NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

As another academic year begins, graduate students across the U.S. are beginning their quest to become future engineers, bankers and doctors. Moreblessings Sekenhamo, an aspiring investment banker from Harare, Zimbabwe, wanted desperately to be one of these students—able to come to the U.S. to pursue his graduate degree so that he could one day work in infrastructure development in his native country.

In 2014, he received a scholarship to attend the University of Chicago’s Booth School of Business. But that wasn’t enough to cover the cost of moving across the Atlantic Ocean, paying rent, purchasing books and managing the other everyday expenses students have to deal with. And even though he had worked as an investment banker in Zimbabwe for more than six years, he was unable to find a single bank in the U.S. or his home country that was willing to provide him with a fair loan. He quickly realized that his potential academic and economic contributions to the U.S. and his home country weren’t seen as sufficient collateral.

Sekenhamo’s experience isn’t unique. It is a far too common occurrence for students in developing countries trying to finance an education in the U.S.

The Reasons for this Widespread Challenge

In 2017, the Council of Graduate Schools reported that U.S. graduate programs received over 700,000 applications from international students. However, for many would-be graduate students applying from overseas, like Sekenhamo, putting together the finances to make it from their home country to a U.S. classroom is often harder than the actual entrance exams.

Why in this day and age — with globalization moving forward at such a rapid pace — is it so difficult for even top international students to secure a loan?

Unfortunately, and to the detriment of students from emerging market economies, access to financing is still very much determined by an applicant’s assets and home country. These students’ local financial institutions primarily decide whether to offer a loan based on a set of local criteria, including borrowers’ credit history and current income, the stability of their current employer, their home value and sometimes their investment portfolio. To even consider lending to students, these banks often require a guarantee or assets to secure the loan. Meanwhile, U.S.-based banks are reluctant to offer a loan to a student who is new to the country, and has no credit and few financial assets.

While these talented students may attempt to cover tuition with savings and scholarships, an overwhelming percentage find themselves requiring outside funding and facing incredible difficulty finding a bank that will provide them with a loan. According to our research, 89 percent of international student borrowers are unable to secure financing from a bank in their home country or the U.S.

This absence of cross-border lending limits educational opportunities, as the only people who can study in the U.S. tend to be wealthy students. Access to an American education should not be determined by where someone was born, it should be determined by merit and potential. Smart, driven students in developing countries, like Sekenhamo, deserve to study at the best institutions in the world. This belief is at the core of what we do at Prodigy Finance.

A Solution for Students without Access to Funding

Our company was born with the mission to create opportunities for international students who needed to finance their education. Prodigy Finance’s founder, Cameron Stevens, experienced this funding gap first-hand after he was accepted to study business at INSEAD in France.

Stevens, a South African citizen who was living in Southeast Asia at the time, was shocked when he realized that for a bank to even consider providing a loan to an international student, they often demand an outrageous amount of collateral, extremely limiting terms or a high interest rate. These students end up facing, on average, interest rates that are often a multiple times the U.S. Federal Student Loan rate offered to American students, despite coming from similar financial backgrounds.

Cameron and a few classmates founded Prodigy Finance during a case competition at INSEAD. Since then, the company has grown into a global platform for investors to help fund high-achieving students from around the world.

Here’s how it works. Impact investors, former Prodigy Finance borrowers, and other sophisticated private entities give their money to Prodigy Finance. We then use that money to issue loans to international students who have been accepted at, but require financing for, select postgraduate institutions around the world. Our investors get a financial return from our competitive interest rates – as well as a “social return” in creating opportunities for our borrowers, 80 percent of whom are from emerging market economies. Prodigy Finance, meanwhile, sustains itself off management fees from servicing the loans.

Our cross-border credit model determines responsible loan offers by looking at a borrower’s projected level of future income. This enables us to fund educations across a variety of postgraduate programs – our loans are compatible with 328 pre-approved postgraduate programs in business, engineering, law, policy and health science, across 155 global universities. So far, over 11,200 students from 132 countries have trusted Prodigy Finance to fund their postgraduate studies, borrowing over $500 million in total.

Social empowerment is at the core of Prodigy Finance’s identity, but we also care about the wider economic implications of limited cross-border financing options. According to NAFSA, the nonprofit association dedicated to international education and exchange, international students contributed $36.9 billion and supported more than 450,000 jobs in the U.S. economy during the 2016-2017 academic year.

On campuses, we’ve found that U.S. universities benefit from the presence of foreign students. International students also add to the diversity of the classroom and enrich the quality of academic programs through broader perspectives. These new students’ tuition fees are a big driver of revenue and help academic institutions fund and expand their offerings, such as new classes and specialized graduate programs with additional seats for American students. Yet despite their academic and economic potential, international students make up only five percent of the higher education population in the U.S. today, according to the Institute of International Education.

Imagine the benefits to everyone in the ecosystem, if more international students had the opportunity to study here. In order to give a greater number of students a chance, we need to take a hard look at how to make cross-border lending more accessible. Only then can we better serve global students, and foster their potential as powerful engines of economic growth for both the U.S. and their home countries.

Joel Frisch is the Head of Americas for Prodigy Finance.

Photo credit: Unsplash