As college graduates continue to cripple under a trillion dollars' worth of debt, a new form of funding is slowly coming to the forefront. Following in the steps of Kiva.org and Kickstarter.com, the world of education is pushing to finance college tuition via person-to-person social investing.
Why the Need?
The level of student debt has grown by 56 percent since the end of 2007, and averages $23,300 per borrower, with 10 percent owing more than $54,000 and 3 percent owing more than $100,000.
The real trouble with this type of debt, aside from the fact that it can't be discharged, is that the federal government does very little to ensure the likelihood of repayment. It doesn't matter if you're an engineer, a business person, a ballerina, or a painter – anyone and everyone, regardless of their future income, is eligible for a student loan.
So what's the big deal? Ask the student interviewed by CNBC's guest blogger, Patricia Chadwick. After taking out 11 student loans that totaled $135,000 and paying $26,000 over the course of two years, she now owes $141,560.
The unfortunate reality is that her $65,000 annual salary isn't enough to pay down the principal on some of her loans, and now she's in more debt than when she first graduated.
Enter Crowd-Sourced Student Loans
Instead of playing an endless game of smackdown with your student loan interest rates, it might be a more realistic option to jump on board with Enzi.org or Lumni.net. These two startups are pushing a new “Human Capital Financing” model, which uses students' “Future Earning Potential” as collateral for their debts.
In each case, multiple lenders pool their finances in order to sponsor a student. In return, the student must pay back a fixed percentage of their future income for a set period of years. For Enzi, this amount can range from 7.5 percent to 15.5 percent of the student's gross annual income for 9 to 13 years after graduation. Lumni offers a similar option with an unspecified percentage rate over the course of 120 months.
The interesting part of this concept plays into the student's ability to pay. Regardless of a student's income, be it $80,000, $20,000, or $5, the student is only obligated to pay the designated return on their income. Lumni explicitly states that a zero dollar income amounts to a zero dollar payment.
Sounds Great. What's the Catch?
You might be too valuable. Prior to matching you with your sponsor, you must qualify for acceptance. This means that you're being rigorously prescreened for your earning potential.
To pilot its program, Enzi chose to work exclusively with graduate engineering students, which should read as “High return on investment.”
If we take a step back and reconsider the guidelines set by both organizations, the student is obligated to pay a set percentage of their income over a predetermined period of time. This means that the student, regardless of their salary, must continue to make payments over “X” period of time.
As the Wall Street Journal's Annamaria Andriotis points out, if “Enzi assumes a starting salary of $85,000 per year. At an 11.5 percent repayment rate for 11 years (not assuming any raises), the student would end up paying $107,525 – about 1.5 times the average cost of a Master of Science in Mechanical Engineering at Stanford.” (The Wall Street Journal)
Deep Thoughts
If we were to contemplate the overall value of this concept, it's pretty sound:
- Your minimum loan payment is based on a percentage of your earnings, which means you're never accountable for more money than you can realistically pay.
- It frees up your finances, so you can invest in other opportunities … like maybe a house???
- You're bound to establish some kind of rapport or mentorship with your sponsor - unless they play the anonymity card, which probably means your parents are backing you, and playing the greatest recoup ever.
- It plays into the concept of tuition assistance programs, if you can remember back to when companies used to pay for college in return for a five-year investment in the company or firm.
In the end, the true risk comes in valuing your own worth. If you expect to trump the world and make gobs of money, you might want to reassess the possibility of a student loan. If you feel like your earning potential is equivalent to a bag of Funyuns, however, then this could be the way to go.