Here’s a quiz. What is America’s largest consumer debt?
- A) Mortgages
- B) Credit cards
- C) Student loans
The answer is C. At $1.5 trillion and growing, student loan debt is now the largest consumer debt in the U.S., larger than mortgages, larger than credit cards.
And it’s impacting not just those who owe the debt, it’s causing real damage to the U.S. economy. The average graduate leaves college with more than $37,000 in loan debt. That’s a lot of money, and it’s a lot not spent on products, services and other purchases that move the economy forward.
In fact, the student debt crisis has produced an entire generation of young people who can’t afford to buy a car or a home. A total of 83 percent of non-homeowners say student debt is the reason they can’t buy a home.
One solution to this problem is political. Bernie Sanders said he’d cancel all student loan debt if elected.
Another solution is entrepreneurial. A number of startups are now taking on the student debt crisis. And they’re getting serious attention from investors.
Shauntel Garvey is a co-founder and general partner at Reach Capital. She has invested in two startups addressing the student debt problem: Frank and FutureFuel.io.
Frank has an online platform that streamlines and simplifies the Free Application for Federal Student Aid (FAFSA) process and helps students obtain the most financial aid possible. It has raised $15.5 million from Reach Capital, Aleph and Ground Up Ventures.
FutureFuel.io’s platform enables employers to offer student loan debt contributions as a standard benefit to their workers. It has raised $15.7 million from Reach Capital, Rethink Impact, Salesforce Ventures and Vulcan Capital, among others.
“It’s important for startups to play a role in the student debt crisis because the price of college keeps rising and people are fed up that the public sector has not been able to make any inroads here,” Garvey says.
She points to Frank for tackling debt at its root by making it easier for students to gain financial aid and reduce their reliance on loans. Every year, the U.S. Department of Education gives more than $120 billion in grants and other funds to more than 13 million college students.
But the FAFSA application process can be time-consuming and convoluted, which means that many students give up before completing the application. The Frank platform streamlines the process so students can complete the application in a matter of minutes.
FutureFuel.io caught Garvey’s interest because it allows employers to offer a benefit that’s relevant to young workers who are overwhelmed by debt in the here and now and who consider retirement plans a meaningless perk.
Among the challenges in this space, Garvey points to the possibility that government will seize the initiative and solve the problem itself. And that is a diminishing likelihood in today’s Washington.
“Still, as an investor in this space, you need to be prepared for whatever new government policies are put in place,” she said.
But is the student debt crisis something that should just be solved solely by government or private sector? “I realized that it can only be solved if there is collaboration between both the public and private sectors,” she said.
A new kind of employee benefit
Tuition.io is a startup with a strategy similar to FutureFuel.io: help employers create student loan contribution plans as an employee benefit to attract and keep good workers.
It’s a powerful incentive. A total of 86 percent of employees say they would work for a company for five years if the company helped pay down their student loans. It’s also effective. Even a small contribution per month to an employee’s student loan debt can cut the length of the payback time by years and reduce the cost of a loan by 20 percent to 30 percent.
Tuition.io works with employers to create a benefit plan around student loan debt, decide who is eligible to participate and determine the size of matching payments. Tuition.io manages the process of collecting money from employers and delivers it directly to loan processors.
This is not only a benefit for employees, it’s also for employers, because workers who are grappling with debt are less productive and more likely to leave. Studies show that boosting employees’ financial wellness means heathier employees, less absenteeism, lower turnover rates, better employee satisfaction and improvement in a company’s brand image.
Tuition.io has raised $15.2 million from Wildcat Ventures, Mohr Davidow Ventures and MassMutual Ventures.
“As an investor, I’ve never seen market interest heat up as fast as it has in student debt,” says Wildcat Founding Partner Bryan Stolle. “This is not only a national hot-button issue, it’s also top of the agenda for HR professionals.”
Stolle added that the cost of the Tuition.io software is a fraction of the cost HR now pays for recruitment and training, “so there is direct ROI attached to Tuition.io.”
Improving degree ROI
Return on investment is a concern not only for HR departments, of course. It’s also a priority for students.
“There are too many people spending too much money on degrees they can’t do much with, so they’re unable to service their debt. And schools aren’t doing much to crank up the ROI of their degrees,” said Wes Barton, managing partner at Third Prime. “Ultimately, there will be some kind of reckoning.”
To help students boost their degree ROI, Barton is backing Climb Credit, which offers loans to students who enter career-skill programs that lead to higher-paying jobs. Climb Credit partners with mostly vocational schools that provide training in areas like coding and healthcare, schools that focus on sectors where there are jobs waiting or where there is evidence that students can, after graduation, lift their income.
Climb Credit also incentivizes the school. If a school’s tuition is $10,000, for example, Climb Credit pays $7,500 to the school on behalf of the student and, when the student lands a job that enables them pay off the loan, then the school gets the remaining $2,500.
So far, Climb Credit has originated $200 million in student loans, which are primarily underwritten by Goldman Sachs. The company recently raised a $9.8 million in Series A round led by Third Prime and New Markets Venture Partners.
“What we like about Climb Credit is that they are only partnering with schools that have definitive data that supports a high ROI for their students,” Barton said. “They want to see some kind of evidence that students can, after attending that institution, raise their annual income from say $30,000 to $50,000.”
Helping students cope with loan stress
Student loan debt is a mental burden as well as a financial one. And for many it’s overwhelming. One in 10 people say student loans are their top worry, 67 percent of student borrowers report physical symptoms of anxiety due to debt stress, and one in 15 borrowers with a high debt load have considered suicide.
Pillar is a startup aimed at helping student borrowers cope with a problem that can seem crushing. It’s a mobile app that securely connects to a user’s bank account and sends customized recommendations for managing debt. It lets users see how much money they can save through specified payments and if they can afford to increase their payments over time. Borrowers can make in-app payments and are regularly updated with new tips to help pay off loans more efficiently.
“Pillar empowers people to save time and money, and to take control of their financial future,” Monica Desai, an investing partner at Kleiner Perkins who has invested in Pillar, wrote in a blog post. “Pillar makes it easier for people to get out of debt faster and focus on big moments like starting a family, investing in a small business or purchasing a new home.”
In a way, VCs who invest in a student debt startup are not only investing in that startup but also in the nation’s future.
“Millennials aren’t behaving the same as past generations in terms of having children and buying homes, and it’s pretty easy to draw a direct correlation to their student debt load,” said Stolle of Wildcat Venture Partners. “That impacts all of us and our economic growth, and as an investor it’s gratifying to help solve this problem.”
Tom Stein is a VCJ correspondent from Palo Alto, California. He can be reached at firstname.lastname@example.org.