Can the Silicon Valley Playbook Solve the Student-Debt Crisis?

A group of investors is paying for students’ tuition in exchange for a percentage of their future earnings.

Eddie Triste, president of Hancock College̢۪s Associated Student Body Government, was recently chosen by the Student Senate for California Community Colleges as the president of the year for southern California.
Lee Central Coast Newspapers
Fawn Johnson
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Fawn Johnson
June 5, 2014, 5 p.m.

In late 2011, Ed­die Triste walked in­to a meet­ing at his com­munity col­lege. There, a couple of middle-aged guys offered him $15,000 to help fin­ance the rest of his un­der­gradu­ate edu­ca­tion. He was skep­tic­al. Triste comes from a fam­ily of farm­work­ers in Cali­for­nia’s Cent­ral Val­ley — the “work­ing poor,” as he de­scribes them — who aren’t used to people of­fer­ing them cash without something fishy be­ing in­volved.

“You’re com­ing in, and they’re of­fer­ing you this too-good-to-be-true deal,” says Triste, who is the first in his fam­ily to go to col­lege. “It took me two or three meet­ings to fig­ure out what they were talk­ing about. Re­read­ing the con­tract, re­read­ing the con­tract.”

Triste and three of his class­mates at the two-year Al­lan Han­cock Col­lege in Santa Bar­bara even­tu­ally took a leap of faith and ac­cep­ted the of­fer of cash to trans­fer to an­oth­er school, with the money pay­ing tu­ition for a four-year de­gree. Now Triste is a part-time stu­dent at Cali­for­nia State Uni­versity in Sac­ra­mento, where he also works as an event co­ordin­at­or. After he gradu­ates with a bach­el­or’s de­gree in so­ci­ology, Triste wants to even­tu­ally be­come a pro­fess­or.

In 2012, these four Al­lan Han­cock stu­dents be­came part of an ex­per­i­ment­al “co­hort” set up by 13th Av­en­ue Fund­ing, a small New York City-based non­profit aim­ing to change the way Amer­ic­ans think about fin­an­cing col­lege. It shouldn’t be about debt, like buy­ing a car, these ex­ec­ut­ives say. High­er edu­ca­tion should be viewed like equity — in­vestors (par­ents, col­leges, and en­tre­pren­eurs) bet on stu­dents’ po­ten­tial earn­ings and ac­com­plish­ments. Some­times they win. Some­times they lose. Col­lect­ively, the eco­nomy gets bet­ter be­cause more people get col­lege de­grees.

The deal for 13th Av­en­ue’s co­hort goes like this: The stu­dents each re­ceive $15,000 to fin­ish their bach­el­or’s de­grees. The award isn’t a loan. It won’t af­fect their cred­it. There is no de­fault if they can’t pay back the money. But if they make more than $18,000 a year after gradu­at­ing from or leav­ing col­lege, they are re­quired to pay a small per­cent­age of their earn­ings to their in­vestors each month. Each year that they make more than $25,000, they are re­quired to pay back 5 per­cent of their in­come. The ob­lig­a­tion ex­tends for 15 years.

The catch is that Triste might wind up pay­ing back more than he got. And, if he does, his pay­ments might well help to cov­er the short­falls of his co­hort peers. Ex­tra money that the group col­lect­ively pays gets rolled over in­to new schol­ar­ships for the next co­hort. “It’s pooled ven­ture cap­it­al,” says Ca­sey Jen­nings, chief op­er­at­ing of­ficer for 13th Av­en­ue. “It’s shar­ing risk.”

Jen­nings and his col­leagues think stu­dent loans are dan­ger­ous for low-in­come fam­il­ies. The bor­row­er as­sumes all of the risk, in­clud­ing a poor cred­it rat­ing if she can’t make pay­ments. The gov­ern­ment lender takes on al­most no risk, ex­cept maybe to tap tax­pay­ers for some un­paid bal­ances 20 years later. A private lender’s only risk is hav­ing to pay a col­lec­tion agency to go after un­paid debt. The schools get the money no mat­ter what.

Chan­ging the mod­el to one in which in­vestors have a stake in a stu­dent’s fu­ture is threat­en­ing to tra­di­tion­al­ists, says An­drew Kelly, who heads the Cen­ter on High­er Edu­ca­tion Re­form at the Amer­ic­an En­ter­prise In­sti­tute. “It’s looked at with cyn­icism, and al­most a dose of fear. The stu­dent-loan sys­tem serves a few act­ors’ in­terests par­tic­u­larly well. First and fore­most on the list are the schools.”

13th Av­en­ue is ad­opt­ing a Sil­ic­on Val­ley play­book, with the goal of dis­rupt­ing high­er-edu­ca­tion fin­an­cing mod­els. In Sil­ic­on Val­ley, in­vestors put money in­to thou­sands of small com­puter start-ups on the as­sump­tion that some of them will fail, some will break even, and one or two might be wildly suc­cess­ful. The suc­cess­ful ven­tures cov­er the cost of the un­suc­cess­ful tries. If a large num­ber of en­tre­pren­eurs and phil­an­throp­ists make these kinds of in­vest­ments in low-in­come stu­dents, Jen­nings says, “the pay­back for get­ting that group to go to col­lege is un­fathom­able.”

Plus, it costs the gov­ern­ment noth­ing.

But, so far, this kind of in­vest­ment is still rare. 13th Av­en­ue fun­ded its first co­hort through its own founders. They are a four­some of former fin­an­cial ex­ec­ut­ives who work full time at 13th Av­en­ue, plus two board mem­bers — one an as­so­ci­ate dean at the Uni­versity of Ore­gon, the oth­er an em­ploy­ee of the Cali­for­nia state gov­ern­ment. After the first round of in­vest­ment, 13th Av­en­ue cobbled to­geth­er enough money to start a second co­hort of sev­en grantees last year. No oth­er or­gan­iz­a­tion in the coun­try of­fers these kinds of in­come-shar­ing ar­range­ments to stu­dents. (One for-profit com­pany called PAVE does something sim­il­ar, but for en­tre­pren­eurs.)

Like any bold idea, it faces leg­al and lo­gist­ic­al ques­tions that are still be­ing worked out, and many people feel that the un­cer­tainty isn’t worth it. Their re­luct­ance re­cently promp­ted Sen. Marco Ru­bio, R-Fla., and Rep. Tom Petri, R-Wis., to in­tro­duce le­gis­la­tion to cla­ri­fy how the pay­ments to in­vestors would be taxed. Ru­bio said at a Next Amer­ica event in Feb­ru­ary that these “Stu­dent In­vest­ment Plans” would give stu­dents the op­tion of pay­ing for col­lege without ac­quir­ing any loans at all.

Up­start, a com­pany of ex-Google em­ploy­ees, stopped of­fer­ing its in­come-shar­ing deals last month in fa­vor of tra­di­tion­al loans. “What we were do­ing be­fore was of­fer­ing a product that the con­sumer had nev­er seen be­fore,” said Up­start CEO Dave Gir­ou­ard. “We said, ‘Let’s not put all our en­ergy in­to this. Give them a product they can un­der­stand.’ “

On col­lege cam­puses and in phil­an­throp­ic circles, in­come-shar­ing agree­ments are well re­ceived, but no one wants to go first. “It’s really pain­ful,” Jen­nings says of his ef­forts to make col­leges the “in­vestors” in their own stu­dents’ fu­tures. “We talked to a bunch of col­leges. They’re like, ‘It’s in­ter­est­ing, but come back when you get an­oth­er col­lege.’ “

Found­a­tions say they want to see data on some ori­gin­al grantees be­fore they put any money be­hind it. That’s why Triste and his peers are so im­port­ant. If their deals work out, they will be liv­ing proof that stu­dents can fin­ance col­lege in a way that doesn’t in­volve go­ing in­to debt or be­ing in­de­pend­ently wealthy. It just re­quires some savvy in­vestors and a di­verse pool of will­ing stu­dents.

Triste doesn’t have any prob­lem with pay­ing back more than he got, say­ing he has a whole com­munity of people at home who should have the same op­por­tun­it­ies that he’s had. But to move the eco­nom­ic dial na­tion­ally, about a mil­lion more people need to fol­low in his foot­steps.

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