Giving credit the old college try

A microcredit revolution is taking the world of student loans by storm. Companies such as GreenNote, Zopa, Virgin Money, and Fynanz (yes, really) combine the twin phenomena of microfinance and social networking to produce novel, financially attractive, and hitherto popular lending schemes that promise the less credit-worthy a chance to give their American Dream the old college try. The emergence of microcredit in the world of college financing is but another avatar of microfinance, the approach to credit schemes that has revolutionized development and poverty eradication efforts across the globe.     

In 2006, microfinance became a buzzword when Muhammad Yunus won the Nobel Peace Prize. In truth, the microcredit model has existed for centuries in various localized incarnations, assuming its current form as early as the 1970s. Today, “microfinance” is an umbrella term, spanning a vast array of financial services made available to the less credit-worthy. These services include loans for investment in micro-businesses, savings and insurance schemes, and fund transfers. With its multiple iterations in both developing and developed countries, the microfinance model has evolved from a simple, localized lender-borrower relationship into a platform for social, economic, and political empowerment and mobilization.            

This is not to say that microfinance is the holy grail of approaches to development. These same economic upheavals have been criticized for disturbing traditional social and cultural structures and for merely shifting the economic gap a notch lower on the poverty scale. Nevertheless, microfinance remains a powerful tool, if not a panacea.
      
Closer to home, microfinance’s latest avatar in the realm of student loans promises to bridge the gap between federal student loans and astronomical tuition costs. Based online, these Web sites shrug off traditional credit scoring mechanisms and encourage borrowers to tap into their social networks. The Web sites follow different setups, with some requiring cosigners and others shaving off their high interest rates as more and more of the loan is repaid. Founded by Akash Agarwal, GreenNote charges low and fixed interest rates, which can be further reduced if lenders choose to gift money. On their Web site, lenders can browse the profiles of registered borrowers and search specifically for students who “share common characteristics” with them. The system formalizes what used to be informal or “soft” loans and turns millions of students into entrepreneurs investing in their own futures. The introduction of a middleman—the microfinance company—transforms transactions from social and emotional obligations into business investments free of the guilt and discomfort of borrowing from family and friends. At the time of its takeover by TuitionU.com, Greennote reportedly raised $4.2 million in 2007 from Menlo Ventures and GlenBrook Partners and registers about 3,000 users per month.      

Peer-to-peer lending is gaining traction all around the world, with Qifang in China and Rang De in India changing the dependence of their populations on banks. Though it is structured on similar lines as its American counterparts, Qifang’s Web site “features” certain students and lenders. Also, while Fynanz and GreenNote encourage students to create a Facebook-like profile and warn that sob stories don’t work, Qifang’s “success stories” definitely tug at the readers’ heartstrings.       

It remains to be seen just how successful microfinance will be as a means to meet the escalating costs of higher education. Microfinance loans certainly appear attractive in the current economic situation, as they are inevitable products of a credit crunch and greater social connectivity, but the high interest rates may deter students from using them once credit is more freely available. While the scale of microfinance loans is appropriate for relatively small expenses such as textbooks and food, it is certainly not sufficient in and of itself to cover the exorbitant tuition costs at most private universities. Even if they are successful, microfinance loans will remain supplements to “close the student funding gap” rather than complete solutions.

Also, in those systems that rely on a student’s social networks rather than the kindness of strangers, students who are already well-connected will undoubtedly face an advantage, aggravating social disparities rather than eliminating them. The operations and outcomes of peer-to-peer models such as GreenNote are therefore likely to be vastly different from those in developing countries. It is important not to view the microfinance revolution as any real breakthrough in addressing the disparities inherent in higher education, but to see it for what it is—an additional option in the realm of college financing. Regardless of the long-term outcome, microcredit platforms are creative and resourceful spaces for student initiatives and society’s philanthropy. For anyone struggling to pay for textbooks, these Web sites hold the promise of soft loans of $2,000 from kind strangers. Hey, you never know.

Monica Varman is a Columbia College junior majoring in economics-mathematics and concentrating in sustainable development. She is a senior editor of Consilience and works on the Millennium Villages Project. Green Piece runs alternate Tuesdays. opinion@columbiaspectator.com