By Cary Springfield
Among the group of crowdfunding platforms that allow budding entrepreneurs to raise money for their enterprises, Kickstarter has always been the market leader. There are other more specialised sites like PlumAlley which caters for women entrepreneurs, JumpstartFund which focuses on tech startups, DragonInnovation for hardware enterprises and Hatchfund.org for artists, but none of these feature the diversity of projects and the investor base that Kickstarter has. They all work in more or less the same way, the investor is guaranteed a product or some pre set reward for their investment.
Upstart, a new entry into the crowdfunding sphere, aims to use a slightly different strategy. Instead of offering the investor a fixed reward, investors can now invest in the future of an individual and his idea and get a percentage share of his profits for a fixed number of years.
At the moment the company, founded by ex-Google employees and backed by a few current Google employees, seems to be targeting students who need to borrow to pay their tuition. Instead of taking out a traditional student loan from a commercial bank, they can now borrow using their future earnings as collateral. Whereas a traditional student loan would charge fixed monthly instalments to be paid back, an Upstart loan will charge a certain percentage of the students monthly income for the next five to ten years. This chunk will not exceed 7 percent of the income but there is a minimum that is expected from the individual. So, if a person does not manage to earn enough in a year to meet the minimum, this will mean that an additional year will be added to the contract.
Upstart recently announced that it will guarantee tuition funding for admitted students to four coding programs – Dev Bootcamp, Launch Academy, Starter School and General Assembly. This seems to be a growing use for the site as a number of aspiring coders use it to fund their studies. Since there is a high demand for software developers at the moment, this makes perfect sense, as investors can be sure of the repayment of their loans.
The current system of student loans, in most countries, sometime gives people no option but to take a job, when they could be better served to continue studying. This new arrangement would mean that people will no longer be forced to work when it would be of greater benefit to them to keep studying. A higher level of education will lead to greater earnings which would be beneficial for both the person taking the loan and the investor.
According to a recently released report by the Consumer Financial Protection Bureau, there is great systematic failure in the student loan system. About one third of all the borrowers in the American federal loan program end up defaulting on their loans or are in deferment, which means that they cannot afford to make the minimum payments.
American Student Assistance, a non-profit agency that provides loan solutions, has statistics indicating that out of the 20 million Americans that attend college every year, 12 million or 60% borrow money to help pay for it. Their numbers also show that 37 million student borrowers have outstanding loans in the country at the moment; this amounts to between $902 billion to $1 trillion in outstanding debts. The federal government has outstanding loans to be collected of $846 billion in this.
More private lending is also a boon for the general health of a debt-ridden government. If it can narrow its loan programs by letting more people borrow privately, the government will also benefit from the Upstart’s success.
There are however some worrying implications of this system proposed by the company. It might work out that the borrowers will face the same problem of having to commit themselves to work they would not be doing otherwise to pay back the loans. This might mean that their entrepreneurial skills would be wasted when they will have to seek work instead of starting their own companies for fear of adding more time to their commitment to the investor. It might result in lack of innovation on the part of the borrower and loss of larger incomes, just like the current system. Young people might end up being indentured to their patrons and some view the system as perpetuating the current trend of inequality of the richest section of the investment class getting rich off the backs of the younger people who have no choice but to borrow from them.
There is also a fear that the relationship between the borrower and the lender will become too personal. Instead of portioning off a piece of a company, people here are portioning off a piece of their personal future. However, this very relationship might cause a change in the culture of lending and how borrowers view their lenders. Borrowing from faceless commercial banks may have meant that borrowers felt less guilty about defaulting on their loans but with a more personal connection they might think twice about it now and actually work harder to achieve their goals. A large proportion of the students who default on their loans are those that drop out of college without receiving a degree, but with a backer that they now can name and meet, they might be more inclined to work through for the mutual benefit of themselves and their backers.
There might be a problem with how the credit of the students are rated, as it is untested. Upstart uses a statistical modeling system, that, according to their website, claims to be able to “predict each upstart’s income over the next decade”. The verity of this system remains to be seen and it can only be made accurate by tweaks as it is working. As such a young company, Upstart may not have all the data yet to make the most accurate predictions.
Then there are problems with a few individuals who might not fit the greater model. Young innovators who may end up forming a wildly successful venture. This will mean that if a young, broke innovator ends up forming a multimillion dollar company, the person who backed them will be entitled to a share of their income regardless how large. Just because someone had to borrow to go to college will now mean that they will have to surrender a piece of their income every year for the next five to ten years.
Regardless of the moral aspects to this new type of loan, there is a clear sense that the old system is failing and something needs to be done and Upstart may be just the program to take off. The traditional student loan system is obviously very flawed and leaving many young people in terrible positions, the least the company will do is start a debate about the system and even if it is not the best way to fund students, it may lead to a better way indirectly.Featured Photo by Donkey Hotey