Moving America Forward

This Venture Capital Firm Bets on College Students

June 13, 2014
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This Venture Capital Firm Bets on College Students
A small group of investors are investing on student's college education, giving loans in exchange for a percentage of their earnings. Getty Images
Can 13th Avenue Funding change how we look at investing in higher education?

In this country, we used to talk about ballooning credit-card debt. Now the bigger money worry? Student-loan debt.

As more students graduate with a crippling amount of it (the total amount of student loan debt now tops $1.2 trillion, according to the Consumer Financial Protection Bureau), Silicon Valley is rethinking the way in which we ask people to pay for college.

As it currently stands, borrowers carry all of the risk while the government lender is only responsible to make up for unpaid balances through taxpayers around two decades later. Private lenders are only responsible for paying a collection agency to chase the unpaid balance and schools receive tuition regardless, all the while a borrower could go into default and ruin their credit for the rest of their lives. And for low-income students, this risk is even greater.

Instead of placing the entire burden on students, financial executives at venture capital firm 13th Avenue Funding believe that education loans should be perceived as equity, placing bets on a student’s potential achievements and earnings.

Two years ago, the New York-based firm offered four students at Santa Barbara’s two-year Allan Hancock College $15,000 for tuition to become a part of a “cohort” before transferring to a four-year institution to earn their bachelor’s degree. The students leave college without the possibility of defaulting and are expected to pay a small percentage of their salary each month if they make more than $18,000 a year post-grad. If they should surpass an annual income of $25,000, they’re required to pay back five percent of their income for the next 15 years.

Granted, borrowers do run the risk of paying back more than they received — but the money is used to cover other members of the cohort who are unable to repay the loan. And any additional remittances are used to fund new scholarships for future cohorts.

“It’s pooled venture capital,” said Casey Jennings, chief operating officer for 13th Avenue. “It’s sharing risk.”

The 2012 experiment, which is the first of its kind in the United States, was backed by four of the VC firm’s founders as well as two board members. The firm put together enough money to support a second cohort of seven students last year and hopes the model will be successful enough to continue.

While the idea is unique, it’s actually similar to that of investing in any small tech startup in Silicon Valley. You run the risk of failing — more often than not — but the chance of success can be worth it. The challenge therein lies with convincing higher education professionals to take the gamble on the concept of “income sharing” agreements.

“It’s really painful,” Jennings said. He continues to meet with college administrators to make them the “investors,” but has found no school wants to be the first to take a chance. “We talked to a bunch of colleges. They’re like, ‘It’s interesting, but come back when you get another college.’ “

If the 2012 experiment succeeds, it shows that students — especially those with low-incomes — can be an untapped market for investments. When it comes to funding those low-income students, Jennings added, “the payback for getting that group to go to college is unfathomable.”

After all, having a more diverse group of college graduates is something that you can’t put a price tag on.

MORE: Ask the Experts: How Can We Keep From Drowning in College Debt?

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