October 16, 2007 — In a country where only 20 percent of people can afford to pay for higher education, IFC is trying to meet the challenge by introducing an innovative product to Chile’s financial markets—the first private student loan program designed to help poor families pay for post-secondary technical and vocational studies.
IFC’s project with DuocUC, a higher education institution in Chile, and Banco de Crédito e Inversiones, one of Chile’s largest banks, will enable more than 15,000 students to finance their post-secondary education with long-term competitive loans.
Guy Ellena, IFC Director for Health and Education, noted, “This student loan program not only increases access to higher education and expands career choices; it also addresses the important social need of opening up opportunities for students from underprivileged backgrounds, regardless of their ability to pay. In addition, it will boost the number of qualified professionals in the labor market—a priority for the Chilean government.”
Ellena added that IFC is actively pursuing similar projects in other countries and that student loan programs are a key component of the Corporation’s education strategy in Latin America, Sub-Saharan Africa, Asia, and the Middle East and North Africa.
The project in Chile is expected to originate loans totaling 27 billion Chilean pesos (about $51 million) over several years. DuocUC students enrolled in any of its professional or technical careers will be able to cover the full cost of tuition and will be offered an attractive interest rate, with repayment terms of up to seven years after graduation.
Risks will be shared between DuocUC, Banco de Crédito e Inversiones, and IFC. DuocUC will assume the first loss risk of the portfolio of student loans, while IFC and BCI will each cover up to 10.13 billion pesos ($19.2 million) of senior risk. BCI will assume the role of fund provider and administrator of the loan portfolio.
Marcelo von Chrismar, Rector of DuocUC, said, “This program is a key element in our strategy to target students who require financial support. It can help meet the educational needs of many applicants to DuocUC—given the additional incentive of better employment opportunities after graduation.”
The project also demonstrates the institution’s commitment to good citizenship and corporate social responsibility, especially in addressing some of the social gaps in Chilean society, such as equal access to education regardless of financial status.
Yolande Duhem, IFC Senior Regional Manager for the Southern Cone in Latin America, added, “IFC is delighted to work with DuocUC and Banco de Crédito e Inversiones in such an innovative project that will enable 15,000 Chilean students pay for post-secondary technical and vocational education. Increasing access to long-term finance for underserved segments in association with the financial sector is a key dimension of our strategy in Chile.”
IFC’s Student Lending Is Unique
IFC’s student loans programs are unique and unlike anything done by other multilateral organizations or development finance institutions, say IFC experts.
In 2006, IFC partnered with universities, foundations, and financial institutions in Mexico and Indonesia to develop sustainable, market-driven, risk-sharing facilities for student lending. The Corporation played a major role by getting financial investors, tertiary educational institutions, and (in the case of Indonesia) a philanthropic foundation to work together in mitigating risk, bringing expertise and brand name, and leveraging their contributions many times over.
As with DuocUC, the loan programs are designed in such a way that the educational institution or private foundation assumes the first loss position in the risk sharing structure up to a pre-agreed limit; IFC and the commercial bank involved share subsequent losses. IFC takes the lead role in structuring the programs.
By introducing affordable and commercially viable student loan programs to local financial markets, the projects demonstrate the profitability of education financing and the creditworthiness of lower- and middle-income students with technical and vocational degrees.
IFC's three most recent student loan projects—in Chile (DuocUC), Mexico (Finem Edu Loans), and Indonesia (Sampoerna)—are the first private sector-sponsored student loan facilities of their type in each of the countries, with DuocUC and Sampoerna specifically targeting lower-income students and Finem focusing on middle-income borrowers, while expanding coverage to lower-income students.
All the programs were launched on market terms and at rates that are competitive with government-sponsored programs. IFC is currently developing similar market-driven risk-sharing facilities for student lending in other countries.
In the longer term, portfolios of student loans can be securitized and traded to local institutional investors, creating a new asset class.
Health and Education Department, IFC