A new industry has emerged to issue loans to international students attending select universities.
The loans carry higher interest rates than those domestic students would be eligible for, but company representatives say they fill an unmet need for international students, who are not eligible for federal student loans and typically can’t get private loans from American banks without a U.S. citizen or permanent resident cosigner. Colleges and universities commonly offer little by the way of scholarships for international students at the undergraduate and master's level.
“You often hear about that international student who has a Ferrari or a Mercedes parked in the parking lot,” says Emmanuel Smadja, the chief executive officer of MPOWER Financing, a Washington-based company incorporated as a public benefit corporation that lends money to international graduate students and upper-level undergraduates attending more than 350 colleges or universities in the U.S. and Canada. The company says on its website it chooses the institutions whose students it will fund "based on a proprietary scoring algorithm that considers a variety of data points such as graduation rates, post-graduation employment rates and alumni earnings."
“There’s this stereotype that international students are wealthy and don’t need any financial support, and part of that is availability bias,” said Smadja. “You notice that shiny car in the parking lot; you don’t see the other international students who are walking to class, who are skipping meals, who are wondering how they are going to pay for their second year of grad school.”
“What companies like us are doing is trying to develop a market by offering products that don’t traditionally exist for these customers,” said Sam Weber, the chief sales and marketing officer at Prodigy Finance, a London-based company that offers loans to international students attending graduate programs in select fields (business, engineering, health sciences, law and public policy) at more than 500 institutions worldwide.
"We feel like there’s a bit of a misconception, particularly among U.S. university administrators, that international students are, air quote, self-funded, which realistically means they’re finding some way to finance this domestically in their home country," Weber said.
“What’s different about our model are a couple of things,” Weber continued. “U.S.-regulated banks that have a student lending arm are typically unable to lend to non-U.S. students unless they have a couple of particular characteristics, one of which would be a [U.S.] cosigner. The other is for that same student who might otherwise borrow from a bank in their home country, we don’t require collateral. The whole premise of the offering is the talent is proven for us by admission to some of the best programs in the world. We’re willing to lend based on that potential and the jobs students will get after that.”
"There should be financial access to college regardless of how poor your family is or where in the world you come from," said MPOWER's Smadja. "Part of the American dream is to level the playing field so it's about people's competence; it's not about their credit history in the U.S."
MPOWER and Prodigy have both attracted venture capital funding and financial backing from major institutional investors. In August, MPOWER reported that it had secured $100 million in loan financing from Goldman Sachs to bring its total loan financing capital to $200 million. Financing for Prodigy’s loans comes from Deutsche Bank, Goldman Sachs, M&G Investments and Sumitomo Mitsui Banking Corporation. Other investors include universities and individuals who participate in a bond program distributed by Credit Suisse.
The Fine Print
There’s no question the loans for international students come with comparatively high interest rates, certainly in comparison to the 6.08 percent rate that domestic graduate students pay for federal unsubsidized loans, or even the 7.08 percent rate for Direct PLUS loans.
MPOWER offers fixed interest rates. After fees are taken into account, the maximum annual percentage rate for international graduate student loans is 12.94 percent, while the maximum APR for undergraduate student loans is 14.98 percent. The company offers various discounts for repaying loans through automatic withdrawal, making six consecutive on-time loan payments through automatic withdrawal and reporting proof of graduation and employment. International graduate students who qualify for all three of these discounts would be eligible for a loan with an 11.59 percent APR, while international undergraduate students who qualify for these discounts could get a loan with an APR of 13.63 percent.
Prodigy offers variable rather than fixed interest rates, which means that unlike fixed rates, which stay the same, the rates are tied to a benchmark figure that is subject to change. In Prodigy’s case, the benchmark is the three-month London Interbank Offered Rate (LIBOR).The company’s student loans range from five to 8.5 percentage points over the three-month LIBOR rate: at the current rate, after fees are taken into account, the APR for an international graduate student loan with a 10-year repayment term range from 7.74 to 11.54 percent.
“Our perspective is we find ourselves to be offering the most competitive rates that these students have access to,” says Weber. “What we feel great about is we’re able to help people because they couldn’t collateralize a loan of this size” in their home country.
"We compare it to the options in the home country," said Smadja. He said that students are often shocked by how low the rates are compared to what they can access in their home country, often with a home as collateral.
The companies differ in relation to which students they fund and where, with Prodigy being focused only on graduate students studying select professional fields, while MPOWER funds both graduate students and juniors and seniors and will in principle fund students studying any field.
Prodigy has more lending restrictions based on the borrower's state of residence or country of citizenship, but it funds a variety of students who attend leading institutions in countries around the world, not just the U.S. and Canada, as in the case of MPOWER. Prodigy offers a refinancing product in addition to its student loans.
MPOWER reports that 76 percent of its borrowers come from emerging markets, and 53 percent have family incomes below $15,000. Seventeen percent come from families with an annual income of less than $2,500. While slightly more than half of all international students in the U.S. come from China and India, MPOWER reports that less than a quarter of its borrowers come from those two countries. Four percent of its loan recipients are undocumented immigrants with Deferred Action for Childhood Arrivals status (another group of students who do not have access to federal loans).
“The bottom line is we need that talent,” said Smadja, the MPOWER CEO. “Socioeconomic diversity is really important. Geographic diversity is really important. We can’t just have the majority of international students coming from two or three countries, or where they have healthy government scholarships.”
A report from Prodigy this summer said that while China, India and Brazil account for the largest percentage of its consumer base, the company has seen significant year-over-year growth in loan applications from places like Cameroon (up 206 percent), Morocco (up 155 percent), Ghana (up 154 percent), Honduras (up 112 percent), Lebanon (up 94 percent), Nepal (up 89 percent), Malaysia (up 70 percent), Pakistan (up 70 percent), Poland (up 66 percent) and Romania (up 62 percent).
The Students' Interests, and the Lender's
Analysts of the student loan industry say what MPOWER and Prodigy offer is unique.
“It’s really challenging for international students who don’t have residency, who don’t have U.S. credit history, who don’t have a cosigner who is a U.S. citizen or permanent resident, to get any kind of college funding,” said Anna Helhoski, a lead writer and student loan authority with the consumer finance publication NerdWallet. “It definitely comes with some drawbacks. If you do a side-by-side comparison, their rates are definitely going to be higher. There definitely are some more limitations in regards to what you have to do to get the loans, in terms of what you’re studying. That’s what they’re going to be looking at.”
At the same time, Helhoski said of the rates, “They’re not outrageously high. By student loan standards, they’re high, but they’re better than the alternative, which might be a loan from a home country that could involve putting up collateral, such as a house. It’s better than a personal loan, which is definitely going to be a higher rate.” She noted as well that the companies offer additional services. Both Prodigy and MPOWER offer career placement services, for example. They also issue letters of financial support that can be used during the visa-application process.
Sandy Baum, a senior fellow at the Urban Institute and an expert on student loans, said the emergence of this type of industry is not surprising given the lack of other financing options for international students. But she said that the loans seem risky for the lender because of the possibility that a student could leave the country and never repay.
"I'm a little worried about how the business opportunities and the student interests may jibe," Baum said.
“Students certainly would want to know when do payments start, how much is the rate going to vary, what happens if their income is lower than expected, what happens if they go back to their home country and potentially have a very low income by U.S. standards," Baum said. "The thing that concerns me here is I would want students to think about all those things. I suspect for many students it is not a good idea, but I would not say that it is predatory on the part of the lender. It might just be really hard to find terms that could be profitable to the lender and would not put the students at risk.”
Both MPOWER and Prodigy report default rates of less than 1 percent. “We don’t want to give them unsustainable debt,” Smadja, the MPOWER CEO, said. "We’re providing a student with $30,000 or $40,000 or $50,000 for a degree that will pay off and be sustainable financially whether in the U.S. or overseas.”
MPOWER has a minimum loan amount of $2,001 and a maximum loan of $50,000, over two academic terms. Prodigy’s minimum loan amount is $15,000 per academic year, while its maximum loan amount is the cost of attendance set by the institution; Prodigy’s maximum lifetime limit for student loans is $220,000. MPOWER’s average loan amount is about $20,000 per year, while Prodigy’s is $40,000.
As for where students go after they graduate, “the model has been built to take that into consideration, so we consider where the student ends up,” said Joel Frisch, the head of Americas for Prodigy. “We do find that about two-thirds of our students return to their home country, although we track that over a five-year period of time.”
At MPOWER, Smadja said about 80 percent of borrowers end up staying in the country where they study.
Both companies are young and don't have a lot of years of data behind them. MPOWER was founded in 2014 and has issued more than 3,000 loans to date, according to Smadja. Prodigy was founded in 2007 and had issued about 15,000 loans through the start of August. Frisch said the company expected to issue approximately another 8,000 loans this academic year.
Brendan Cantwell, an associate professor in the department of educational administration at Michigan State University whose research focuses on higher education organization, finance and comparative higher education, said the lending model raises questions for him about financing for talented students coming from abroad.
“If this is a boutique sort of individualized industry linking investors to individual students who need capital to either stay in school or integrate socially in the country and these are people who are likely immigrants and likely contributors to the country, then I think there are two ways to think about that,” Cantwell said. “I think of people who are advocates of capital markets in education [who would say] this is solving an important social problem with benefits to the individual and to the country who's ultimately going to benefit from the presence of this person, and we’re privatizing the risk: this is a great example of the way markets solve social problems.”
“Another way to think about it, and probably the way I am more attuned to thinking about it -- but it’s certainly not the capital-T Truth -- is this reflects a public policy failure, that we are in a sense passively demanding talent whom we rely on to be our doctors and our engineers and our businesspeople from abroad and yet we are unwilling to create a policy frame that will allow them to be stable or live decently.
“It’s a pay-to-play situation,” he added. “You’ve got to be able to pay these really high interest rates to play, and yes, the individual student can benefit, maybe ends up staying in this country, maybe ends up with a great-paying job and it may be worth it to them individually. But the question is, is this the way we as a country want to integrate and support high-skilled immigrants?”