The Cost of Opportunity

Mexico City resident Alberto Gutiérrez García was certain a foreign degree was the way to expand his horizons and land a better job, so he cobbled together his savings, help from relatives and other financing to study in Spain. But Gutiérrez had extra aid from an unusual source – a social capital firm that invests in students instead of lending to them.

Gutiérrez is one of hundreds of carefully selected Latin America and U.S. Hispanic students who receive cash from Lumni, a novel educational funding company whose investors hope to make a return on their investments while contributing to progress in Latin America.

Lumni is the brainchild of business consultant-turned-social entrepreneur Felipe Vergara and his partner Miguel Palacios, both Colombians, who wanted to apply “human capital” funds to the problem of finding money to finance higher education in Latin America. The type of funding they employ is known as “income-contingent” because the recipients agree to pay a fixed percentage of their future earnings for a set period – as long as they are employed. A conventional loan would require the student to repay the principal, plus interest. By focusing on top students with high earnings potential, Lumni aims to provide richer returns to investors.

Although experts caution that the results of some income-contingent programs are mixed, Lumni has produced a relatively high return of more than 7 percent and has had a low drop-out rate in its seven-year history.

Gutiérrez is one of the Lumni success stories so far. The funds from the company helped cover his living expenses – “something the banks do not offer,” he said in an e-mail interview. Gutiérrez was 26 when he headed to Madrid in the fall of 2008. He finished his master’s degree in political action in a program offered by three universities a year later, and in late 2009 he landed the position of head of documentation in the chief of staff’s office of Mexican President Felipe Calderón Hinojosa.

“I am currently meeting my obligations to [Lumni],” said Gutiérrez, who credits his international education with helping him meet the pressures of the job.
Lumni’s Vergara said the company is looking for a profit on its investments in deserving students, but does not lose sight of the goal of making a contribution to progress in the region.

“Lumni is a company with a clear social purpose,” Vergara said, noting that greater access to university education has a lasting impact on students and society.
Lumni offers itself as an alternative to financing education in societies where many families cannot afford the costs of higher education and private and government student loan programs are still out of reach for most low-income students. Lumni’s scope is still limited to offering the funds to students in Chile, Colombia and Mexico, and most recently to Hispanics in the United States.

Vergara, who oversees this regional company from his base in Miami, studied industrial engineering at the Universidad de Los Andes in Bogota, and worked in France, Brazil and Colombia before he attended Wharton to study for a master’s degree in business administration. He received an international study loan from Colombia’s Colfuturo, a public-private partnership. After earning his degree, Vergara worked as a consultant for McKinsey & Co. and was an Internet entrepreneur. But after he met Palacios, who at that time was researching investments in human capital at the University of Virginia, the two decided to put the ideas to work and launched Lumni.
Lumni raises money by attracting investors and offering them profits as well as the extra benefit of knowing they are helping talented and deserving students who would not be able to pursue or finish degrees without the extra money.

Latin American is not the only region in the world trying to boost educational levels while resources are shrinking. But the issue has taken on greater urgency as business and government leaders see the region falling behind education investments and results in Asia.

Lumni’s initial efforts in Chile and Colombia gained recognition in 2006 when Ashoka, a nonprofit that supports social entrepreneurs, named Vergara a Global Fellow because of his education program. The distinction brought crucial support, networking opportunities and other benefits for the fledgling company that had only 20 students participating at the time.

“Ashoka incubated us,” said Vergara.

The Inter-American Development Bank has also provided grant money and provided IT support to improve Lumni’s procedures for collecting on funding repayment.

In 2007, Lumni expanded into Mexico, as well as Miami, New York and the San Francisco Bay Area. Vergara said the low rate of Hispanics pursuing higher education in the United States was of major concern. But expanding its work to the United States also gave it access to “the most advanced capital markets in the world.”

The National Center for Education Statistics, part of the U.S. Department of Education, reported in a study that only 12 percent of Hispanics have bachelor’s degrees, compared to more than 30 percent of non-Hispanic whites. “Latinos have the lowest high school and college completion rates of any racial or ethnic group,” states the website of the Hispanic Scholarship Fund, which granted some $28 million in scholarships to 4,600 students in the 2008-2009 academic year.
Lumni has also partnered with private companies. The global beer brewer SABMiller, through its Colombian operations, and Office Depot in Mexico are working with Lumni to offer funds to educate the offspring of low-income retail distributors and employees, respectively.

Lumni’s Latin American human capital funds generate an average return of 7.5 percent, while the U.S. funds offer a return of some 3.5 percent, Vergara said.
Repayment rates vary but do not exceed 15 percent of an annual salary, with the average period for payment set at 60 months cumulative so that a student is not obligated to pay when he or she is not employed.

“We don’t ask for collateral or for a co-signer,” Vergara emphasized.

To prevent dropouts and to produce attractive returns, Lumni vets its participants carefully and targets those pursuing high-demand fields, such as business, engineering, economics, medicine and education. And often the source of funding is the government itself, not primarily private funding, like Lumni. “We put in money and time,” said Vergara. “We want to know our students.” The company also helps the students on the other side, coaching them to help them find jobs. So far, such efforts have paid off, keeping attrition at around three percent, according to Vergara.

Lumni’s highly selective process may be the one way to ensure the company’s viability, according to experts.

“Unless you are extremely selective, I don’t think you can conceivably make money,” said Bruce Johnstone, emeritus professor of higher and comparative education at the State University of New York at Buffalo.

Income-contingency plans have not been a big draw in markets where students have other alternatives, said Johnstone, who directs a university project that studies the shift in higher education costs from taxpayers to students and their parents.

And often the source of funding is the government itself, not primarily private funding like Lumni.

“As with other income-contingent, low-interest loans provided by the state or an agency of the state, the loan capital comes from the government’s current budget,” Johnstone stated in an excerpt from a forthcoming paper for the World Bank.

Harry Patrinos, chief education economist at the World Bank, said human capital funds have an advantage because “they get more information about the individual early on.”

Governments already under budgetary strain are hard-pressed to shift funds into higher education. A company like Lumni injects private capital into an arena where it historically has not played a part, Patrinos said.

Lumni is so far working effectively in three Latin American markets and shows promise, Patrinos said. “But I don’t know how large they can get.”

To date Lumni has worked with some 1,000 students, a number Vergara expects will rise to 3,500 by the end of 2010. Capital currently under management and forthcoming commitments total $12 million across 14 funds, he said. The investor base exceeds 100 individuals and corporations.

Vergara is thinking bigger. He is already in talks with investment banks in anticipation of creating in the next two to three years a securitized portfolio “that will give more liquidity to investors.”