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Navigating the Student Loan Startup Space

(or at least attempting to...)

· startups,Entrepreneurship,Student Loans
Have you noticed that just about every other time someone wins the state lottery nowadays, you hear the same message about what they are going to do with their winnings first: "I'm paying off my student loans!" Thrilling, right?  That's what our world has come to...
Listen - if you tried to find someone more passionate and informed about the student loan situation in the US (and these are not mutually exclusive, sadly), you would be hard pressed to find someone other than me. After paying off quite a lump sum in 2015, I'm still sitting on over $100K in student loan debt. My undergrad loans are almost paid off, and although I don't question my decision to go back to school to get my MBA, Babson has put some serious hardship on my bank account.... even after going on the "PAYE" (pay as you earn program). Note: if you don't know about the availability of payment plans tied to your income for federal loans, check this out).
Not surprisingly, given that the student loan space is a $1.3 trillion market, it's a pretty hot place to be in if you're in the startup world.  Aside from loan education sites and loan aggregators (lead generation revenue stream), there are three main places for startups to be within the student loan space: origination, refinancing/consolidation, and payment (with default being the 4th, but no one has figured out a new business model to topple old-school collections agencies yet; that's a story for another day).  Anyways, let's break it down:
Loan Origination: Let me quickly note that between origination & refinancing, the former is a much less attractive option from a financial return perspective.  The risks associated with providing a loan for someone entering school are inherently higher than giving a loan to someone after they already have a job.  That said....your big players are Sofi, Earnest, and Common Bond,.  Each of these uses a proprietary algorithm based on several factors (income, school you went to, etc. - with credit score ranking last - a millionaire can forget to pay their gas bill for a month, and get their credit dinged), and some offer additional benefits as well (e.g. mortgages & personal loans).  UpStart, Pave & Prosper also started in this space through ISA's, or income-share agreements, but the model just didn't seem to work (though widely used in Australia), so they moved into the smaller "personal loan" space (~$50K and under).  
Loan Refinancing/Consolidation: Very sexy, attractive space to be in.  The same players that do origination are doing refinancing as well: SoFi, Earnest, & Common Bond...using the same algorithm, each of them different.  For example, Earnest may qualify you for a loan that SoFi rejected you for. SoFi alone has already done over $4B in loan refinancing, for example.  But be wise in making your decision to refinance [see my note at the bottom]* 
Loan Payment: Here, I'm specifically referencing the new breed of student loan startups that I've seen popping up more and more often.  These are the ones that call themselves "your 401K for student loans" - they basically partner with employers and provide a platform for the company to automatically match your student loan payment, similar to how they would do so with your 401K investment.  SoFi has actually been doing this for a couple years already, as they were already working on white label solutions for Google and Apple, but the other ones I've seen include Gradifi, Peanut Butter, Student Loan Genius, TuitionIO , and likely plenty of others that I've missed.
Look, I get it - this is a benefit to hopefully reduce employee turnover, a carrot to use in recruiting, and just a "feel-good" approach by companies....but what I don't get is how each of these startups has a unique value proposition - besides potential UX/UI differences, it seems like all these platforms are just doing the same. exact. thing.  Yet VC's are giving out funding like candy to any of these companies that pop up.  Are they just trying to back every horse, and see which one wins??  Or am I just cynical, and jealous that I haven't started my own yet?  Likely a bit of both, I presume.
At the end of the day, don't we need someone to better educate us on student loans before we even get into this predicament?
* Editor's Note: I love the premise of refinancing through these startups (full disclosure: my summer internship was at SoFi during business school), but for all these people who get on their soap box and talk about refinancing your loans as quickly as possible, I would say the following: these are awesome solutions if your loans are private, as they quickly will reduce your interest rate.  Go for it!  If your loans are federal, however, I would think hard about choosing to refinance with them, as you'll opt out of the ability to use one of several types of repayment plans that are solely based on your adjusted-gross income.  Sure, your rate will be better, but your payments will be much higher.  Understand your situation first.
Editor's Note #2: I'm the editor
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