With 2014 expected to be the tipping point for alternative finance, we take a look at its impact in the lives of students.
We’ve explored a smattering of student-focused platforms from the US and UK. The list of platforms is by no means exhaustive, but it does give some insight into the sheer variety of financing methods available to students.
Student Debt and Unsecured Lending:
A report released in late November by PwC this year contained some telling analysis of the effect of student loans on unsecured lending. According to this report, typical student loans have risen 2000% since the 1990s, now standing at around £8,000 on average. Unsecured debt has also soared, having climbed by £8.5 billion in 2013 alone – a four percent spike. But new research by PwC has suggested that this hike in unsecured debt is largely attributable to the rise in student debts.
Borrowing for education aside, unsecured debt is markedly lower now than it was in 2008 – falling from £8,108 to £5,980 for the average household. Credit card write-offs are also much less common. In 2010, nearly one tenth of outstanding balances were written off, in comparison to only four percent today (the lowest for over a decade). This may provide some idea of students’ reliance on forms of alternative finance, and vice versa – they are the key factor in the continued growth of unsecured debt.
“Although student loans are provided on very favourable rates and repayment terms, this significant increase in student debt is likely to have profound effects on graduates’ future borrowing and consumption patterns.”
Post-Graduate Education and Alternative Finance:
Fears of a collapse in post-graduate education due to rocketing tuition fees has led the government to explore alternative finance options with increased vigour. Ministers recently invited the major banks, as well as a number of alternative financers, to the Department of Business to discuss options for making funds more accessible to post-grads.
David Willetts, the Universities Minister, who hosted the meeting, said:
“There is not only a graduate premium but there is clearly a post-graduate premium and post-graduates doing these courses are likely to end up in very well-paid jobs and are a good bet to invest in.”
Post-graduate students are not currently entitled to government loans, but there is a fund of up to £50 million from 2015 to support the group.
The number of master’s degrees undertaken has risen in the past eight years, but post-graduate research degrees (like PhDs) have been on the decline since 2010, following the raising of tuition fees in 2006. University leaders are fearful of a drop in demand for master’s degrees once the first wave of students to incur £9,000 a year in fees graduate with huge amounts of debt.
Mr Willetts further commented:
“Postgraduate education is the next frontier in social mobility so it is very important we work on it.”
A Department of Business study suggests that some graduates, in response to the higher fees, may now wait 5 to 6 years before applying for a master’s degree. Those from poorer backgrounds may not apply at all. Small wonder, then, that the government now seek to shepherd indebted students towards the more flexible world of alternative finance, where platforms (like StudentFunder) cater exactly to their needs.
I have written before that there is no marriage more fitting in crowdfunding than that between the donation-based model and suffering students. That may be true, but the overwhelming reality, regrettably, is that pure pledge-based crowdfunding will not cure the debts of more than a few lucky students. Debt will always outweigh pure altruism.
Philanthropic donors are not immune (and nor should they be!) to seeking a little more bang-for-their-buck, even if not in terms of any kind of profit or tangible reward. You need only look at the emergence of platforms like ZeroBound to understand my point. The funds pledged by donors using ZeroBound, as well alleviating an individual student’s debt, also commit that student to a certain amount of voluntary work within a given community. This is an intelligent innovation. Donors will inevitably be drawn to the platform where their money will effect the greatest social impact, and that is good news for the students who will use ZeroBound once it is launched.
Another interesting spin on the typical pledge-based platform is Educredit. Funds donated through Educredit go directly to the educational institution which the borrower attends/hopes to attend. Donors have a firmer sense of assurance that their funds will be properly deployed. Uncertainty in this area is often a thorn in the side of charitable giving. Educredit lenders also have the option of donating to a fund pool, meaning their money is spread between a number of students. These pools often relate to subject area – such as the creative fund pool. Friendships and beneficial links may also be forged between the members of these pools. The pledge-based crowdfunding model needs the like of Educredit and ZeroBound to incentivize donors.
How about magnifying the scope even further? Some platforms focus not on students as a collective but on a specific type of student. Medifund operates as an intermediary between lenders and medical students. The platform exists to tackle the often cripplingly high debts incurred by medical students – which causes many to drop out and perhaps more to never apply for medicine in the first place. There is a worldwide shortage of doctors. Medifund will seek to address this deficiency by easing the financial burden of aspiring practitioners.
You may notice the conspicuous absence of UK-based donation platforms. I can only tentatively attribute this to the fact that fees have been sky-high state-side for a long time, whereas the full effect of rising fees in the UK has yet to be felt. Either that, or Americans are a far more charitable bunch.
We also have platforms that specialize not in directly financing an individual’s education, but in funding projects and initiatives concerning education. Hubbub, for example, aim to transform university fundraising by connecting students, societies, universities and alumni. But they do more than to simply raise funds for projects. Hubbub can provide universities with white-label, institution-branded crowdfunding platforms. This service represents a savvy method of establishing a cohesive community of donors (often alumni) and entrepreneurs who are all tied to the same university. Institutions can then receive donations from alumni through the more fluid, efficient medium of crowdfunding. You can view the platform which hubbub built for York here: https://yustart.hubbub.net/. “YuStart” was the first university crowdfunding platform in the UK.
Funding4Learning facilitates funding for individual fees and campaigns, as well as allowing institutions to advertise learning programmes on a reward-like basis. To give a few examples, the platform currently displays several opportunities to support masters students, in addition to advertising several yoga and cookery courses.
Piglt is a smart, rewards-based crowdfunding model. The rewards offered by loan-recipients upon this platform are directly tied to the education of that recipient. A trainee lawyer may offer a free consultation to his/her supporters. There is a lot of sense to this method, and I believe pledgers will be attracted by it. The only pitfall may be that a student of, say history, may struggle to offer incentives as enticing as the sketching classes offered by an art student.
Of course, student-related campaigns find their way onto all manner of platform. GraduRates, a peer-to-peer lending platform specifically for post-graduate loans, recently offered equity in exchange for backing on CrowdCube. Gofundme is a US donation-based site that isn’t student-focused, but it features numerous student campaigns for paying expenses and backing projects. While they may not directly cater to students, a vast amount of platforms old and new could feasibly host student-driven projects.
Some of these platforms are not student-focused but provide funding for recent graduates, and I’ve included them for that reason. Upon such platforms – like Upstart and Pave – backers can invest in a young individual for a stake in that individual’s future earnings, generally over a period of 5-10 years. Such models represent an intriguing proposition. The platform vets applicants so that only very high-potential young people can receive funding, based on the assumption that these people will go on to earn high wages.
On Upstart, for instance, a statistical model is used to predict each borrower’s income for the next decade. They then generate a funding rate, which is the amount the applicant can raise for each 1% of income shared – for either a 5 or 10 year term. “Upstarts” decide the amount they wish to raise, and share the set per cent of income with their backers over the 5 or 10 years. Payments are waived for years in which the upstart earns less than a minimum income amount, but an extension year is added, up to an additional 5 years. The risk? Backers are reliant upon the success of the Upstart.
The UK-based Prodigy Finance offers crowdfunded loans to international students at the world’s leading business schools. Again, a high-potential set of borrowers is the major selling point to lenders here. Investors using Prodigy Finance can expect a return of roughly 5%. Prodigy are hoping to draw on community ties and shared experience to leverage the power of the alumni base to invest in the next class of MBA graduates. Clearly the alumni goldmine is a nut which many different student-focused platforms are trying to crack.
I would suggest that the benefits of this model are skewed slightly more in favour of the investor than the borrower. That is not a bad thing. Indeed, the investors who therefore flock to these sites will be a most welcome support-base for promising graduate initiatives.
I’ve rambled for quite long enough, how about some thoughts from the coalface of alternative student finance?
The alternative finance world is becoming increasingly specialized. Each new peer-to-peer lender in some way tweaks the typical proposition. There are crowdfunding platforms for music, art, film, sportspeople, gambling, healthcare, publishing, journalists – and just about everything else. The student crowdfunding space is very busy too, and I have little doubt that it will continue to swell for a while yet. Alternative finance is clearly a smart match for the variety of students’ financing needs. I envisage the two sides relying upon each other increasingly in the foreseeable future.
It is unlikely that any platform will ever be able to dominate the student alternative finance space as a whole. To do so would require implausible flexibility. Instead, I believe we will see clear leaders emerge in more specific roles – i.e. “the premier option for tackling student debt”, “the centre for student-led initiatives”, etc. This will be one of the more intriguing alternative finance sectors to watch going forward.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.