Financing Education with Tokenized Loans
What is the Value of a Good Education?
Education — like all impact — has intrinsic value. This is something that most people agree with. Parents who spend fortunes educating their children. Companies who pay premium for an educated workforce. Governments who (should?) subsidize education. And of course, all of us who end up benefiting from our own education.
In fact, there is no other variable that correlates stronger with wealth/ predicted income than education — anywhere in the world. Yep, your mum was right — education equals wealth.
This is why the student loan is something that has been around for a long time. If you don’t have the cash, someone lends you the money for your education, and then, as you reap the fruits of said education by enjoying better income, you pay back, with or without interest.
Yet, unless you are fortunate enough to having being born in one of the very few places where this arrangement is institutionalized — for better or worth — accessing education funding is going to be very hard. There simply isn’t the infrastructure to service such loans. Banks/ financial institutions — and even family members that would be willing to lend — have no ways to follow students over long years. Once the cash has been given, they have no way to influence how it will be spent, never mind-being able to collect payment rates. Such credits end up being very expensive to service, and eventually unattractive as investments.
Then there is the other problem — in the communities where investments in education would have the biggest impact, there isn’t any cash available. So people don’t get the education they could, which keeps them poor, which keeps the community poor. It’s a depressive and unnecessary cycle that repeats itself across the world in low income communities.
All of this can change and it should change. Here is how we can structure education loans that are investable and trackable using Proof of Impact:
Let’s say that one year of primary school for a girl in a community in Cameroon would cost 200 USD and that if we could raise funds to put 1,000 girls in this community through school every year we would break that cycle in that particular community and achieve well-documented positive socio-economic effects of educating girls. This would be our theory of change, which we can reflect in a quality white paper.
The 200 USD that it takes for one girl’s year education can be divided in 1,000 tokens, priced at USD 0.20 each, meaning that our education token for this community will have a circulation of 1,000,000 and an initial market cap of 200,000. Exactly what we need to cover the cost of educating 1,000 girls in that specific community.
Now we make these tokens available to investors (and donors) — small and large — worldwide. Unlike current impact investment instruments related to education, these tokens would be accessible to any investor — even those that would only invest a few dollars i.e. a fraction of the cost to educate a girl for one year. It shouldn’t be that hard to raise 200K.
Now, each token will be governed by a bunch of simple smart contracts:
- When the girl completes clear milestones, installments of payments are released into her wallet; Such milestones can be proof of minimum attendance, or passing exams, or completing an assignment;
- As the payments get released, tokens are created and transferred into the private wallet of the investors — they get 100% attribution of milestones funded;
Over time, girls receive payments, investors accumulate tokens and everyone can follow on the project’s dashboard how all the students are doing, and what amounts were paid and amount must be paid back later;
Eventually, as the girl graduates and accesses higher income, a % of her income will be used to pay back investors as agreed. This can also be handled by smart contracts.
The Local Coop
There are several ways this can be operationalized. My favorite is the use of a cooperative/ community structure in the community itself. While cooperative structures have been around for centuries — I believe they will find an entirely new way to be relevant again with the emergence of blockchain technology. I think community cooperative structure could become powerful mechanisms for better and more relevant community services (including insurance) and they could become key tools in receiving community funds — either as payments for community output or simple donations.
They would use such funds to reward community impact, subsidize services, aggregate payments and risks, provide a basic form of KYC for the girls/ girls’ families and issue the wallets needed to verify & receive payments.
With our tokenized education loan, local cooperative structures would aggregate and distribute loan payments and they would automatically deduct payments once the girl completed education and the family increased income. This could be done through (local) tokens but also through balancing out other services/ subsidies that the cooperative structure aggregates.
Above all, there will be a strong community incentive to ensure that all individual debts are paid, as defaults in payments will harm the community in the long run — because investors track milestones in real time, they will dis-invest communities with high default rates and simply choose to invest in other communities.
While there will always be defaults on any loans, this arrangement will probably reduce the risks of defaults significantly and make education loans more serviceable. The tokens held by investors are liquid and can be sold on a secondary market (i.e. any crypto exchange).
Finally, if traditional donors want to invest in education, they always have the option of buying education tokens off off investors, providing essentially a risk underwriting.
- The community benefits from the socio-economic correlation with education and increases its resilience;
- The girl gets access to education funding;
- Investors get to invest in impact while making a profit;
- Impact investment is accessible to regular joes;
- Donors can invest in successful education while sharing the risks;
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