Study Now, Pay Later

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

PAVE is fuzzy about how it will ensure that backers get a reasonable return on their investment. A proprietary algorithm, developed with the help of a Yale professor of labor economics, takes into account a prospect’s occupation, location, age, and degree level, and compares them against national data to predict how much money he or she will make over 10 years, but PAVE allows prospects to adjust both the funding request and the share percentage—after that, “we let the market take it from there,” says Bass. The average funding request is $20,000—close to the average student loan debt carried by a new graduate—and the rate of income share usually falls between 4 and 6 percent, which is close to the range of interest rates offered for federal student loans. The ratio has already varied widely, though: Filmmaker and Dartmouth alumna Clara Aranovich raised $50,000 in exchange for a 5 percent income share to help fund her first feature, while Pitzer College student Benjamin Levine raised $3,000 for a 0.4 percent income share to hire employees for a business producing and selling traditional Chilean pastries.

It may seem counterintuitive that an investor would wish to choose to fund any prospect with less favorable terms than another, but PAVE believes that the growing number of investors who, in Bass’ words “want to do well and do good”—they’re often referred to as “social investors”—are a different breed. Lahoud and Bass say their market research has told them that a compelling personal story—of uncommon striving or overcoming adversity—might attract some backers as much as academic awards earned by a premed student at an Ivy League college. Bass cites Michigan native Jennifer Schoolcraft, who sought funding to cover tuition for an occupational therapy program to work with at-risk young people, writing that she is inspired by her younger sister, who suffered a traumatic brain injury after a collision with a drunk driver, as one example of a prospect whose story likely helped her get funded.

Students who can’t present as compelling a profile, meanwhile, risk coming up short in their fundraising. Once a prospect’s profile is posted on the site, there’s a 60-day window to raise an agreed-upon minimum, then another 30-day period to raise the rest of the money. Prospects who come up short will have their profiles taken down.

Ellen Weinstein

Backers typically form “teams” to offer prospects their full loan amount. In Ross’s case, his team of eight backers includes a former vice president of Apple; Silicon Valley business consultant Martha Josephson; marketing executive Sam Wilson, whose firm co-created the Bono-led RED Campaign, which raised $210 million for AIDS causes; and Hilary Lefebvre, a former CNN producer.

Josephson is typical of pilot-phase backers in that her motivation to invest was more strongly social than financial. “I did not pick Terrance because he’s going to make me a million dollars,” she says. “He’s not even going to make himself a million dollars. There is some altruism behind this.” Says Wilson, “Finding the next Mark Zuckerberg wasn’t really my going-in motivation.”

Josephson and Wilson are also typical of the first group of backers in their superstar status. Over the past few months, PAVE has gained several new backers with less stratospheric credentials, including a family physician in Seattle, an accountant in San Diego, and a photographer formerly based in Iraq. As the site grows, says Bass, this will change: “The idea is that anyone on the backer side can get involved. The only requirement would be to have some money”—as little as $100, he says—“to invest.”

But there is one major roadblock in the way of this vision of a democracy of backers. For now, out of concern that any potential investors “are very compliant with all the legislation out there,” PAVE is requiring that any backer who wishes to invest be an SEC-approved accredited investor, for which one requirement is that they have either $200,000 in yearly income or a net worth of over $1 million. For now, any backer who does not meet these criteria would be allowed to give only by utilizing a “ripple money” option, which channels any profits from an investment into funding other prospects, rather than returning it to the investor. (Four thousand would-be prospects have already applied to PAVE. Backers are rolling in more slowly.) Bass says he is working with regulators to open the option of investing to less wealthy backers, but he could not provide a target date.  

For Ross, a U.S. citizen who grew up in Trinidad and moved to New York in 2008, working during college as a coat checker at the Blue Water Grill on 14th Street allowed him to avoid taking out student loans, but provided little cushion for spending on anything other than tuition and books. PAVE enabled him to spend his last semester at Baruch burnishing his credentials as a budding foreign correspondent: His first purchase was a round-trip ticket for a spring break trip to Kenya, which resulted in two news stories, one of which ended up on USA Today College. The money also allowed him to quit his job to take on an unpaid internship at Forbes magazine.

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