Can the Silicon Valley Playbook Solve the Student-Debt Crisis?
A group of investors is paying for students' tuition in exchange for a percentage of their future earnings.
In late 2011, Eddie Triste walked into a meeting at his community college. There, a couple of middle-aged guys offered him $15,000 to help finance the rest of his undergraduate education. He was skeptical. Triste comes from a family of farmworkers in California's Central Valley — the "working poor," as he describes them — who aren't used to people offering them cash without something fishy being involved.
"You're coming in, and they're offering you this too-good-to-be-true deal," says Triste, who is the first in his family to go to college. "It took me two or three meetings to figure out what they were talking about. Rereading the contract, rereading the contract."
Triste and three of his classmates at the two-year Allan Hancock College in Santa Barbara eventually took a leap of faith and accepted the offer of cash to transfer to another school, with the money paying tuition for a four-year degree. Now Triste is a part-time student at California State University in Sacramento, where he also works as an event coordinator. After he graduates with a bachelor's degree in sociology, Triste wants to eventually become a professor.
In 2012, these four Allan Hancock students became part of an experimental "cohort" set up by 13th Avenue Funding, a small New York City-based nonprofit aiming to change the way Americans think about financing college. It shouldn't be about debt, like buying a car, these executives say. Higher education should be viewed like equity — investors (parents, colleges, and entrepreneurs) bet on students' potential earnings and accomplishments. Sometimes they win. Sometimes they lose. Collectively, the economy gets better because more people get college degrees.
The deal for 13th Avenue's cohort goes like this: The students each receive $15,000 to finish their bachelor's degrees. The award isn't a loan. It won't affect their credit. There is no default if they can't pay back the money. But if they make more than $18,000 a year after graduating from or leaving college, they are required to pay a small percentage of their earnings to their investors each month. Each year that they make more than $25,000, they are required to pay back 5 percent of their income. The obligation extends for 15 years.
The catch is that Triste might wind up paying back more than he got. And, if he does, his payments might well help to cover the shortfalls of his cohort peers. Extra money that the group collectively pays gets rolled over into new scholarships for the next cohort. "It's pooled venture capital," says Casey Jennings, chief operating officer for 13th Avenue. "It's sharing risk."
Jennings and his colleagues think student loans are dangerous for low-income families. The borrower assumes all of the risk, including a poor credit rating if she can't make payments. The government lender takes on almost no risk, except maybe to tap taxpayers for some unpaid balances 20 years later. A private lender's only risk is having to pay a collection agency to go after unpaid debt. The schools get the money no matter what.
Changing the model to one in which investors have a stake in a student's future is threatening to traditionalists, says Andrew Kelly, who heads the Center on Higher Education Reform at the American Enterprise Institute. "It's looked at with cynicism, and almost a dose of fear. The student-loan system serves a few actors' interests particularly well. First and foremost on the list are the schools."
13th Avenue is adopting a Silicon Valley playbook, with the goal of disrupting higher-education financing models. In Silicon Valley, investors put money into thousands of small computer start-ups on the assumption that some of them will fail, some will break even, and one or two might be wildly successful. The successful ventures cover the cost of the unsuccessful tries. If a large number of entrepreneurs and philanthropists make these kinds of investments in low-income students, Jennings says, "the payback for getting that group to go to college is unfathomable."
Plus, it costs the government nothing.
But, so far, this kind of investment is still rare. 13th Avenue funded its first cohort through its own founders. They are a foursome of former financial executives who work full time at 13th Avenue, plus two board members — one an associate dean at the University of Oregon, the other an employee of the California state government. After the first round of investment, 13th Avenue cobbled together enough money to start a second cohort of seven grantees last year. No other organization in the country offers these kinds of income-sharing arrangements to students. (One for-profit company called PAVE does something similar, but for entrepreneurs.)
Like any bold idea, it faces legal and logistical questions that are still being worked out, and many people feel that the uncertainty isn't worth it. Their reluctance recently prompted Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R-Wis., to introduce legislation to clarify how the payments to investors would be taxed. Rubio said at a Next America event in February that these "Student Investment Plans" would give students the option of paying for college without acquiring any loans at all.
Upstart, a company of ex-Google employees, stopped offering its income-sharing deals last month in favor of traditional loans. "What we were doing before was offering a product that the consumer had never seen before," said Upstart CEO Dave Girouard. "We said, 'Let's not put all our energy into this. Give them a product they can understand.' "
On college campuses and in philanthropic circles, income-sharing agreements are well received, but no one wants to go first. "It's really painful," Jennings says of his efforts to make colleges the "investors" in their own students' futures. "We talked to a bunch of colleges. They're like, 'It's interesting, but come back when you get another college.' "
Foundations say they want to see data on some original grantees before they put any money behind it. That's why Triste and his peers are so important. If their deals work out, they will be living proof that students can finance college in a way that doesn't involve going into debt or being independently wealthy. It just requires some savvy investors and a diverse pool of willing students.
Triste doesn't have any problem with paying back more than he got, saying he has a whole community of people at home who should have the same opportunities that he's had. But to move the economic dial nationally, about a million more people need to follow in his footsteps.