by Nick Leiber,
When Marcelo Mazzafera was accepted into the MBA program at Duke University’s Fuqua School of Business, he couldn’t afford the tuition and living expenses. He also couldn’t find financing in his home country, Brazil. Mazzafera ended up taking loans recommended by Duke for students who don’t have a U.S. co-signer or collateral.
The interest rate was steep—about 7.25 percent plus the three-month London interbank offered rate, compared with the 2 percent to 3 percent plus three-month Libor paid by fellow students with co-signers. When Mazzafera graduated in May 2018, he owed about $180,000 plus interest. Then he heard about a new refinancing product that could reduce his interest rate to 5 percent plus three-month Libor. “It’s not ideal, but it’s better,” says Mazzafera, who earns $150,000 annually at his investment banking job in New York.
Student debt refinancing is the newest product from Prodigy Finance, a business with offices in Cape Town, London, and New York that’s betting on foreign students with high earnings potential. As more students consider enrolling in postgraduate professional programs outside their home countries, the company is growing quickly, planning to raise staff headcount to 250 from 166 by yearend, says co-founder and Chief Executive Officer Cameron Stevens. Since its founding in London in 2007, Prodigy has helped about 14,000 grad students borrow close to $700 million and has expanded from business programs to engineering, law, and other disciplines. Of the slightly more than 1 million international students who studied in the U.S. in the 2017-18 academic year, nearly 429,000 studied business, management, or engineering, according to the Institute of International Education’s most recent Open Doors report.
From fall 2017 through fall 2018, Prodigy raised $1 billion, primarily in institutional debt facilities from banks including Deutsche Bank, Goldman Sachs, and Sumitomo Mitsui Banking. In November it unveiled refinancing plans for foreign borrowers such as Mazzafera living in the U.S. and the U.K. who’d taken student loans from other lenders. “There are international grads making an amazing salary, but they have $200,000 in student loans with co-signers or their family’s home in India is being used as collateral,” says Ricardo Fernandez, Prodigy’s head of new businesses and strategic partnerships. He sees refinancing as a way to reach more of the 260 million people living outside their native countries.
Prodigy’s thesis: Individuals of modest means who get into top graduate programs outside their home countries are good credit risks. But in many cases, particularly if they’re from a developing country, they can’t secure bank financing. Alternatives such as government loans and school scholarships exist, but access varies widely. “There’s a spectrum,” says Imran Kanga, director for recruitment and admissions at the Rotman School of Management at the University of Toronto. Countries such as India and China, which have hundreds of thousands of students abroad, have multiple options, while a nation such as Mongolia has nothing. “All of the other countries fall in between,” he says. Kanga believes more banks should fund foreign students: “It’s a profitable investment,” he says. “It’s a win for the bank, their economy, and for business schools like Rotman to attract talent from all over the world.”
Prodigy’s underwriting model pays more attention to earnings potential, while conventional lenders emphasize borrowers’ current income and assets. Clients borrow an average of $40,000 and pay 5 percent to 8 percent fixed interest, plus Libor, which is variable. Nearly 80 percent of Prodigy’s borrowers are from emerging markets, the company says; engineering is a key growth sector, especially among students from Brazil, China, India, and Russia.
Models like Prodigy’s make sense, says Stevens, especially considering the $1.5 trillion student debt crisis in the U.S. “If you are borrowing against your own earnings potential over your life for certain degrees at certain universities, there’s no issue,” he says. “Lending someone $150,000 to do a cooking course in Idaho makes no sense whatsoever.”
Stevens, a South African entrepreneur who couldn’t get a bank loan after he was accepted into INSEAD’s MBA program in 2004 in Fontainebleau, France, was convinced that a more accessible option—no co-signers or collateral required—would appeal to applicants. If you happen to have been born in San Francisco and are accepted into Stanford University, there are many sources of financing, he says. “But if you happen to come from Ghana or South Africa or Indonesia, your access to funds is completely different. This is purely because of structural issues; it has nothing do with you as a person. That’s fundamentally unfair and a really big problem.”
Businesses such as Prodigy are helping foreign students “who can’t really fathom the kind of debt we’re talking about in the U.S.,” says Tim Mescon, chief officer of Europe, Middle East, and Africa at AACSB International, an accrediting body and alliance of business schools. “They’re returning lending to where it began, which is really based on the integrity and quality of the individual. The traditional banking sector can’t do that and doesn’t do that. Circumventing banks is a massive opportunity.”
Entrepreneur Mike Davis is co-founder and chief investment officer of Mpower Financing, a public benefit corporation in Washington, D.C., that was started in 2014 with a mission similar to Prodigy’s. Davis also had trouble paying for his education. His parents had sold their home in Iowa and most of their possessions to put him and his sister through college after immigrating from Iran.
Davis’s 41-employee venture earlier this year surpassed $1 billion in loan applications and has lent to thousands of students from about 100 countries. In November it finalized a $100 million credit line from Community Investment Management, an impact investor in San Francisco. Unlike Prodigy, it lends to both undergraduate and graduate students, offering fixed-rate loans of up to $50,000 at about 8.9 percent to 15 percent APR. Foreign students he lends to default far less frequently than their domestic counterparts, he says. “It’s ridiculous—internationals getting loans get treated like second-class citizens.”