Website: https://smartloan.github.io/smartloan-page/
https://www.youtube.com/watch?v=qnIUb5pemOw
dApp: https://github.com/SmartLoan/celo-dappkit-pineapple
Contract: https://github.com/SmartLoan/celo-hackathon-smartloan
ID: https://github.com/SmartLoan/indy-sdk (Fresh fork! Still working on it!)
SmartLoan is a Proof of Concept DeFi prototype for the future of education loan, attempt to solve the student debt crisis. The design of negative interest rates calculated based on monthly repayment principal, and positive interest rates based on the debtor's net income. This prototype might only be implementable in a fully digitized ecosystem. SmartLoan attempt to bridge between permissionless (Celo) and permissioned (Hyperledger) chains, providing a low risk, secured and collateral-free financial product that is wholesome to both borrowers and lenders.
SmartLoan is currently still in developing process and is a prototype of research on credit creation theory. It will be opperated accordance to Friendly Loan Agreement between leanders and borrowers.
The advancement of technology has caused increasing demand for skilled workers and credential inflation among professionals. This phenomena pushes every average people to pursue higher education in order to survive the paradigm shift of the world. Therefore, more and more people are getting into graduate schools, either in their early career or middle of their life. Student debt is not just a trillion dollar crisis in the United States. It is a worldwide problem. A group that oversees the government’s student loan system in Japan reported that it has been lending over $9 billion to students yearly since 2010. Similar situation happens in Africa and South America. At the same time, governments are investing less money in public colleges and universities. Although most of the countries (example: Malaysia and Singapore) raised the budget for public education, the larger percentage of the budget allocation is to develop the primary and secondary education. Financial support for graduate school and research is still very limited. As for the 40 countries with free graduate school tuition, for example in Germany. Although the system were praised worldwide to be a success, it cannot deny the fact that more than two-thirds of the annual funds invested in research came from industry. Companies either conduct research themselves or collaborate with research partners. Researchers are supported not only with job offers, but also with scholarships and prizes from corporate foundations. Although corporate funding are well received, such approach might raise a conflict of interest between corporate benefits vs scientific integrity. For various reasons, the debate of whether graduate school should be free or not, it still depends on countries’ government and policy makers. However, as a simple everyday person who eager to learn, research and advancing our skills, we came into a situation that there are limited financial services and products to choose in order to finance our education. The existing student loan packages are flawed and can be predatory towards the prospective students. Furthermore, the scholarships, sponsorship and grant awards that are available mostly reserved for young, elite or students from under-developed countries. This has put a limit to every average people who intend to learn, serve and contribute. Many existing meritocratic awarding system is flawed in a sense when the award is given to young elite few who are not financially poor. Although some studies indicates that student debt forgiveness could help borrower to recoup their lives. Their research does not include a study at implications that might happen to financial institutions or the overall economy if debt were to be forgiven. Debt forgiveness might discourage for-profit financial institution to abandon the education loan product and causes the financial support for the average students to be scarce and might negatively impact research and development activities. ## The Scenario Asvoria is a 37 years old Malaysian single adult who wish to pursue a PHD by research and she got an offer to do her research in a public university in United Kingdom. Her tuition fee total about £23k and need living costs total of £37k over 3 years. However, due to her age and average performance, she might not be eligible for most of the scholarships and sponsorships which mostly are looking for students who are younger, poorer and with better scores. Given the above scenario, Asvoria is looking for a loan to support her livelihood during her years pursuing her PHD in UK. The total amount of loan she’s taking is £60k for the duration of her study of 3 years. She’s not eligible for most education loan products in Malaysia. Therefore, personal loan came in place. However, it is impossible for any banks in Malaysia to provide a personal loan of £60k. Therefore, PHD is a wishful thinking for her even though she met the technical qualification and received an offer letter from the university. ## What if… What if there is an institution which would offer Asvoria a student loan? According to traditional loan calculator, Asvoria’s student loan repayment scheme will be:  ## The Crisis After Asvoria graduates, if she unable to find a job in UK, and must go back to Malaysia. She might get herself a job lecturing in Universities. The crisis begins when her salary was paid in MYR and the average salary of a PHD holder lecturer in Malaysia is about RM10k per month. Which is only about £1.787k per month. In such circumstances, she might not able to pay the monthly instalment of her education loan, which is about £0.97k. However, if she found a job in UK as an engineering PHD graduate, the average salary according to payscale, is about £43.6k (which is about £3.6k per month). Asvoria might still able to repay the loan by living a frugal life for 10 years. From the above example, we see that the system is flawed, in a sense that the financial product is not “future proof”. As future is something unpredictable, and it is a form of investment risk to the money lender and a financial risk for the borrower. Although in the United States, PSLF (Public Service Loan Forgiveness) program seeks to help those who work for public services and non-profit organizations. However, such system does not help people who choose to serve independently. For example, a graduated physician who want to open their own family clinic in a rural under-serve area, they may not qualify for PSLF. ## The Proposed Solution SmartLoan is a DeFi (Decentralized Finance) dApp that helps average person to generate smart student loan contracts. The uniqueness of SmartLoan is that the interest is calculated based on the debtor’s income instead of the fixed percentage of the amount borrowed. With dynamic interest rates, ranging from 18% to -5% based on the career path taken by the borrower.  The contract begins with total fund of £80k, only £20k will be released each year depends on the student’s performance. For a PHD by research, average year of study is 3 years. The contract is programmed to limit failure to achieve yearly milestone for maximum 2 times. This is to prevent circumstances when a student accumulates more debts but still unable to graduate with the PHD. If the student performs well and able to graduate less than 3 years, less debt will be accumulated. If the student graduate early, additional interests is charged since early graduation is a sign showing the student has higher potential and the additional interests is to reward the lender. For example: if the student able to graduate after first year of study, 1% of the reward charges is charged based on total amount of A1=£20k loan, which is £200 as a reward for the lenders, since the other T1=£60k is not released to the student, they will be returned to the lenders, and the student shall start repay the total amount of £20.2k by instalment. If the student failed to graduate and decided to drop out of the program, 1.5% of total released debts will be charged as penalty. For example: if the student decided to drop out of the program after year 2, 1.5% of A1=£40k will be charged, which is £600, as penalty for unable to complete the program. The student shall start repay the total amount of £40.6k by instalment. Penalty percentage (P1) and reward percentage (R1, R2) are variables that can be changed based on the student’s ability when the contract being formulated. P1 should be larger than R1, and R1 should be larger than R2 (P1>R1>R2) to encourage student to work hard for graduation, at the same time, compensate and reward the lenders when the total accumulated debt is less than contract total. ## The Repayment Scheme When the student dropped out or graduated, the next phase would be the repayment of the loan. At this stage, there could be various circumstance. SmartLoan introduce a loan interest calculated based on salary income, capital gain, bonuses and awards which the borrower received throughout the repayment period. The interest rate varied between a set of range pre-programmed in the smart contract. For the above example, the contract is programmed with instalment period of 10 years with 5 variable annual interest rates. Five Categories of Consequences As future of a person can be unpredictable, the SmartLoan attempt to provide solution that benefits both borrower and lenders through dividing the possible outcome of the borrower’s future prospect. The percentage of each categories can be pre-determined during the design of the contract. Given the above example, 5 annual interest rates were determined: -12%(C1), -6%(C2), 0%(C3), 6%(C4) to 12%(C5): Table 1: | Categories | Interest Rate | Consequences Description | |----------|:-------------:|:-------| | C1 | -100% | Facing difficulties living situations such as accidents that lead to permanent disability, critical illness or natural disaster… etc. Negative interest rate calculated based on monthly payment principal. | | C2 | -50% | When borrower works for charitable organization that serves general humanities or facing difficulties living situations such as accidents that lead to permanent disability, critical illness or natural disaster… etc. But still have total income is more than 5x monthly principal. Negative interest rate calculated based on monthly payment principal. | | C3 | 0% | When borrower is jobless, without any source of income or capital gain. | | C4 | 6% | When borrower gain source of income, capital gain, compensation and bonuses, working for a for-profit organization or own business. | | C5 | 12% | When borrower met the T4 category and reach certain social status, such as leading an organization. | ## Negative Interest Rates for Certain Circumstances The rationale for negative interest rate for C1 and C2 categories, is that tough times does not last forever, and a person has the freedom to serve either for-profit or non-profit organization though out different stages of life. The weakness of existing PSLF program demands a person to serve a non-profit organization for 10 years. Such requirement limited the freedom of career choice. Negative interest rates encourage borrower to seek a career in non-profit or charitable organization for duration of less than 10 years. During the time when borrower work for these organization, the negative interest rates reduces their total instalment they have to pay monthly. This give earlier reward for the borrower. In year 5 of their service, the borrower decided to change career to serve a for-profit organization for better salary package. Probably they want to get married or have children and need to earn more money to support their family. At this point, once the borrower begins the career at for-profit organization, the subsequent interest rate will be charged at C4 (6%). After 2 years (year 7th) the borrower gain major success in their career, and were promoted to be the chief executive officer of the company. At this point, the interest rate shall reach C5 (12%) category. ## Interest Calculation Based on Total Income The uniqueness of SmartLoan is that the interest is calculated based on the total income, including capital gain, compensation and awards received, instead of calculate based on the amount of debt. The rational behind this idea is to prevent exploitation by the borrower, and also prevent predatory debts. As the example above, Asvoria borrowed £80k with the payment period of 10 years, following table shows the difference between interest schemes: Table 2: | Income (Monthly) | Interest | Principal | Payment | Job Description | |----------|:-------------|:-------|:-------------|:-------| | £3600 | £216 | £667 | £883 | Working in UK with PHD position (IR=6%) | | £1787 | £107 | £667 | £774 | Working in Malaysia with PHD position (IR=6%) | | £1787 | -£333 | £667 | £334 | Working for international charitable organization (IR=-50%) | | £0 | -£667| £667 | £0 | Accident with permanent disability (IR=-100%) | | £3600 | -£333 | £667 | £334 | Accident with permanent disability, remain receive income of more than x5 principal (IR=-50%) | | £0 | £0 | £667 | £667 | 0 (IR=-50%) | | £10k | £1200 | £667 | £1867 | Become CEO of profitable company (IR=12%) | From the example above, it is clear that if Asvoria failed to land a job in UK as a foreign talent, she may still be able to serve her home country without immense burden of the debt. And with the negative interest calculated based on monthly instalment principal, borrower benefited from the providing service for charitable organization. While if borrower get into accident, the -100% interest rate is similar to a form of debt forgiveness scheme. However, this could be temporary, when borrower regain money making ability, they shall resume the loan repayment. However, borrower still benefited from the -50% interest rate in this case. This system is also profitable for the lenders, when the borrower receive promotion and advancement in career. When life is good and prosperous, the positive interest will increase based on the borrower’s total income. As shown on Table 2, when borrower achieved better career path, the amount of interest increased. This will benefit the lenders and it is a form of a good return of investment.  ## Smart Contract Design The SmartLoan ecosystem Take into consideration of mobile dApp users who will simply fill up a form, including their details and the loan parameters that is suitable for their financial requirment. On click of a button, the dApp generates a simple solidity smart contract, based on a designed templete. The small contract size is desirable in this case due to the hadware limitation of mobile devices. Thus, a SmartLoan core library (similar to OpenZeppellin, but will not be inheritable) that carries the basic functions of all the contracts is shared among all users.  Issues: 1. need to take into consideration on when the borrower fail to repay the instalment or cheating... etc. 2. circustances when borrower adopt one dollar salary. 3. default consequnces how should it be? how to enforce when a system is decentralised? 4. Still need to fix the case when debtor pays partial for over 12 time, should not trigger default. Contents will include: How lenders can get huge profit from successful debtors! I need help from those who are in financial industry! Things need to create: 1. App where users can modify the variables, will generate a spreadsheet that shows payment plan and total interest paid. This tool will help users to design their own contract suitable to their needs. 2. securitize the loans (pooling them up) 3. Flow chart for the repayment scheme. 4. Implement Hyperledger Indy for credential evaluation of borrowers. 5. Integrate with Remix IDE, some tool that enables borrower to retrieve their generated contracts, compile, and deploy. All done with mobile. ## This project is not something can be complete within one month as currently, the dapp is not fully working and it is just for showcasing the idea and concept. Demo flow: 1. User login 2. key in parameters: ** Amount to borrow ** Duration to repay ** University offer reference number 3. Confirmation, and will generate smart contract .sol based on parameter entered. 4. User compile and deploy the contract through Remix IDE. 5. Lender buy token, borrower receive celo, then Lender receive PINE token with specific contract address. 6. End of demo. Still under construction... discussion is on going with people who are more experienced in finance... Things will change... TBC... ## References https://learningenglish.voanews.com/a/growing-global-student-debt-fuels-search-for-solutions/5157022.html https://yaleglobal.yale.edu/content/student-debt-rising-worldwide https://www.makelemonade.co/student-loan-debt-statistics/ https://data.oecd.org/eduatt/population-with-tertiary-education.htm https://www.valuecolleges.com/collegecosts/ https://www.research-in-germany.org/en/research-funding/funding-organisations.html https://www.brookings.edu/blog/up-front/2019/11/12/five-facts-about-student-loans/ https://www.thebalance.com/student-loan-debt-crisis-breakdown-4171739 Support this project: https://gitcoin.co/grants/2020/smartloan asvoria@live.com Looking for team mates who wanted to solve this problem! I wanted to get a PHD, got the offer, but didn't get the funding... That's why I started this!