For countless student loan borrowers and their lenders, return on investment doesn’t come up during the application process, often leading to less than stellar results. After all, the internet is littered with stories of students who took out $100,000 in student loans only to graduate with a degree that will earn them a fraction of that annually.
One startup—Climb Credit—thinks it has found an answer to this problem: providing loans to students pursuing an education in an area that will yield it a substantial return on investment.
According to a report in the Economist profiling the New York-based fintech startup, loans are in the $10,000 range and typically go towards financing programs that will last less than a year and aren’t often covered by federal financial aid. The courses the new lender provides loans for are very diverse – from coding school to underwater welding to courses that teach programming of robots used in the auto industry.
A lot of the schools Climb Credit works with do not offer typical two or four-year degrees, limiting its customer base to the roughly 5 million people who are taking non-traditional courses in areas that are yielding high-paying jobs.
Currently Climb Credit’s loans cover 70 schools with an additional 150 undergoing a vetting process. Over the long haul there could be as many as 3,000 schools that are part of the lending network.
Borrowers repay Climb Credit based on the increase of their earnings minus the costs associated with servicing the loan. While Climb Credit has provided little evidence of its success, it did tell the Economist that it received 10,000 loan applications since starting in 2014.
Borrowers of these loans often pay a much higher interest rate than federal student loans with the average standing around 9 percent, though some loans carry interest rates as high as 15 percent.
To prevent defaults, Climb Credit avoids students pursuing acting or modeling careers or any courses that don’t have a clear return on the investment. That strategy has resulted in default rates that are in the low single digit range.
Climb Credit’s business is unique in the student loan lending market but it isn’t unheard of. Another idea attracting some attention over the last few years is income-share agreements, in which a borrower would get a fixed amount of money from an investor that would go to cover the cost of higher education. In return, the investor gets back a percentage of income the borrower earns after graduating for a set amount of time.
Take an engineer for example. An investor may lend the student $100,000 to attend school and then will receive 5 percent of the graduate’s income each year for say ten years. The agreements can be a way around taking on a slew of debt, but critics contend it favors those pursuing high paying degrees over those going to school to become a teacher.
Author: Dave Rathmanner
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