A Company Where You Are the Investment and Your Success Is the Payoff
When young entrepreneurs need cash to get a company started, they can reach out to venture capitalists and banks. When young artists want to get a project off the ground, they can turn to crowdfunding sites like Kickstarter and Indiegogo. But where do young people turn — at a time when the average American college graduate carries $26,600 in student loan debt — for the financial freedom to realize their potential?
Enter Pave and Upstart. The two startups — launched separately last year — are betting that more ambitious young people would pursue their dreams if they had access to good mentors and enough cash to cushion against temporary setbacks. So, they built online platforms to help "Prospects" or "Upstarts" — young people who registered to be listed on the websites — find backers who provide upfront funding and advice in exchange for a small percentage of their future earnings.
With a literal stake in the future of the young people they've invested in, backers through Pave and Upstart have an incentive to do everything they can to help young people propel their careers.
"The product is an investment in someone’s potential, unlike a loan," Pave COO Oren Bass told Campus Progress. "In a pure financial sense (i.e. excluding the social benefit), the better a prospect does, the more a backer will gain; and the worse a prospect does, the more a backer will lose."
If the young people receiving Upstart or Pave funds make under a certain amount ($30,000 for Upstart, 150 percent of the poverty line for Pave), they don't have to pay anything at all.
Pave's first class of Prospects received loans ranging from $3,000 to $50,000. Among these eight young people are an aspiring filmmaker, a social entrepreneur looking to pay off grad school debt, a professional jazz musician and a student journalist.
President Obama expanded similar income-based options for student loans in his first term. Inside Higher Ed reported last year, however, that while 5 million borrowers are now behind on their student loan payments, only 1.6 million are enrolled in income-based or income-contingent repayment programs that would make their payments more manageable. Those statistics suggest that borrowers remain largely unaware of income-based programs.
Bass dismissed the suggestion that similar challenges might arise for his company.
"The main issue with income-contingent loans (ICLs) and debt, generally, is the concept that regardless of how someone is doing financially, there is always a claim of principal and interest," Bass said. "This means that the interests of the borrower and lender are not fully aligned…People unable to make payments could end up in a position whereby, as a result of the accrual of interest, they owe significantly more than what they originally borrowed, despite having made payments."
"Pave offers income-contingent repayment, but our model does not oblige the prospect to repay the amount raised…There is no claim of principal and interest."
Those generous terms are attracting borrowers. Both companies report demand for their services is sky-high.
Zach Duffy is a reporter for Campus Progress. Follow him on Twitter @zachduffy.