Mar 21, 2008

Emerging Opportunities in the US, Part II

by Tim Ogden

Two weeks ago we began looking at some emerging opportunities for high-impact philanthropy in the US. As the economic situation grows cloudier philanthropy has an opportunity to take the lead in helping those most vulnerable to economic downturns. Here are a few more ideas on where private philanthropy might have a big impact:

  * College Loans: The mortgage crises and the resulting ‘credit crunch’ is having an impact far beyond home-ownership. In addition it is hurting the majority of college students in the US who are financing their education through loans. Today, three major banks announced they were withdrawing from offering federally guaranteed student loans. A recent Washington Post article likewise noted that 12 lenders had stopped offering private student loans entirely. These dynamics imply that the cost of private student loans is likely to rise dramatically, and it seems increasingly clear that some students won’t be able to get loans at all, particularly those students who attend community colleges or lesser-known four-year schools. In response to this crises, there is an opportunity for foundations to work with colleges and lenders and use their endowments to guarantee loans, thus making more loans available at affordable rates. The opportunity is particularly compelling for three reasons: 1) Foundations will continue to earn a return on the money being used for the guarantees; 2) Very little money is likely to be actually paid out, as most loans will be repaid; and 3) The credit crunch is unlikely to last, so a long-term commitment is not required.

  * Payday Lending: Payday lending, short-term uncollateralized loans for those unlikely to have access to credit elsewhere, is frequently demonized by the press and politicians. Just this week the attorney general of Arkansas issued cease and desist letters to Arkansas payday lenders, claiming their practices violate Arkansas legal limits for loan interest charged. The contention in this case as in others is that these lenders prey on the poor and unfortunate, charging extortionate interest rates. Of course, the client base of payday lenders rarely have any other options. They cannot get credit cards or loans from traditional financial institutions. While there are plenty of anecdotes of unethical behavior by payday lenders, there is also evidence that the net effect of payday lending is positive, enabling the poor to navigate short-term financial crises. Dean Karlan and Jonathan Zinman found in a controlled experiment in South Africa that clients of short-term, high interest, uncollateralized loans fare better 6 to 24 months after the loan than those who do not have access to the loans. A Federal Reserve study of payday lending found that states who banned payday lending saw increases in consumer complaints about credit and bounced checks. Given the worsening economic outlook, it’s likely that more and more people will turn to payday lending. Here is a great opportunity for philanthropists to work with payday lenders to provide these loans at lower interest rates. A well-designed program could also provide much needed evidence on the upside and downside of payday lending, enabling a more rational policy approach to this issue.

  * Reducing Energy Consumption: A pressing non-economic issue that is confounding philanthropists is how to reduce energy consumption and therefore carbon emissions in the US. Most proposed programs—alternative energy, mass transportation—require huge sums and many years while carrying significant risk of failure. In the most recent Technology Quarterly, the Economist profiles some new gadgets that provide real-time energy usage information to homeowners. As the article notes, individuals are much more likely to change their energy-consuming behaviors when they get real-time information. It’s a lot easier to remember to turn off the lights when there’s a gadget showing you how much money you’re spending minute-by-minute. While these gadgets exist, they don’t seem to be available yet in the US and tend to still be expensive (the Wattson costs about US$300; the Owl around US$100). For relatively low cost, funders could underwrite an experiment to provide these real-time meters to households and measure the impact on energy use. Given that real-time gas mileage meters in cars tend to reduce fuel consumption by 10 percent, this seems an outstanding opportunity for immediate climate change impact.