Student debt is increasing rapidly in developed economies as the cost of higher education rises and more of that cost is passed from the state to individuals.
In the US, the size of outstanding student debt passed $1.2 trillion at the start of this year – questions of whether and how it can ever be repaid are now being discussed in crisis terms.
“In the US, where lenders take a charge over borrowers’ estates, you have people still trying to pay back student loans out of their retirement pensions,” says Tom Woolf, founder of a new crowdfunding platform aimed at UK students called EdAid.
In the UK, much attention has focused recently on non-payment, including by foreign students that are hard to trace and by UK graduates struggling to get or retain jobs that ever meet the hurdle rates of annual pay at which repayment starts. Rather than re-examining loan structures, efforts to curtail the burden of non-payment on the taxpayer are centring on stricter enforcement of debts.
EdAid is a fascinating mixture of crowdfunding, impact investing and new advertising that aims to head off a crisis similar to that in the US from now emerging in the UK, where students borrow the money for their recently increased university tuition fees from the Student Loans Company.
Woolf says: “Most students are borrowing blind to the eventual cost of compound interest on their debts. The typical student borrowing £27,000 to cover tuition fees and then going into a middle-class job – becoming a teacher or a nurse earning £25,000 upon graduation, working hard and seeing their salary rise with good career progression – may end up paying back almost £50,000. Our vision is to crowdfund loans where principal repayments are linked to CPI, but on which no further fees or interest are charged. We believe that a student funding £27,000 of tuition fees through EdAid will end up taking just seven years to repaying £30,144 at current CPI inflation rates.”
EdAid is regulated by the FCA and launched in March, having been in closed beta testing since mid 2014, with the ambition of funding 1,000 to 2,000 students this year. It is encouraging students to market themselves, their education and work plans, their ambitions and passions, just like any crowdfunder appealing to fund a project.
Woolf says: “We’re telling students: ‘You don’t have to be aiming for a career in management consultancy to benefit from EdAid. You can be a scientist, an artist, whatever. You just need to get up in front of potential backers and rock it.’”
Woolf is at pains to point out that this is not charity, but the starting point for most funding campaigns will be friends and family putting in modest amounts each – rather like a Just Giving campaign for a charity event – and not venture capitalists looking for a typical financial return.
However, EdAid, as a regulated entity, cannot load up with debt people with no likelihood of ever being able to repay it. It does both KYC identity checks and credit underwriting on applicants, even though young peoples’ credit profiles are flimsy.
Woolf says: “We aim to deal with the large middle chunk of students, whose parents are not independently wealthy, who go into regular jobs but who work on the principles of working hard, paying their dues and taking care of their debts.”
|Fourteen fintech firms in focus|
The recent launch of EdAid follows almost four years of research and testing on campuses to devise a low-cost, sustainable and collaborative model for student loans. Woolf says: “Another big group of potential lenders are college alumni of the kind that may not be rich enough to build and put their name on the new science block but are attracted by the idea of putting small amounts of money to work helping young people fund their education, then getting repaid and perhaps recycling that money as a kind of lasting way to put something back.”
There are three other groups of potential lenders: corporations that have identified and want to back a demographic of future employees; advertisers looking for innovative but effective new ways to deploy budget and connect with buyers of their product or service; and institutional investors with inflation-linked liabilities.
Woolf explains: “We believe that larger loans will come from corporates looking to recruit on campus that may match money raised through friends and family for students fitting their target hiring profile. But we cannot allow any type of contingent contract. We cannot let, say, KPMG, lend £500 or £1,000 to students meeting a certain profile on condition that those students undertake to go and work at KPMG on graduation. And nor will we sell any of the student’s data. But we can certainly allow such companies to curate and fund potential future talent, in turn inviting their desired cohort of future employees to recruitment events, whether those be the kind put on at Glyndebourne or at the student union.”
A second group of potential lenders comprises consumer-led corporations who target students, for example in fashion retail and fast casual dining, who wish to connect to students in ways beyond traditional advertising channels and see loans of £20 per student as a way to do that. When a student repays that loan, the money rather than being lost in traditional advertising, is then recycled and lent to another student. As a result, EdAid aims to transform corporate advertising dollars into an ever-green marketing endowment, never seen before.
Woolf adds: “As well as corporate recruiters and advertisers, another group of potential lenders we will be engaging more with in coming months are investors such as pension funds that are looking to match liabilities against well-underwritten assets with an index-linked return.”
There are other network benefits for students to fund through EdAid. Because the platform needs to see students employed in order to service their loans, it has a strong interest to use the data it gathers to help students find and retain jobs, acting like an employment bureau.
“The fund raising effort becomes almost a LinkedIn-style way for students to showcase their potential worth to employers. At the same time, we are gathering a lot of information from corporate recruiters on the types of students they want,” Woolf says. “That data is not all about subjects and grades. We have been speaking to employers such as Newton Asset Management that tell us their best graduate hires are women who have impeccable academic performance, and participate on and lead sports teams. There’s a lot we can do to match borrowers with the target profiles of recruiters.”
The first-year cohort of students funding through EdAid will be, no doubt, carefully curated and supported during an initial scale up that should reveal pain points and potential within the business model.
“We are giving students a new choice, as well as transparency as to the full costs of debt,” says Woolf. “Initially we will be capping the amount of loan funding to any individual through the platform at £10,000. And remember, this doesn’t have to be a platform just for funding annual tuition fees. If a student is studying town planning and needs a couple of hundred pounds for their research field trip to measure traffic flow at roundabouts in Milton Keynes, this is a good way for EdAid and the community to facilitate that.”
For all the feel good buzzwords around the platform of impact investing in education, the process of becoming fully regulated by the FCA and complying with all the anti money-laundering and know-your-customer requirements is a stringent one and a barrier to entry.
Woolf says: “I am very much in favour of regulation and believe we are all better businesses for being regulated. But the time required and the cost involved in getting FCA regulated is quite prohibitive to innovative financial start-ups. EdAid invested over £250,000 in just becoming regulated.”
He says: “I believe the FCA is trying hard to keep pace with innovation in the fintech world. But there seems, at times, to be a difference between the strategic vision of senior management and the reality on the ground. However, this is slowly changing. Anna Wallace is doing a superb job to accelerate this evolution as part of the FCA’s Project Innovate.”