College Loans - Lumni Allows You to Pay Only What You Can Afford

Here's a brilliant notion: let college students pay back their college loans based on a percentage of their actual income. Lumni has figured out how to do this -- while earning a profit for investors who make the loans -- relieving students of the stress of making exorbitant loan payments after graduation and giving them some flexibility in how much they must earn. 

Summary: Lumni gives colleges loans to students who agree to make the amount of their monthly loan payment a percentage of their salary for a pre-agreed number of months. Students who land jobs with high salaries after they graduate may end up paying more than the value of their loan.

But this compensates for other students whose payments may fall short of their loan amount (plus interest) because they are earning lower salaries. The idea works: altogether, Lumni’s loan pool has earned an average 9 percent interest for its investors.

Lumni plans to double the number of its student loans in 2009 from 150 to 300. After pioneering this idea in Colombia, Chile, and Mexico, Lumni will expand to the United States this winter where it will set-up several loan funds that are targeted to investors’ particular interests, such as a funding students at a graduate school business program in Pennsylvania, or students with physical disabilities.

Lumni got started in Latin America because it is very difficult for students there— as in other developing countries—to get financing for education. Frequently only the very wealthy can afford to go to college. Developing countries lack the strong financial sector and institutionalized banking systems that support the student loan institutions which provide financing for education in developed countries like the United States.

The founders of Lumni—two business school graduates from Colombia—wondered, what if a college loan fund didn't need the infrastructure of a traditional banking system? They turned to an idea expressed by classical economist Milton Friedman as a footnote to a book he published in 1945.

At the time, the idea—that students could sign human capital contracts to finance their education, pledging their future income—seemed outlandish. But Lumni found a way to make it work. And besides directly benefiting students who need help financing their education, this investment in education boosts the economies of both developing and developed nations by putting resources into training a skilled domestic workforce.