Hi everyone, Charley here.
New topic for me today, but one that we’re all very familiar with: student debt (yes, I’m on a lending kick the past month, don’t @ me). The pandemic has had a profound effect on the financial services industry, and one area that investors are now taking a closer look at again is student lending. I wanted to spend some time investigating what’s happening as well as where some investors are starting to deploy capital back in again.
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CARES Act Ending
Back in March of 2020 as part of the CARES act, the US Department of Education temporarily suspended loan payments and applied a 0% interest rate across the pandemic for loans owned by the Department of Education. The program was extended multiple times afterwards as the pandemic continued, but in less than 100 days (on Jan 31), the government will restart collecting on student loans. The Biden administration is apparently developing plans on how it’s going to restart federal student loan payments for tens of millions of Americans, but one way or another, it’s probably going to be a bit chaotic and confusing for many people.
Against this whole background, student debt exposure continues to grow in the United States. All of us have family members, friends or are personally trying to navigate through the maze of regulation, repayment schedules, minimum payments, interest rates, alphabet soup agencies, etc. College students today, on average, graduate with $29k of private and federal loan debt and default on their loans at a rate of 15%. Meanwhile, overall US consumer debt continues to increase, with an average American holding an overall debt burden of $92k. Over the past year, student loans saw the largest growth in average balances at nearly 9%, followed by average auto loan debt and mortgage debt.
The freeze (for better or for worse) effectively wiped out the business model for a lot of companies in the student lending space. To further add to the chaos, several student loan servicers decided to exit the federal servicing business (Navient, PHEAA, Granite State, and UHEAA). However, with the freeze being lifted, $1.7T of payments will need to be managed, serviced, and collected. Thus, the timing seems right for a new crop of companies to emerge. We’ve seen established players like SoFi add on other products (and heck, even companies) in order to diversify. We’ve also seen new business models emerge, such as Commonbond creating a B2B offering for companies to contribute to student loans as a corporate benefit or Acorns acquiring Pillar to help its consumers manage student loan debt.
A New Cohort
We’re also starting to see the next wave of student loan debt infrastructure start to emerge! Players in the space that are on my radar include:
- Spinwheel: Recently raised $11M led by QED with Core Innovation Capital, Fika Ventures, and Firebolt Ventures (full disclosure, I’m a small investor!)
- Payitoff: Recently announced a $8.5M seed round led by Lightspeed Venture Partners
- Rightfoot: Announced its $5M seed in Feb 2021 led by Bain Capital Ventures and joined by Boxgroup
- Plaid’s liabilities API (for those that are new here, I was one of Plaid’s early employees)
Each company has taken different approaches towards how much they build vs buy when it comes to their own internal stack. For example, Rightfoot partners with Plaid and Dwolla to provide some of its data + write capabilities while Spinwheel has built its own data integrations into debt servicers - and even provides fully white-labeled “smart” experiences for calculating refinancing payments on the fly that its customers can pull off the shelf. Payitoff has also built out its own integrations and provides access to payment capabilities + repayment enrollment programs.
In my opinion, the key comes down to coverage + data accuracy and then secondarily, the additional features built on top of that data for different types of companies. As embedded fintech becomes more “mainstream,” the thesis is that more and more companies will want to offer products that help consumers solve main stresses in life + increase product stickiness - and student debt is a super fascinating place to start. I expect there to be more updates over the next few months on how the administration plans on restarting student debt payments and it’ll be interesting to see how companies respond to regulation in real time.
Charley Ma is currently GM of Fintech at Alloy, where he focuses on the go-to-market strategy for the fintech vertical. Prior to Alloy, he was head of growth at Ramp. Previously, he was the first growth hire at Plaid, where he started its fintech sales team and opened the NYC office prior to the announced exit to Visa for $5.3B. Charley is also an active angel investor in fintech + developer infrastructure and enjoys a good tweet.