SafeStart; A Hand Up for Students Facing a Mountain of Debt

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A Hand Up for Students Facing a Mountain of Debt

Daniel Rosenbaum for The New York Times
By RON LIEBER
Published: August 14, 2009

The biggest problem for consumers of American higher education is that many of them must take on a mountain of debt to get the degree they want. That intimidating quandary has inspired some unique, though often unsuccessful, attempts to make student loans more affordable over the years.

One of the most innovative sprang from a handful of trailblazers, including an economist who later won a Nobel and some entrepreneurs barely out of school themselves, who tried to persuade undergraduates to sell a portion of their future income to investors in exchange for money for college. Critics fretted about “indentured servitude,” and the idea never amounted to much.

Others have tried to let strangers finance students’ fixed-rate loans via Web sites. The idea of “peer to peer” lending hasn’t gained much traction either so far.

Now comes the latest innovator, SafeStart, just in time for back-to-school season. It aims to reduce the fear of debt that might keep, say, middle-class 18-year-olds from borrowing for school in the first place. SafeStart, owned by a company called BridgeSpan Financial, charges $40 to $70 for every $1,000 a student borrows. In exchange, it promises to lend customers money interest-free later on to pay back some of those loans. You get the money only if you’re having trouble paying back your loans in your first years in the workplace because your income is too low.

Students and parents might pony up for such an offering, and schools or lenders might pay for it too. But its highest and best use may be for alumni who’ve paid their own loans back and now want to throw the rope back for others by buying SafeStart coverage for current students.

If enough alumni see the worth in investing in students, some may decide that peer-to-peer lending isn’t so bad after all. And others could realize that investing in an 18-year-old’s future income under the right circumstances is hardly akin to forcing them into financial servitude.

We’re getting a little ahead of ourselves here though. So first, a bit more about SafeStart.

Let’s begin with the $40 to $70 fee per $1,000 borrowed. The fee is higher if a student wants access to the company’s financial literacy training and debt counseling service. Economic conditions, local labor markets and characteristics of the schools may affect pricing, too. Students’ majors and credit scores don’t matter. The service is available only for federal Stafford student loans; the company hopes to cover other student loans eventually.

Upon graduation, a 60-month period begins. During that time, if SafeStart customers’ total monthly loan payments rise above 10 percent of their income, they can access the interest-free line of credit. The idea is to help customers avoid paying their student loans late, which would damage their credit. It would also help graduates steer clear of something called forbearance, which can add interest to a loan that could ultimately cost more than SafeStart’s upfront fees.

Once customers access the credit line, SafeStart makes their loan payments. Customers may use the loan for only 36 of the 60 months, though that window can expand beyond five years, since the clock pauses if a customer goes back to school, for instance.

Once the 60 months are up, another five-year clock begins, during which customers must repay the loans. Graduates who use the line of credit for 12 months and have loan payments of $300 a month would repay that $3,600 over the next 60 months, in $60 installments. Again, the graduate incurs no interest, having paid SafeStart’s upfront fees.

What’s the catch? Well, plenty of people won’t need to access the line of credit at all. They could easily be out $1,500 or so in SafeStart fees, though customers who buy the most expensive SafeStart plan and never use it can get a 30 percent refund.

Also, customers could simply take that $1,500 and put it someplace safe. If they run into trouble several years later, they can tap it to make their loan payments. It wouldn’t last 36 months, which is when the SafeStart coverage maxes out, but many people won’t find themselves in hardship for that long. And another thing: The federal government now has a program in which it will retire federal loan balances after 120 payments for people working in certain public service jobs. There may be circumstances under which those people would do better by avoiding SafeStart.

Meanwhile, SafeStart itself has to stay in business. Some students may jump in with glee, knowing full well that they plan to work in fields where they’ll make very little money for a while.

College alumni, having survived the student loan gauntlet themselves, could also play an influential role. Sure, they have the choice of simply donating money to their alma maters and earmarking it for financial aid. But plenty of people comfortable with programs like DonorsChoose or Kiva, in which people can direct gifts or loans to specific public school projects or entrepreneurs in developing countries, no longer find it satisfying to throw money into a giant charity or university pool and hope administrators use it well. SafeStart could allow them to direct some of their giving to specific individuals.

But for that to happen, schools would probably need to be willing to match alumni with those students, and they may not want to do that. That could cause alumni to take renegade action outside of the formal system. For example, UniThrive, a nonprofit, helps Harvard students borrow money interest-free from university alumni. GreenNote, another peer-to-peer lending service, caps the interest lenders can earn at a reasonable 6.8 percent.

A UniThrive spokesman said some other schools had expressed interest in the program. A GreenNote executive said it had heard from only independent alumni groups so far, which is too bad. Universities’ alumni offices ought to realize that someone with only $500 to donate might also have $10,000 to invest in loans for students, who might otherwise have to pay more to borrow from banks.

Then, there’s that whole indentured servitude thing. In the 1970s, Yale introduced the Tuition Postponement Option, which allowed students to borrow money and pay it back later as a percentage of their income. James Tobin, an economist who later won a Nobel, was in on the plan design. But many graduates wound up repaying far more than they had borrowed. Yale forgave the remaining balance more than 20 years later.

In the 1990s, a small group of inventors obtained a patent on a different, more benevolent approach to “human capital investment contracts,” in which private investors could finance loans to students in exchange for a share of their income. Why is this not financial bondage? Students sign up willingly, and there could be competing offers for shares of their income. Also, the investors have no guarantee that students will earn much, whereas the burden of private student loans could force students to choose a lucrative career over a worthy but low-paying one, said Raza Khan, who came up with a similar investment plan with his business partner after graduating from New York University.

In 2001, they invested in about 100 students. Mr. Khan said the portfolio had done well, and given the choice between making such an investment again and buying stocks, he’d continue putting his money towards others’ tuition.

None of these models may ultimately succeed. But someone, sometime soon, will figure out a better way of easing indebted young adults’ path into the world. It would be nice if more of their schools were taking a bigger interest in some of the innovators who are trying to make this all a bit easier.