The student loan industry is a $1.7 trillion mess.
Defaults loom, averted only by presidential decree (again). Tuition fees increase at multiples of the rate of inflation.
And of course, borrowers spend decades trying to pay it all back. That is, if they can get a loan in the first place – it’s not an easy task, according to Tess MichaelsCEO of Funding Stride.
“In the private lending industry, 92% of private loans required co-signers; less than a quarter of students actually have access to a trustworthy co-signer,” she told PYMNTS in an interview. “There is a huge void in the market that needs to be filled.”
The promise of embarking on a rewarding career is what drives individuals to take out school loans, she said, for both degree and non-degree programs. But with student debt taking up more and more of the take-home pay, the question arises as to whether it’s all worth it.
Revenue-sharing agreements (ISAs), she said, offer a flexible alternative to the onerous payment schedules of traditional installment loans.
Through Stride’s ISAs, the company is expanding funding to help students pay for their education. These students then pay Stride funding a percentage of their future earnings, which is tied to the rates students are expected to earn after graduation over a set payback period.
Under the mechanism of the agreement, students pay nothing if they earn below a minimum income threshold, typically $30,000 to $40,000 per year. When they earn a salary above this threshold, they start repaying their ISA at the same percentage rate.
Stride Funding estimated that students will typically meet their obligations within 60 ISA payments (although Michaels noted that the duration can be as short as several months), and well within 10 years (even in downturns, contracts with Stride Funding are extended for a maximum of one month). This is in direct contrast to the traditional student loan which can impose a debt on an individual that must be paid under rigid terms regardless of their paycheck status.
Also Read: Stride Funding, Credit Investors Partners in $105M Student Loan Facility
$105 million facility
The interview came against the backdrop of earlier this month the company said it had partnered with Encina Lender Finance and other lending funds, through a facility $105 million senior loan that will allow Stride to fund students pursuing alternative education in high-growth technology and business fields.
The $105 million facility, Michaels said, represents further gains for the alternative education space. She noted that the facility will be geared toward non-degree programs, which have seen significant enrollment spikes during COVID-19, with the goal of pursuing new professional expertise (or deepening existing expertise). Those same programs don’t give students access to federal loan conduits, Michaels told PYMNTS.
“Students end up paying out of pocket for expensive private loans,” she said.
But, Michaels said, outcome-based lending products, such as those offered by Stride Funding, align the costs and value of education.
Digging a little deeper, she said Stride Funding loans are a “healthy mix” of degree and non-degree programs.
The most prevalent segment, so far, is nursing, where the company funds undergraduate and master’s students at 140 universities.
“In our degree marketplace, we always advise students to take scholarships and grants first,” Michaels said. “Then they take subsidized federal funding. And then after that, when they look at private loans versus unsubsidized federal loans, that’s where they look at products like ours.
In the non-degree market, the company funds students in bootcamp and certificate programs (where the cost can be around $10,000). The company’s online platform leverages cutting-edge technology for income and employment verification in tandem with companies such as Plaid.
“We don’t want to be just a financial provider, we want to partner with these students,” Michaels said.
The typical revenue share percentage is in the single digits, Michaels said, making it easier to budget for the cost of higher education as well as everything else in life.
Looking ahead, Michaels said there is “a huge move towards results-based funding” and noted that Stride Funding also offers deferred tuition plans, where payments are fixed and triggered by the income level of a graduate.
As Michaels told PYMNTS, “We align the cost of education with the value of that education.”
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