Access to education remains a challenge for many young people around the world. With the cost of education—specifically university-level education—rising globally, student finance is due for a radical transformation.
Thanks to software and financial technology advancements, the idea of a student finance revolution is plausible. One could argue that it is already happening. Some of these innovations involve artificial intelligence (AI) and blockchain.
Others use familiar technologies to create new tools that improve user experience and access. Others still use financial innovation to offer new products and services that make it easier for students to achieve their funding goals.
Given the need for change, let’s examine the tech-driven solutions reshaping student finance. We discuss how students can build their future with basic financial literacy and minimal investments. We also explore how new technologies redefine products like student loans, making them more affordable for those aspiring to higher learning.
Higher Education: An Increasingly Unattainable Goal?
Higher education has always been seen as the ticket to a better future. A college or university degree has been proven to command better salaries and set someone on a better career path. The prospects only increase with postgraduate education.
According to the National Center for Education Statistics, those with a bachelor’s degree earned 55 percent more than those with a high school diploma. Someone with a master’s or doctoral degree could expect to earn even higher. Master’s or higher degree holders exceeded their bachelor’s degree-holding peers’ earnings by 21 percent. Given these significant income gaps, students are incentivized to complete higher levels of education.
However, the cost of higher education has soared. Student loan debt in the US ballooned to a staggering $1.74 trillion in 2023. About 54 percent of bachelor’s degree holders graduated with student debt as of 2021.
Moreover, the average student loan debt per household is $55,347.
When divided by debt type, the loans typically increase with higher levels of education. For example, a bachelor’s degree holder typically owes $29,100—the amount of debt spikes among graduate school students, with an average debt of $77,300.
Average MBA student debt is $51,850, while law school debt typically goes up to $132,740. Medical school debt is among the highest, averaging $206,924.
Traditional lending institutions need to catch up in providing affordable and flexible options. Despite the government’s best efforts, many graduates have been saddled with debt for decades.
Disruptive Fintech Solutions for Student Finance
Where traditional institutions fail, fintech may have the answer. Financial technology and its adjacent innovations allow a degree of flexibility and experimentation not possible with traditional financial models.
The following are the technologies promising to disrupt student finance, providing potential relief for student debt holders and better financial options for those aspiring for new ways to manage their money as they navigate higher learning:
Blockchain DeFi solutions: An alternative way to pay off student debt
Blockchain is an umbrella term for the applications of a technology based on distributed networks, cryptography, hash functions, immutable ledgers, and smart contracts. These technologies allow blockchain to track and verify transactions without requiring a trusted third party like a bank.
While initially known as a component of Bitcoin and cryptocurrency, blockchain has since branched out into other uses. Smart contracts enable almost any transaction on a decentralized network.
Such contracts resemble any regular human agreement but can be handled anonymously between parties that don’t know each other. This new type of secure agreement guarantees the delivery of a token or currency once certain conditions are met.
Hence, blockchain smart contracts are the perfect tool for loan agreements across decentralized networks. By leveraging blockchain, online lenders can generate tamper-proof records of loan agreements. They can also track payment histories, verify borrower identities, and enhance trust and transparency in the lending process.
Moreover, blockchain-based smart contracts enable collections. They can automate loan disbursements and repayments, reducing administrative costs and minimizing errors.
Blockchain is a valuable yet less-explored alternative for paying off student debt. Some students have already considered it an option to help pay off student loans. It is possible to take out a loan through decentralized or DeFi lending platforms and use it to pay off student loans. You can then work on paying off the new DeFi loan, which may offer flexible or better terms.
And no, the process does not involve selling crypto gains or assets, which would mean you have to pay taxes on profits. Instead, it involves delving into decentralized finance (DeFi) and understanding how DeFi loans work.
Understanding DeFi loans
As the name implies, decentralized finance or DeFi loans don’t involve traditional banks. The conventional banking system does not govern them, allowing them to offer lower interest rates. They also don’t affect the credit score of the borrower. In addition, at least in theory, they could be held indefinitely.
You can use various digital currencies to make a DeFi loan. To participate in such loans, you will need to understand stablecoins. Stablecoins are cryptocurrencies tied to a different asset or currency—most commonly the US dollar.
To take out a DeFi loan, the borrower must deposit crypto assets as collateral. DeFi loans are often overcollateralized, so borrowers must deposit assets worth more than they borrow. This practice of over-collateralization is used to cushion against volatility in crypto markets.
The percentage of overcollateralized assets depends on the requirements set by the lending platform. Think of it as putting down $100 in one crypto asset to borrow $75 worth of another crypto asset. In many cases, the borrower receives the amount in stablecoins. These stablecoins can easily be exchanged for US dollars in platforms that allow this transaction.
The student borrower can use the redeemed dollar amount to repay the student loan debt. Subsequently, the borrower focuses on repaying the DeFi loan to reclaim the crypto collateral. Such loans are suitable for those who already have existing crypto assets. They are also ideal for those willing to explore new options to lower the cost of borrowing.
While DeFi loans have their benefits, they come with risks. Based on the terms of a blockchain smart contract, crypto collateral can be liquidated if its value drops below the loan value. Bitcoin, for example, is highly volatile. Even if it enjoys a high market value and liquidity, it can fluctuate wildly in the short term. If the borrower chooses to use BTC as collateral, that BTC could be lost if the price dips too much. However, the liquidation risk is lower if the collateralized asset’s price appreciates.
Another risk to DeFi is the issuing platform itself. Borrowers must ensure they are using a secure and highly trusted platform. In some cases, decentralized communities hire security firms to review loan protocols’ code to guarantee the safety of their funds.
AI-enabled loan offerings
Artificial intelligence (AI) applications these days seem ubiquitous. In the lending landscape, AI plays its role by enabling personalized recommendations in loan offerings. Using data from financial profiles, it analyzes income, credit history, employment status, and other variables to evaluate creditworthiness. AI also uses borrower information to create loan terms.
With AI, lenders can offer more competitive interest rates for students. Rather than providing a one-size-fits-all loan, they can offer flexible repayment options. AI can also help streamline the loan application process. It can reduce paperwork and time for approvals. Such benefits can reach students constantly looking for affordable, accessible, and flexible loans.
Accessible and affordable refinancing through fintech
Fintech platforms and apps offer another avenue for student finance innovation. From digital banking to budgeting apps and lending platforms, fintech uses the power of software to create user-friendly experiences and provide more accessible options for students.
Fintech apps offer high-yield savings and check accounts with minimal balances to help students save. Budgeting platforms help borrowers manage their money to make room for essentials and loan repayments.
The student loan refinancing market is being disrupted by software. New platforms are leveraging technology to connect borrowers with a network of lenders. Such networks facilitate competitive refinancing, matching borrowers and lenders for the best possible deals. They offer loans tailored to unique financial circumstances.
SoFi, a leading financial services company, offers student loan refinance solutions that empower borrowers with favorable terms and lower interest rates on private loans. By signing up online, students can combine some or all their loans into a single loan with new terms. Due to their agile business model, online lenders can afford to cut their fees to zero, making them less expensive.
The lender pays off the old loans, and you can now focus on the new online loan, which may reduce your borrowing costs or offer a more extended repayment period that reduces your monthly payments.
A Flexible Financial Future: Technology Offers Out-of-the-Box Solutions
Students grapple with numerous financial challenges, including the unaffordability of higher education. The rapid advancements in financial technology are creating new solutions for saving, budgeting, investing, and debt management.
AI is beginning to offer personalized financial solutions. Blockchain enables secure transactions over decentralized networks, allows students to own alternative investments, and enables alternative lending through crypto collateralization.
Fintech platforms are making financial services more accessible and attractive to new users. Digital banking with high-yield accounts allows student savers to earn more as they navigate the formidable challenges of paying for college. Online lenders offer low to zero fees. They help borrowers merge existing student loans into a single refinancing option, which could offer better terms, lower interest rates, or a more extended repayment period.
With continuous innovation, students are gaining access to new services and solutions that help them save and allocate their money optimally. To be financially free, borrowers can finally look to tech-driven options. They edge out traditional players by offering flexible and unconventional solutions to old problems.
