Education’s Buy-Down Option

WASHINGTON, DC – Last year was an important one for developing countries, if only because the world was reminded of the true value of education there. Indeed, Malala Yousafzai, the young Pakistani girl who spoke up for children’s right to go to school – even after surviving an assassination attempt by the Taliban – served poignant notice that not educating a child in the developing world is significantly more costly than doing so.

With education squarely in the spotlight, new trends are gaining momentum, many of them merging with “innovative finance” – a concept much beloved by development policymakers and practitioners in difficult economic times. In particular, the emergence of so-called loan buy-downs could encourage financing for education from reluctant donor countries.

A loan buy-down is a transaction in which a third party pays down part of a loan by softening its terms or reducing the principal outstanding, thereby releasing the borrowing country from all or some of its future repayment obligations. Because the buy-down is triggered by achievement of a pre-defined target, such transactions promote results-based financing, bringing about quantifiable reforms that otherwise might not have been realized.

Appropriately defined triggers thus address one of the main criticisms of international aid. They also encourage borrowers to invest in projects with long-run returns that may not be politically attractive, such as teacher training.