Student loan start-ups are seeing favorable winds of new investment and new customers as the United States faces an ongoing student loan debt crisis.
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the Federal Reserve estimates $ 1.7 trillion in student debt in the United States. Students, on average, graduate with $ 29,000 in private and federal debt and default on their loans at a rate of 15 percent.
Startups in this space are developing technology to target both private and federal lending in areas such as responsible lending, loan management, and refinancing, as well as to make it easier for employers to create benefits that help clients. employees to repay their loans.
“For a lot of people last year, COVID-19 happened in the middle of college and their income was reduced. Real innovation in this market requires a little money on top of federal loans and in the traditional market, which is not often available to a 22 year old, ”she added. “The majority of them cannot get a loan without a parent co-signing.”
Many fintech founders credit SoFi, founded in 2011, with the launch of new ways to refinance debt, including student debt, at a price that suits the borrower.
Since then, new strategies have emerged, in particular Right foot, based in San Francisco, who obtained a $ 5 million in seeds round in February, led by Bain Capital Ventures, to enable software developers in companies, such as Plaid, to add debt repayment capabilities to any application.
Financial Wellness, Payroll, and Benefits companies use Rightfoot’s API to create programs, such as the ability to route money from a borrower’s paycheck to a student loan account. or the creation of tax-exempt student debt repayment programs as an employee benefit.
In an interview at the time of his raise, Rightfoot co-founder and CEO Danielle Pensack says she and her team realized that saving isn’t the biggest issue for people, but getting out of student debt is.
“While understanding the landscape of how to make payments, we’ve seen businesses just send out checks, but they bounce back or don’t go to the right accounts,” Pensack said. “We know we had experience building infrastructure, so we started working on an API.”
In the area of social benefits, Beautiful, a San Francisco-based company launched in 2018 to offer student loan repayment as a benefit to employees. The company raised $ 1.3 million in seeds funding, led by Norwest Venture Partners in 2019.
Two years before Goodly, fintech FutureFuel.io was founded to enable employers and financial institutions to deploy digital tools aimed at eliminating student debt. He raised $ 10 million in Series A fundraising in early March, led by UBS.
Some employers provide tools to help employees better manage and speed up their reimbursement, with 63% of them already offering some form of tuition assistance programs. These programs often help employees return to school to earn a graduate degree or acquire a new set of skills. However, these funds are largely untapped, Founder and CEO of FutureFuel.io Laurel Taylor said in an interview.
“Over the past four years, we believe we have pioneered this category of student debt in the workplace,” Taylor said. “The first two years employers tried to figure out what it was and how to fix it. Over the past two years, we have seen a rapid acceleration in crushing debt appreciation. There is pent-up demand for social benefits, and student debt is in the top three along with salary and health. “
Help in many forms
Going forward, workplaces will need a student loan tool to attract employees, and look to student loan startups for the tools, Michael barry, head of workplace solutions and managing director of UBS, said in an interview. Barry participated in the investment of FutureFuel.io.
“This is not only related to student debt, but also to financial well-being, which was at the heart of American businesses before the pandemic,” Barry added. “Due to the pandemic, there is increased interest, and human resources departments are more action-oriented to drive these solutions.”
Government ready to help employers: in December, Congress Extension of tax-free student debt repayment benefits for employers until 2025 under the Coronavirus Help, Relief and Economic Security Act (CARES). As part of the $ 2.2 trillion stimulus package passed by Congress in March, employers can get a tax incentive to help their employees pay off student loans. Also this week, the Biden administration said it would continue to pause student loan interest and collections to over a million borrowers in default on loans from private lenders.
Investors are there too. In the Crunchbase dataset, we counted at least 35 known startup investments in 2020 and 2021 – totaling $ 139 million – in global fintech companies focused on financing or student loans. Since 2016, investors have pumped at least $ 517 million into companies in this space, including more than $ 294 million in U.S. companies, according to data from Crunchbase.
Although global student loan startup funding has declined by 30% from 2019 to 2020, investment dollars allocated so far in 2021 are already climbing to 2020 funding amounts, the data shows. It was a different story for domestic companies: Data showed investment increased nearly 10% between 2019 and 2020, despite the pandemic.
Default before graduation
Typically, students with private loans start paying them off while they are still in school. Many start their first year well, but some fall behind in subsequent years and are already in default on their debt before graduation, Funding U’s Tarkenton said.
U’s funding approach to lending is to manage income-based debt by leveraging academic data and income during the underwriting phase when resources like FICO are not helpful, she said. declared. FICO is an abbreviation for the Fair Isaac Corp., the first company to offer a credit risk model with a score.
Since its inception in 2015, Funding U has made 900 loans, Tarkenton said. Prospective borrowers can apply for a loan within minutes provided they meet citizenship, school, and study requirements.
“Academic behavior is more indicative of their ability to repay their loans,” she added. “We can predict if a student will graduate, and we can predict what their income will be, make sure borrowers are on track to graduate and what their income-to-debt ratio will be.”
In 2020, Funding U partnered with Goldman Sachs Urban Investment Group, which infused $ 10 million in debt financing in the company, to provide “last minute” loans, credit training and professional networking to more than 1,500 students enrolled in four-year colleges in the United States
Margaret anadu, head of Goldman’s urban investment group, said the group’s goal was to provide capital to create opportunities for underserved individuals and families, including by narrowing the opportunity gap.
She believes school loans should consider the student’s potential and opportunity, which the group liked about Funding U.
“They ask questions like, ‘Is this amount of money something the student can pay back, and does the student get what they pay for? Anadu said in an interview. “Education is important, but we have to figure out how to provide the capital for people to go to school, and what results in student outcomes that is also affordable.”
Drawing: Li-Anne Dias
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