ISAs can scale through private capital markets and operate effectively in emerging economies without requiring extensive government infrastructure. This makes them particularly suited for rapidly expanding access to education in the Global South.
ISA in detail
Structure
Strengths and Weaknesses
Strengths:
- Proven model enabling tens of thousands to access higher education
- Sustainable investment returns while maintaining ethical standards
- Scalable across different regions and education types
- Supports both private gains (income, empowerment) and public gains (skilled leadership, local development)
Weaknesses:
- Current funding models limit ability to scale
- Need better infrastructure for transparency, auditability, and risk management
Requires coordination between multiple stakeholders (providers, investors, institutions)
Regulation
Voluntary self-regulation: GIA
- Legal cases: USA, elsewhere
- Govt regulation: todo
Case Study: Exploitation
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Case Study: Ethical
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ISA Lenders
- growing number of Lenders
- seed funding, grants, and first lost capital
- allows them to establish themselves
- challenges in growing
How do ISA providers operate, grow and expand, and access capital?
What are the risks to their business? What makes them succeed and fail?
Securitization
Securitization is a process where illiquid assets are bundled together and sold to investors. This has become a common model for allowing lenders to free up money to issue new loans instead of waiting years for borrowers to repay the loans, while also spreading the risk of defaults across many investors. By turning illiquid loans into tradeable securities, lenders can quickly convert their loan portfolios into cash, creating liquidity that keeps credit flowing through the financial system.
In the context of ISA providers, this allows
Pricing an Income Sharing Agreement
Repayments from an income sharing agreement (ISA) loan are dependent on income, the income sharing rate, and employment. Additionally, the loan contract will always specify a number of payments, maximum total repayments, and sometimes a maximum duration (e.g. 15 years from graduation) after which no repayments are owed.
Rating
Employment and earnings are primary ratings attributes for determining which loans (or income from loans) should be acquired. Specifically employment and repayments should be continuous for the past 12 months.
Additionally income should be at least 50% greater than the minimum income threshold.
Income
Past income is taken as a primary indicator of future income.
On average, once member has a 12 months of income history, income is assumed to remain constant. A degree of growth from inflation and career progression is expected, however there is substantial uncertainty in forecasting such growth.
Conservatively, we propose to assume income growth at half average CPI growth rate over the last 5 years (Source: IMF, 2019-2023)
Examples:
- Rwanda: 20.5% => 10.25%
- Kenya: 14.1% => 7.1%
- South Africa: 8.9% => 4.5%
- Colombia: 10.8% => 5.4%
- Peru: 7.4% => 3.7%
Employment
Past employment is taken as a primary indicator of future income.
All members are expected to have periods of unemployment for various reasons, including economic and personal. This is expected to be within the range of 10-20%, and will be estimated based on country, provider, and qualification.
For the purposes of pricing, all members are assumed to experience average unemployment every year. The expected annual income is reduced by the average unemployment rate.
Contracted Repayments
Contracts specify a specific number of monthly repayments required (e.g. 120 payments) which are made in any month where income exceeds the minimum income threshold. A month of unemployment or income below the threshold does not reduce the number of required repayments.
For the purposes of pricing, all members are assumed to experience average unemployment every year. The number of contracted repayments is increased by the average unemployment rate.
Maximum Total Repayments
Contracts specify the maximum repayments that may be collected to protect the highest earners from exorbitant repayments.
Currency Depreciation
todo.
Examples
Preconditions:
- 12 months of annual earnings of at least 1x loan size
- 12 months continuous earnings & payments
Formula:
- PMT: Avg repayment: over past 12 months
- UER: Unemployment rate (e.g. 15%)
- wage growth: 4% p.a.
- currency depreciation: 6% - price it in, if we can hedge, yield will be higher
- discount: 6% (fund target yield)
n = periods * UER
r = discount - (inflation - depreciation)
PV = (PMT * (1 - UER)) * (1 - (1 / (1 + r)^n))/ r
Example:
- PMT = 50
- n = 48 periods * 1.15 = 55
- r_annual = 6% - (5% - 6%) = 7%
- r_monthly = r_annual / 12 = 0.5833%
- PV = (50 * (1 - 0.15)) * (1 - (1 / (1 + 0.0058)^55))/ 0.0058 = 1,996
References
- Gao, Shang; Darvas, Peter; Shen, Yijun; Bawany, Bilal (2017) Sharing Higher Education's Promise beyond the Few in Sub-Saharan Africa, https://hdl.handle.net/10986/27617