This fintech will put your kids through School

By David Tuckwell on Monday 3 July 2017

Alternative Lending

Edstart lends parents money to pay for their kids private school fees

Aussie fintech Edstart provides money for parents looking to get their kids through the increasingly expensive private school system. 

“There’s something about the Australian psyche. It’s been a bit of a thing historically that parents really value education.  It’s amazing what parents will do to send their kids to a good school.”

So says Jack Stevens, CEO of Edstart, explaining why 45 percent of all high school students in Australia go to private schools - a phenomenon that exists nowhere else in the developed world.

Mr Stevens’ company is a fintech that provides loans to parents looking to pay private school fees. Private school fees can be staggering - up to A$60,000 a year for boarders. For many families, these fees are their biggest expense, particularly if they have more than one child.

“If you need financing, there is a solution for cars, holidays, renovations, etc. But when you want to invest in your kids’ education you don’t have a financing tool for that,” Mr Stevens says.

Edstart provides loans over the internet. Parents wanting their kids’ school fees paid can simply hop on Edstart’s website and feed in their personal information, including how many children they have and what their school fees are.

Edstart then examines what other debts parents might have, credit bureau information and bank statement data. The company’s software then gives a risk rating to each borrower and sets an interest rate according to how risky the family is deemed to be.

“We model out how we could fund these fees and parents’ choose how they want to pay. A very basic example is if I have one child going through 6 years of high school, I could pay it out over 10 years. The complexity builds as you have more kids,” Mr Stevens says.

Because most parents using Edstart are prime borrowers, Mr Stevens says, interest rates can be as low as 8 percent a year, despite the loans on offer being unsecured. Risk is mitigated further by the fact that in 95 percent of cases families coming to Edstart are already paying this expenditure themselves.

“Our borrowers are not typical consumer loan borrowers. Many parents coming to us have never taken a personal loan before.

“We don’t do it in one day. We’re going to be looking after these families for a long time so we don’t want to be thinking short term. We certainly don’t want kids going half way through school then finding this doesn’t work.”

Edstart profits from the interest rates on outstanding balances, as well as through a fee on drawdowns. Much of the Edstar’s money comes from its partnership with RateSetter Australia.

The market for this type of loan is upper-class parents as well as middle-class ones, Mr Stevens says.  It is not restricted merely to Henrys (High Earners Not Rich Yet).

“Quite a big chunk of applicants go to top tier schools,” whose fees can be up to $35,000 a year for day students. “We didn’t expect to have that demand at the top end so it’s quite interesting. We get high-earning parents on $200,000 to $300,000 a year coming to us.”

“The trigger point [for these families] is when they have multiple kids overlapping for the first time. You all of a sudden have a steep change in expenditure.”

There is also demand from aspirational class parents, whose kids are in cheaper private schools.

“The smallest loan we’ve funded as a $3,000 a year for a Catholic school. These parents might earn $70,000 a year, but they are good borrowers because they’re doing things for the right reasons. They want to put their kids through a good school.”

Australia’s education landscape continues to change. As this article was written, the federal government is spindling over a new school funding model, called “Gonski 2.0”, which ups funding for government schools.

Private schools are also changing. In particular, fees are increasing, at an almost vertical rate. Mr Stevens – who says he supports increased funding for government schools – has a handle on why.

“Private school fees have consistently outpaced inflation and wage growth over the last decade. No question. The cost of running a school has gone up…. But you’ve also got a situation where demand has increased into the sector.

“So in 1970s you had 20 percent of students in a private school. Now it's at 35 percent across the board and almost 43 percent at the high-school level. That doesn’t exist anywhere else in the developed world. Natural demand has increased and so has genuine cost.”

School fees increasing faster than wages is an unpleasant thought for struggling parents. But the trends bode well for an education lender like Edstart.

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