Would you invest in the education of a college student if you were able to earn a tidy return from his or her success? Felipe Vergara and Miguel Palacios are betting that a lot of people would. Since 2006, the investment model created by their Miami-based company, Lumni, Inc., has financed the college educations of nearly 1,300 low-income students in Chile, Colombia, Mexico, and the United States.
The arrangement is simple. By purchasing shares in a Lumni fund, buyers can earn an average return of 7.5 percent, according to Vergara, as students start to earn a salary and repay their loans.
Lumni started in 2002 with a seed project in Chile and later expanded to Colombia. The idea was to establish a “human capital investment fund” to make traditional college loans to qualified students. Vergara and Palacios soon discovered that it could reduce both the risk to investors and the burden to borrowers by allowing students to pay back their loans as a fixed percentage of their post-graduate salaries; the amount students are required to pay never exceeds 15 percent, and the term of the loan varies with the borrower’s capacity to pay. The so-called “portion-of-earnings” arrangement helps ensure that repayment does not become a financial burden to graduates starting their careers.
According to the company, three out of four qualified students in Latin America will not earn a college degree. Vergara, a graduate of the Wharton School, and Palacios, a graduate of the University of Virginia’s Darden School of Business, are both Colombian. Lumni, they believe, will give needy students a chance for the same top-grade higher education that they enjoyed.
So far, Lumni has attracted more than 100 private investors. They include high net-worth individuals, foundations and non-profit organizations, as well as international financial institutions such as the Inter-American Development Bank. Large international businesses, sensing an opportunity to demonstrate good corporate citizenship, are also attracted to the idea. In Colombia, Lumni has partnered with SAB Miller to increase access to college programs for young people in rural areas and to rehabilitate former combatants through education. In Mexico, the company has teamed up with Office Depot to finance education for the disabled.
The structure of the program is also innovative. Lumni has created several funds of diversified pools of students matched to investors’ financial and social goals. Lumni allows some students to repay less than their original investment if they enter the workforce in a low-wage industry. For now the company relies on a mix of investors and charitable donors to replenish and increase its loan pool, allowing it to fund a diverse group of students. Eventually, say Lumni’s founders, the fund will be self-sustaining.
Lumni improves the odds by being highly selective in its choice of students. Fewer than 13 percent of applicants are approved, and recipients are selected based on “integrity, educational achievement and future potential in their chosen field of study,” says Vergara. And like any good investor, Lumni takes care to protect its investment: the company provides each student in its program with a mentor—often a Lumni graduate. This stay-in-school approach has been successful so far. Two percent of students drop out of school, and the default on repayments is only 1.5 percent.
The market seems to be on Lumni’s side. In May 2009, Endeavor recognized Vergara’s work and committed to help Lumni expand its reach in the Americas. Recently, it expanded operations to the San Francisco Bay area and Miami, FL. “Our goal is to invest in one million students in the next ten years,” Vergara says.
