Education is a quasi-public good: your education benefits society, but you pay for it, "consume" it and in doing so, make it unavailable for others. As a result, there are opportunities for the private sector to partially supply it when there is an opportunity to make a profit – see, for example, charter schools.
The latest iteration of this is Upstart – its nifty slogan is "the startup is you" – which provides venture capital funding in return for a share of your future income.
The process is not difficult to grasp. The "Upstarts" – borrowers – create a profile and describe their funding needs. According to the website, this can vary from starting a business to getting rid of student debt or paying for school. The "Backers" choose where to invest their money.
Upstart takes responsibility for verifying borrowers' identities and credentials and uses a proprietary "pricing engine" to create an income prediction based on what the site describes as "signals of accomplishment or potential," such as major, test scores and job offers, to determine the amount a borrower can raise for each 1 percent of their income over either a five- or 10-year term.
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Upstart paints a picture in which the Backers find borrowers so inspiring they want to invest in them, follow their journeys and help them out along the way (the latter also helps improve their own return). There are also some built-in protections for borrowers. For example, you can't share more than 7 percent of your income and the total payments are capped at three to five times the original loan amount.
Despite this, we would advise reading the fine print and making sure you fully understand the terms and conditions of your contract. A brief perusal of the FAQs, for example, indicates there a number of fees, including a funding fee of up to 3 percent.
Falling behind on your payments would also be a very bad idea. If you don't pay Upstart for 30 days, the company can charge you a late payment fee, whichever is greater of 5 percent of the past due amount or $15. More importantly, it can convert your payment obligations into a traditional loan with a fixed annual rate of interest of 14.99 percent. That's a credit card level of obligation and far more than the fixed interest rate on any federal student loan.
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Your payments will also be deferred in any year your total income is less than an income threshold that is disclosed to you as part of your Upstart terms, and there is a hardship exemption of $20,000. An additional year is then added to your payment term, up to a maximum of five years. While this might appear to be a borrower protection, it is actually an investor protection, since it effectively pushes your payments back to a higher-earning year to ensure you generate a sufficient return.
If you are married, you don't have to share any income your spouse earns. But you are required to share half of the income you earn from assets you own or acquire jointly with your spouse.
If you are considering using Upstart to replace or repay federal student loans, you should carefully weigh these costs and benefits against those of federal student loans.
Some borrowers, especially those with enough capital to repay their obligations immediately and in full if they need to, may indeed benefit. But make sure you figure out how much you would pay in federal loans – FinAid.org has great calculators that can help – and factor in the possibility you may need to rely on their important borrower protections, including access to income-driven repayment plans and Public Service Loan Forgiveness, because, as they say, life happens.
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Looking at the big picture, Upstart's business model is predicated on providing an alternative to federal loans for a small subset of borrowers whose "signals of accomplishment or potential" indicate they will not have a problem with repayment. This does not help address – and Upstart certainly does not claim it does – the real problems currently bedeviling the public good aspect of higher education.
We all benefit from universal access to an affordable higher education. But factors that include an ongoing steep rise in tuition, insufficient funding for Pell Grants and the insistence the federal government must continue to profit off student loans, are huge impediments to that access and the larger policy problems we must solve.
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.