Pool Your Student Loans to Build a Frat House
This article imagines how an organization could raise capital for real estate to house college students by pooling students’ access to guaranteed government loans. It is inspired by the Korean system of Jeonse.
“Jeonse (전세), also known as Key Money Deposit or Key Money, is a real estate term unique to South Korea that refers to the way apartments are leased. Instead of paying monthly rent, a renter will make a lump-sum deposit on a rental space, at anywhere from 50% to 80% of the market value.”
Jeonse originated when Korean landlords lacked access to banking capital, so they raised capital from residents. Now that banking capital is more readily available in Korea, Jeonse is dying out. But we can imagine how a similar system could be used in America where students have guaranteed access to capital via government student loans.
I’m thinking of situations where a capital-constrained organization with limited access to bank loans invests in real estate to house college students with access to government loans. That could include:
- College students who want to buy a house for their fraternity or sorority, without a capital endowment
- A newly formed, capital-constrained college buying an existing college campus
- A new residential community formed to house online college students
The most typical approach when raising capital for housing is for the housing developer to use a bank loan. The developer buys the building with a mortgage loan and charges rent to cover the payments.
While uncommon in college housing, another common real estate financing scheme for shared housing is a condominium. In a condominium, residents buy shares in the building. The table below contrasts typical rentals, condominiums, and Jeonse rental.
|Monthly Rental||Condominium||Jeonse Rental|
|Capital from developer||High||Low||Medium|
|Capital from residents||Low||High||Medium|
|Capital risk for residents||No||Yes||No, if landlord is insured|
|Control of property||Centralized||Decentralized||Centralized|
Undergraduate students in the US can borrow about $10,000 per year in federal student loans, plus other money they can borrow via private student loans. The average student who graduates with debt is $30k in the red by the end of college. Current interest rates on federal loans are 2.75% per year.
Imagine a sorority wants to buy a house with space for 50 sisters. Jeonse or “Key Money” of $10,000 from each student’s federal loan eligibility (repaid when they move out) would raise $500,000. If each student could muster $40,000, they could pay for the whole house in many college towns with the $2 million raised.
That sounds steep for the students, but if the venture were securely backed, the students would be guaranteed to be repaid once they left the housing. How much would interest cost? Assuming 4% average interest rates over 4 years of college, a student who borrowed $40,000 as a freshman and repaid it after senior year would pay total interest charges of $6800, or $142 per month.
Obviously, food and maintenance would raise the monthly living cost beyond $142, but it’s not too shabby. Four years in my undergraduate dorm, Tarkington Hall at Purdue University, costs $302 per month + food. It’s also worth noting that the $142 per month could be paid after graduating since student loan payments are typically deferred while one is still enrolled in school.
A system where college freshman start off by lending $40,000 for housing might sound elitist and impractical…and maybe it is. Or it could be a creative way to fully leverage the egalitarian access to credit that college students almost uniquely have. The elitist bit is perhaps assuming the students don’t need their loan eligibility to pay for tuition and food. (Jeonse could pair well with Income Sharing Agreements, where student loans go unused.) As a silver lining, it neutralizes the possibility of students irresponsibly burning through loans they don’t really need - because all their loan eligibility is tied up in their housing.
This idea is incomplete at best…but think of the possibilities! :)