Study Now, Pay Later

A new city startup promises to eliminate student loans for those who'll share their future income with investors

If you're a college student funding your education through student loans, or a recent graduate just beginning to receive monthly statements—or, worse, robocalls—from Citibank, chances are you've fantasized about a beneficent stranger sending you a five-figure check that would rescue you from your debt.

For Terrance Ross, this fantasy was realized last winter, when, as a Baruch College senior, he received $20,000 drawn from contributions made by four people he'd never met.

Of course, there was a catch. In return for this money, Ross, an aspiring journalist and media entrepreneur, signed what his funder describes as a "social-financial" agreement to "share" 4.5 percent of his income with his benefactors every year for the next 10 years.

The transaction was brokered by PAVE, an eight-month-old New York City startup that aims to leverage students' future earning power and personalize the way we get money for college. Sal Lahoud, a 29-year-old former Goldman Sachs banker, arrived at the idea for PAVE in 2011, when a friend asked him for a loan that would allow him to quit his job at an interior design firm to start freelancing. Lahoud felt uncomfortable making a traditional loan that might put him in the position of collecting money from a friend even if his transition to freelancing proved unsuccessful.

Lahoud ultimately raised $5 million to create a company that he claims will create mutually beneficial relationships between professionals with money and connections—PAVE calls them "backers"—and younger "prospects," who have ideas and the capacity to innovate but fewer resources. In the vision of Lahoud and his business partner, 35-year-old Oren Bass, also a Goldman alumnus, it will one day be commonplace for people to decide whether to invest their money in a mutual fund or in a promising college student.

For students, PAVE money is designed to allow you to go to school, pursue a period of non-traditional study, or undertake a project that would be impossible without funding, such as making a film or starting a company. Prospects are not required to share any income with their backers in years that they make below 150 percent of the federal poverty level, or $17,235 for a single person living in New York; if they never make more than that, they never have to pay. (The agreement prospects sign, which PAVE officials say they drafted after speaking with regulators from the Consumer Finance Protection Bureau and the SEC, allows PAVE to view prospects' tax returns and use "standard payment collection methods" against anyone who tries to hide income, according to a PAVE spokesperson.) PAVE itself makes money by taking a series of cuts from backers: 3 percent on each backer's initial gift (so that a prospect who's funded for $5,000 will actually end up receiving $4,850) and 1.5 percent on each payment a prospect makes to them (so that when a prospect sends a backer $200, PAVE will collect $3, with the backer receiving $197). PAVE also encourages backers to become mentors to students, helping them achieve their career goals.

New York University economist Arun Sundararajan calls PAVE's investment-based model one "whose time has come." He predicts that soaring debt will not only drive students to seek alternatives to college—most notably Massive Open Online Courses—but to consider alternate forms of financing their education. The growing interest in an income sharing model is undeniable: PAVE already has a Silicon Valley rival called Upstart, and this summer Oregon lawmakers are considering a "pay it forward" program that would provide students with tuition assistance in return for a 3 percent income share over 20 years.

Ira Rheingold, executive director of the National Association of Consumer Advocates, has criticized other income-based loan deals, such as "human capital contracts" wherein high-risk borrowers agree to repay debts with a cut of future earnings. But he says the PAVE model, though untested, "sounds pretty creative. If this frees people up to pursue their dreams in a way that they don't find themselves in a debt nightmare down the road, then that's a really good thing."

PAVE's flexible rates mean that students could end up paying far more than they would have for a federal student loan—or far less. Ross's monthly payment over 10 years on subsidized federal Perkins loans (with an interest rate of 5 percent) totaling $20,000 would have been $212, significantly less than the $375 per month he will pay his backers should he draw income of $100,000 per year for the next 10 years, but more than the $188 a month he will pay his backers if he earns $50,000 a year. The federal government allows borrowers who can prove financial hardship to make lower monthly payments over a longer period through a program called Income Based Repayment. A borrower approved for this program who is making just $25,000 and owes $20,000 would pay $97 a month for 20 years; if Ross earns that little, under his PAVE terms, he will pay $93 a month for 10 years.

Whether or not all prospects end up getting a better deal through PAVE, its website is certainly a lot more fun to browse than Sallie Mae's. Prospects' profile pages include a brief mission statement—recent Hunter graduate Syreeta Gates's is "to inspire 10,000 people to become social entrepreneurs"—and four "highlights," as well as prospects' ideas about how they might spend PAVE money, which are often a grab bag of academic and extracurricular expenses, such as Detroit-based jazz musician Evan Perri's request for "funding to cover final year of BA degree, pay down old loans and tax debts and purchase a new, professional-grade guitar."

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