Student loans startups: coming of age
The cost of higher education has been on an expensive upward trend for decades, making access and affordability of education financing more in demand than ever. A new generation of startups are reinventing student loans, and even disrupting educational financing structures themselves.
Regardless of geography or degree type, most students rely on student loans and financial aid programs to attain third-level education. In the last decade, degree costs have increased 14%, while the inflation-adjusted debt for four-year university student’s debt increased by 45% in the same period, making student debt relief is an issue pressing enough for President Joe Biden to take “a hard look at”.
On the private market side, there are now over 90 startups tackling the student financing, from debt marketplaces and scholarship search aggregation, to employer-student loan assistance, to income-sharing agreements.
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The ballooning scale of student debt
Tuition fees alone vary widely by institution and geography, from paying nothing for a degree from TUM in Munich, to the best part of $200,000 for an unaided degree from Harvard.
And tuition is just one expense. Even in countries with free university tuition, living expenses can still result in decades of debt.
Student debt – a hindrance to economic and growth?
Beyond the stress and health-related issues that large loans can cause, student debt can impede economic growth. It impedes the ability to own a home, and has a stifling effect on entrepreneurialism – as a person with student debt is significantly less likely to start a business than one who graduated debt-free.
The scale of the issue is also compounded by social factors. Despite financial aid programmes, students from underrepresented groups and lower-incomes tend to have to take on more debt, and experience highest default rates on student loans, complicating the popular narrative is social mobility through education.
Challenging the value of higher education
Historically, obtaining some form of post-secondary education has been shown to lead to higher wages, lower unemployment and greater lifetime earnings. But while university fees have been climbing, educational outcomes have not kept up the same pace.
During the pandemic students we paying high fees for online classes, from institutions often ill-equipped for the format of delivery. As a result students are now more likely to explore how else they can invest in their education outside of established institutions, and where they might see the greatest returns.
At American universities, there are now 1 million fewer students enrolled in higher education than before the pandemic began.
The new technologies tackling student debt
As the costs of higher education soar, a new wave of startups have emerged to tackle private and federal student funding options. These companies essentially focus on either helping students assess different financial aid options (NerdWallet), or they help students manage their debt after they finish school to optimize their repayment or acquire loan forgiveness (SoFi).
Although an increased amount of funding was directed into the field last year, the majority of startups are in the early stage. The space is dominated by US-based SoFi, which raised 46% of 2021’s total $800M. This year’s funding has nearly matched 2020, with $255M raised so far, led by Income-Sharing Agreement (ISA) education provider Masterschool.
Student debt refinancing
With student debt totals now approaching those of mortgages in the 90s, it tracks that borrowers would seek out refinancing options, seeking lower market interest rates.
While these solutions were attractive due to the spread between federal and private rates in the US, the gap is shrinking.
These are also still far from accessibly solutions, targetting a very small pool of borrowers. The average approved borrower for SoFi has an annual income of $100,000 and an average credit scape of 650.
Employers’ student loan assistance
As employers seek to attract and retain the best talent in competitive job markets, some have identified student debt as a compelling financial and wellness benefit.
A new wave of startups is helping employers offer student-related assistance to employees, especially with recent new rules in the US, where the Consolidated Appropriations Act of 2021 allows employers to contribute up to an annual maximum of $5,250 per employee to repay a student debt. These contributions are tax-deductible for both employer and employee.
Questioning the value of income sharing agreements (ISAs)
Income Share Agreement (ISA) – an alternative to student loan – is not a novel idea, but gained popularity in recent years. Most of ISAs are education providers who reskill and upskill people for jobs in the tech industry, with the promise of a fast track to high-income jobs.
ISAs removed upfront costs, instead taking a percentage of their future earnings over a certain (relatively high) threshold, derisking the undertaking for learners. And investors liked it too. In 2021, funding for ISAs reached $125M, double the levels of 2019.
Recently, ISAs have been under fire, however. One of the biggest names in ISAs, Lambda School, was forced to make major changes after being sued for misleading financial and educational practices. Now branded as Bloom Institute of Technology, it has heavily edited its user promises.
But the question still remains: are these options helping resolve the student debt issue? BloomTech’s loans have an interest rate of 12.5%. US federal loans are 3.73%.
As discussed in other segments such as on-demand pay, the line between a very useful help to people and predatory lending at very high rates is a thin one.
What’s clear is that there is strong (and largely unaddressed) demand for alternative options to the financing and access to higher and continuous learning. And where demand arises so do startups.
But with 56% of student finance startups having been founded after 2016, this is a space that is itself still coming-of-age.
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