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😲 What no one tells you about student loan
Published 2 months ago • 3 min read
Higher Education, like it or hate it, you are going to need one and it’s not cheap.
That’s because today, I’m talking student loans.
You might have taken out one, or are planning to take out one but do you know how it actually works? And how it can also be an incredibly lucrative way of generating profit and make a positive impact?
Ironically, the school doesn't teach you this but we'll give you a run-down of it today.
But FIRST
If you are new, welcome to OCE’s weekly newsletter curated for the ambitious youth…here are some articles you missed from previous weeks:
Carmina Bayombong, Forbes 30 Under 30 honoree in the finance & venture capital category, was OCE cohort’s co-creation partner from the Philippines last year.
Born to a middle-class family, Carmina pushed hard to complete her engineering degree from the Philippines’ national university. Through part-time jobs and multiple scholarships, Carmina graduated magna cum laude.
During her time in college, she witnessed countless Filipino youth struggled to pursue higher education because of a plain lack of funding opportunities for the unbanked.
Unlike many western countries, Philippine does not offer a federal student loan program and this in turn perpetuates the cycle of poverty.
“I wanted to build a company that would provide education access to Filipino youth at scale.”
So what’s her solution?
She started small, taking out a mini business loan as startup capital, disbursing it as a micro loan to 12 students as an experiment and to collect initial data.
This data is then used to develop a credit rating model of individuals who do not have a credit history. This innovative screening algorithm is what sets them apart from other lenders on the market.
To date, InvestED has disbursed a total of $1.6M+ USD of loans to unbanked, low-income students all collateral free and each loan generates ~30%+ of annual return in the form of interest repayment to the company.
Investing in future talents really pays off. Now the company plans to expand their offering to other Southeast Asian nations.
The WINNING business model
With a look under the hood, y’all can see why their business works so well.
InvestEd’s lending model is relatively standard—they take out loans from institutions at the market rate, assuming risk by lending it to the broader market with a margin added on top in the form of interest repayment and processing fee (origination fee).
They opted for this tried and true business model paired with an innovative screening algorithm. Winner of a combination.
The standard student loan lending model
#1: Easy(ish) upkeep. Huge demand means no need for marketing. In fact, InvestED haven’t even partnered up with schools, people come to them straight by word of mouth!
#2: Low overhead, big margins. Other than repaying lenders at market rate there are no other large expenses in their business. And with a solid screening process in place, the company achieved an impressive default rate of <10% bringing their net profit to 20%+.
#3: Social Impact. To date, InvestED has served 3000+ unbanked low-income students in the Philippines by providing collateral-free education loans.
Carmina’s story is truly inspiring, and it fully exemplifies the power of financial literacy. Particularly, smart use of “debt”.
In fact, "debt" is the go-to tool that big private equity firms like Bain Capital use to accumulate wealth and accelerate growth. Just like InvestED, these PE firms borrow money from banks at market rate. But instead of lending it out at premium, they use this capital to buy out established businesses, restructure the organization to make them more profitable, then selling the biz for a big profit. This whole deal structure is called a Leveraged Buy Out (LBO).
This is also why we use mortgages to buy houses. :)
How private equity uses "debt" to build wealth
So now you see why as a future business founder (big or small), you must have a basic understanding of finance, such as:
Credit Building
Lending Terms
P/L Statement
Sales Forecasting
Discounted Cash Flow
Sounds foreign? Don’t worry, OCE have got your back. We will be co-creating with another mission-driven founder and dive right into the art (and science) of financial modelling.
Sorry mom. Not all debt is bad…as long as you understand finance :)
Hold up — Have you applied to OCE2024 yet?
Changemakers, buckle your seatbelts.
We’ve been teasing this for a few months… Now, it’s finally here:
Inside: Case study and interactive exercises led by Silicon Valley experts + co-create with ASEAN founders + build with a network of ambitious youth. Check it out.
PS. This summer, we are going to tackle pressing global issues and drive innovation in regions where it is needed the most. Want in?
We run a summer cohort for ambitious youth (high school and undergrads) to work directly with world-class founders while learning from Silicon Valley leaders. Check out our info session recording.
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