Startups Want to Cash In on the US Student Debt Crisis

[ad_1]

The pause has allowed people to pay down other debts, save money, and improve credit scores. It has also brought an opportunity to take pause and question the broken economics of the US higher education system. The federal government is expected to lose nearly $200 billion on student debt rather than profit from it, while large firms have raked in profits.

The moratorium also affected some student loan refinancers and other companies that had built businesses on college debt. In January, SoFi CEO Anthony Noto said that the refinancer’s student-loan-related business had “declined meaningfullySince loan payments were paused. SoFi is doing just a quarter of the student loan refinancing business it did before March 2020, Noto said.

The majority of student debt is in federal loans. Refinancing can lower interest rates, but shifting debt into privately held loans during the payment pause would have been a poor financial decision. People who refinanced federal loans to private ones are not eligible for plan, payment pause, or other federal loan safeguards.

But SoFi is still growing, thanks to other aspects of personal finance it manages. And the company’s stock rose last week after Supreme Court justices expressed skepticism about the legality of the loan forgiveness program. The company did not respond to a request for comment on how the student loan pause has affected its refinancing business.

Startups built on the student loan ecosystem have continued to raise new investmentdespite the payment pause. announced on March 2 that it had raised $3.1 million in a seed round led by XYZ. The company, founded amid the payment pause in 2021, relies on a provision in the Cares Act, a federal economic relief package addressing fallout from the Covid-19 crisis . It lets employers make tax-free contributions of up to $5,250 per employee annually to pay down federal or private student loans. Still, it’s a benefit that hasn’t been adopted widely by employers.

Don’t expect investment in these startups to transform or end the student loan crisis. “This is still a drop in the ocean, and quite a measured bet by investors,” says Carla Napoleão, innovation analyst at Dealroom. Startups might see a need for disruption in the medium to long term, Napoleão says, but “in the short term, the unfortunate truth is that debt, particularly debt collection, often does well in a downturn.”

It’s not surprising to see so many startups flood the space when there’s so much earning potential. That doesn’t mean it’ll solve the student debt problem, says Dalié Jiménez, director of the Student Loan Law Initiative at UC Irvine. ‘t fixed the underlying problem: How do we finance higher education?”

Because some of these startups focus on helping people pay for loans they have incurred by making payment plans, refinancing, or getting small employer contributions, they don’t tackle the root affordability issues. are still playing in a frustrating system. “It’s very hard to do good,” in a moral sense, by building a business on student loan debt, says Jiménez. “Because the fundamental thing—the way we think about how to invest in higher education—is flawed.”

Startups may not be in a position to tackle the underlying causes of rising tuition costs and inflation. Biden’s novel, but precautionary, widespread debt-relief plan is caught in the same tangle. As long as there’s a booming business around student debt, there will be entrepreneurs looking to help out—or cash in.

[ad_2]

Source link

Recommended For You

About the Author: News Center