Study Now, Pay Later
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."
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.
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.
Ross speaks with gratitude about being able to fully dedicate himself to his entrepreneurial vision at such a young age. “I’ve met so many people my age who really want to do things. PAVE is like, ‘Go ahead, try it.’”
PAVE also promises to help prospects by connecting them to a team of accomplished professionals, and if you listen to Baruch College senior Anjelica Mantikas and Gates, both of whose profiles were posted this summer, the possibility of finding a wise and well-connected mentor was just as appealing as receiving a large chunk of money.
Like Ross, Mantikas envisions a multifaceted career, with a human rights law practice anchoring less remunerative nonprofit projects and higher-risk pursuits, such as her plan to develop a multimedia platform for telling stories she’s gathered from Ghana and other developing countries. It was this project that led her to PAVE, which she hoped would—in addition to sending her $20,000 from backers to invest in starting it up—connect her with a media-savvy backer to help her draft a business plan. As presented on the PAVE site, her plan was “to help create a platform for either a written publication, a web channel or a television show that focuses on the beauty in developing nations.” Asked if this seemed vague, she said, “PAVE allows you to be more vague” than crowdfunding sites like Kickstarter.
Gates, who was named as one of Glamour magazine’s Top Twenty Under Twenty-Five in 2010 for projects including an HIV testing program for teenagers in Brooklyn, racked up $20,000 in student loans at Hunter as well as credit card debt funding her initiatives as a student. She says she signed on for a practical reason—the 3.5 percent she’d owe to her backers is “definitely less than my APR,” she says. “But more so than the money, I’m definitely here for the relationship.” Gates, who is at work on a documentary about hip-hop journalists, hoped taking on a backer would be “like adding someone to my board of directors.”
Lahoud suggests that it will be the rare prospect who has a standing coffee date with his or her backer, and that most mentoring will occur online, using messaging features PAVE says its engineers are refining. Ross himself says he’s had limited contact with anyone other than Lefebvre, with whom he e-mails frequently; among other things, she put him in touch with a contact that led to his first publication on the Huffington Post.
When the Voice reached out to Mantikas and Gates, they were both in the middle of the first, 60-day phase of seeking funding, and neither had yet attracted any interest from backers—a circumstance that was causing Gates to reflect on the viability of the model. “I think PAVE is a brilliant idea,” she said. “But if I don’t get funding, then what?”
Asked what she would do if she failed to raise her minimum, she answered quickly: “Kickstarter.”
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