Student Loans 2.0

Filipinos are known the world over for being meticulous, diligent workers. Unfortunately, the lack of education prevents many of our countrymen from realizing their full potential. Studies from the Commission on Higher Education and Technical Education and Skills Development Authority show that for every three Filipinos, one is unable to complete their college education primarily due to financial reasons.

I recently reconnected with an old friend from Madrid, Ana Pastor, who is now based in Manila. Ana casually told me that she is now working for a Philippine company that provides collateral-free student loans to deserving Filipinos. The company, EduCredit (www.educredit.ph), operates in full compliance with the Financing Act of 1998.

I was immediately interested in Ana’s company since keeping children in school is how we can improve our Country Human Capital Index (the global measurement of education and skills of a workforce). As we all know, the country is the midst of a demographic sweet spot where the majority of the population are in their prime working age. This sweet spot will last for 50 years beginning 2025. However, a study conducted by the National Economic Development Authority asserts that while the country is poised to reap the benefits of its demographic profile, it is hindered by its relatively low human capital index. Providing education to as many unschooled youth as possible will address this.

The founders of EduCredit are both foreigners — Vasyl Davydko and Daniel Jose Georges. Vasyl was born in the Ukraine but was raised in Spain. Before setting up EduCredit, he worked for First Circle, the largest technology-powered SME lending platform in the Philippines. Daniel, on the other hand, is a Spaniard who worked at Amazon, Rocket Internet, Arthur D. Little, and other tech start-ups in Spain. The duo set up shop in the Philippines not only to take advantage of the business opportunity in the local financing space, but more so because of the vibrancy of the economy and imminent explosion of tech-based businesses. EduCredit is funded by big names in the venture capital field such as Atler of Singapore and iGlobal Financing Services.

What is interesting about EduCredit is that they only provide loans to students in the information technology field, whether in traditional universities or online courses. They only accept applicants in the college and post-graduate level. Vasyl and Daniel believe that the shortage of qualified IT professionals will become more acute in the future given the rapid pace in which technology is changing how we live, work, and enjoy our leisure. Even today, one out of every five jobs that are in demand in the US is for an IT professional. Most sought after are those who know how to write code and those who can navigate cloud-computing platforms. These jobs command a salary of more than $100,000 a year, allowing a steep rise in income for talented Filipino graduates. In fact, the demand is so great that EduCredit can place outstanding students in jobs as soon as they graduate. The job can be on a remote basis so they don’t have to live abroad and deal with the high cost of living.

Loan applications at EduCredit are done online. There are only three qualifications needed for a loan. One must be a Filipino; must use the proceeds solely for tuition fees; and be credit worthy. The applicant can be a working student or a full-time student with a guardian or co-maker.

Interest rates can vary from one to three percent per month, depending on the applicant’s credit score. There is no limit to how much EduCredit can lend so long as the monthly installments do not exceed 25% of the borrower’s (or co-maker’s) salary. Payments can be on a lump sum basis or in monthly installments of up to 12 months.

How are EduCredit’s terms different from traditional banks?

Student loans fall under the personal loan category in traditional banks. They also grant collateral-free personal loans on the back of a certificate of employment and proof of income through one’s income tax return. As a rule of thumb, banks can lend up to 170% of a borrowers monthly salary if the credit term is 12 months and up to 200% of salary for terms of 24 or longer. Interest rates range from 0.99 percent to 1.4% per month.

Traditional banks offer lower interest rates than EduCredit, the latter being at par with interest rates of credit cards. However, the rates of EduCredit are still lower than that of pawnshops and private lenders.

EduCredit’s key advantage is that they can process a loan in as short as two days, compared to banks which could take weeks, if not months. In addition, traditional banks sometimes require that the borrower maintain an account in their bank with a specified average daily balance. EduCredit has no such requirement.

EduCredit also claims to be more flexible. While banks can freeze accounts or demand full payment of the loan should a borrower default, the online lender says they “understand that there are various reasons for a non-payment, so are always in touch with our clients and will work with them to help them repay the loan.” In other words, EduCredit claims a personalized approach to lending as opposed to some banks which can be impersonal and inflexible.

Since owning a computer is an necessity for anyone studying an IT course, EduCredit grants separate loans to its borrowers to acquire a computer. The loan can come in the form of a lease-to-own scheme or a direct loan, payable by installments.

Bad loans are the main pitfall of EduCredit’s business model given that all the loans are uncolateralized. When asked how they minimize the risk of defaults, they said that they use a program with a special algorithm to ascertain an applicant’s credit worthiness. They did not expound on the technology but I am familiar with a Ukrainian program that correlates data obtained from an applicant’s smartphone to his/her paying behavior.

Evidently, applicants with bad paying habits have similar patterns, and vice versa. For instance, if an applicant has a record of not answering calls, frequently changes his/her e-mail address, has other delinquent payers in his/her address book and frequently plays games (Candy Crush in particular), that applicant is probably of high risk. Applications filled-up at night for an extraordinarily long period also raises red flags.

On the other hand, those who stick to one e-mail addresses, those with bank apps, sports apps (eg. Fitbit), travel apps, and food delivery apps are indications of a good payer.

There are hundreds of other data points put into consideration but these examples should give you an idea of how certain finance companies determine credit worthiness.

While EduCredit’s loan offerings may not be the cheapest in the market, it remains to be the easiest to obtain. It serves as another option for financially challenged students who would otherwise drop out of school. Keeping children in school is key towards increasing our Human Capital Index and consequently, maximizing our demographic dividends. For this, EduCredit serves a good purpose.

Andrew J. Masigan is an economist.