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Student Finance in the US – a Discussion with Credible and LendKey

It seems that no sector is protected from the spread of disruptive finance. AltFi caught up with Stephen Dash – CEO of Credible - and Vince Passione - CEO of Lendkey - whose platforms connect borrowers with student loan financing and refinancing options. This week has been an exciting one in the space, as Commonbond announced that it is adding Morgan Edwards as their new CFO. The move marks another example of platforms bringing in expert knowledge from the traditional banking sector to bolster and establish themselves. Mr. Edwards joins after a 25 year banking career at firms such as BofA, Morgan Stanley, Bear Stearns and Macquarie. Last month, AltFi reported that LendKey had reached the $800M mark in terms of loans facilitated.

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When the student receives their acceptance letter, it will alert them to the scholarships, bursaries and loans available. To top this up, the student can apply for loans. Students are advised to apply for a federal loan first. These are awarded on a needs basis, so students are not judged on earning potential. Following this, they may get further state funding. After this, they can apply for private loans. As a result, competition in the industry generally rages over that final bit of finance: the private loan.

This is where disruptors, such as LendKey and Credible come into play, and they operate in different ways. LendKey works by connecting students/graduates with community banks and credit unions offering (re)financing options. Offering this service since 2001, Vince claims that they have brought 315 providers into the industry. Given that community banks are typically regional players, LendKey's online presence allows these community banks - which may only have a handful of branches - to communicate with students nationwide, depending on their license. Mr. Passione argues that by reducing the cost of supply and bringing more suppliers into the market, they are helping to drive rates down - important work with tuition costs rising by roughly 5% a year. Furthermore, given that credit unions can provide some of the cheapest credit around - with Passione citing 0.5% - they have the ability to drive down costs for students. In this way, LendKey argues, their services are an important development for those seeking student finance.

Furthermore, the opportunities for refinancing are great. Mr Dash pointed out that the government – that controls 80-85% of the market – lends at around a rate of 7%, sometimes regardless of earning potential or ability to repay. This means that the only risk assessment is a check against bankruptcy. Private lenders' ability to assess on the basis of earning potential allows them to offer more appropriate loans to higher achieving graduates. LendKey pointed out that it is not unusual for a student to refinance their loan upon graduation, shave 200 basis points off their rate and save themselves $11,000 in interest repayments. Of course, upon graduation, the ex-student has higher expected earnings, so can often release co-signers from loans - notably parents roped in on a Parent+ plan.

Mr Dash emphasised that student finance was probably unique in its ability to bring together traditional and new finance. Credible says that its model of acting as a comparison website for other finance providers has given roughly a 50/50 split between disruptive and traditional finance providers, as they work with P2P lenders, regional banks and national banks. Bringing together so many different players is part of the reason why customers with a FICO score around 620 are still able to access funding via the Credible website.

As a vindication of the benefits of services provided by these two platforms, Credible has recently announced a partnership with NerdWallet – the comparison website. NerdWallet will now use Credible’s services to compare student financing options. Mr Dash believes that this shows them as a market leading platform and helps bring the industry into the mainstream. US university fees are some of the highest in the world, with a report by the U.S. Government Accountability Office (2007) placing the States at second only to Australia - although other reports disagree - and this takes into account the grants available. Much attention is given to the discriminatory effect on social mobility of high education costs – as low income earners become unable to attend and so have earning potential capped, entrenching socio-economic positions. The opportunity that these platforms provide to reduce financing issues for students is significant and important. Doubtless that government will remain the dominant provider in the market. However, by drawing more competition into the industry and increasing awareness - something that impartial comparison platforms are well placed to do - organisations such as Credible and LendKey can do much to benefit students in need of finance.

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