We recently surveyed the latest examples of product diversification that have opened up over the past year within the alternative finance space. Platform investors are being offered exposure to a whole host of new asset classes, and there might not be a more exciting opportunity out there right now than lending to students. In the States, SoFi has pushed beyond the £1 billion mark in cumulative transactions. UK P2P outfits in the same space are also starting to build momentum.
One such example – Student Funder – makes loans exclusively to students enrolled in post-graduate and professional courses. Their loans are currently funded through a mixture of peer-to-peer lending and institutional capital. We caught up with David Puttergill, Investment Associate at the platform, to learn more.
Could you give us a brief intro to Student Funder and a little information about your background?
StudentFunder is an award winning London-based social business that provides loans on clear and fair terms to students matriculating in masters and professional courses. The company was founded by people who struggled to fund their education and wish to help others finance theirs. The team has a wide background from micro-finance, retail banking, structured finance and corporate finance. Investors in StudentFunder include a corporation, a foundation, two former FTSE 100 CEOs and seasoned financiers.
What are the main advantages of lending to postgraduate students?
Postgraduate students are very near to employment (typically only 1 year away), and have skills that are highly sought after in the job market. This means that they are actually a much safer group to lend to than undergraduate students. Despite this, postgraduates have been relatively under-banked for the last 30 years with only 10,000 loans available for over 250,000 students starting each year. StudentFunder loans are helping universities increase the size and improve the calibre of their postgraduate intake. The government has recently announced plans to offer loans to certain types of postgraduates but we still see a large, underserved market.
I understand that Student Funder has chosen to veer away from the typical P2P model – why is that?
P2P lending platforms are receiving funds not just from individuals, but also from institutions. Our model involves working in partnership with universities, which makes StudentFunder loans an investable proposition for institutional capital providers. Peer to peer lenders need to find the optimal balance between institutional money and individual investors.
Could you give us some insight into the terms, borrowing rates, flexibility, guarantees, etc. – and explain why StudentFunder provides such a good deal for students?
We designed our loans based on our experience of funding our own studies and on feedback from Students. The key elements are a simple and efficient application process, a loan that can be repaid over a long enough period to make repayments affordable (but with the flexibility to repay early), and a buffer period after graduation to start earning and repaying comfortably. Our loans are repaid over 3-7 years. There is a grace period, typically of 18 months, in which students only pay £1 per month. This builds the habit of repayment. Our rates are currently 7% fixed (c. 8.33% APR after admin fee) but we may introduce floating rate loans this year. As many students don’t have a strong credit history, they can qualify for a loan through a UK based guarantor; so far we've seen friends and family and even course directors guarantee loans.
Can you explain a little more about the contingency fund? What kind of coverage does this provide to lenders?
Last summer we lent to students using money we raised solely through our P2P platform. Thanks to the generous support of the Garfield Weston Foundation, we built a £100k contingency fund to offset any losses on the loan portfolio. This is way above expected default rates. We will continue to find innovative ways of delivering the best returns at the lowest possible risk to our lenders.
Where possible, universities share the risk of their students' loans. This strengthens the credit such that it is possible to offer more finance on better terms to their students. This is particularly attractive to institutional investors.