• Student debt in the United States has become a significant issue.
  • It currently amounts to $1.5tn and accounts for 10.8% of the total debt outstanding (vs. 3.3% in 2003).
• Tuition fees at private institutions doubled between 1990 and 2018, on an inflation-adjusted basis.
  • The average cost to attend a single year at a private university exceeded
•  $35k in 2018-2019, to which an estimated extra $12k would be added for room and boarding fees.
• Net of grants, the real cost of attending private university has remained the same since 1990.
  • The increase in tuition fees has been fueled by government and schools grant aids.
  • Private schools can give large grants thanks to their endowment funds (over $600bn).
  • Moreover, it relates to consumer psychology: students feel more comfortable attending a school with a $35k tuition reduced by $15k aid, than a $20k education with no aid.
• 75% of students borrow money to be able to attend their chosen school.
  • There are 44.7mn people with a student loan in the U.S. who pay an average monthly installment of $393.

• Student loan debt has a significant impact on society.
  • The financial burden limits savings (e.g., retirement plans) and investments (e.g., housing), and puts pressure to accept a job even if underpaid or not matching the skillset.
• The U.S. Federal Government originates 90% of student loans.
  • The rates offered by the government are set annually and do not change over the life of the loan.
  • The average interest rate on outstanding student loans is 5,8%.
• Student loans have the highest delinquency rate in the U.S.
  • The loans become a financial burden for those students who do not graduate, and those who graduate from predatory college models providing little or no marketable skills.
• Fintech companies see the business opportunity.
  • A national problem generating billions of interests paid per year.
  • Dealing with federal agencies is far from easy.
  • They aim at simplifying the process and improve the user experience.

Overview of the fintech segments active on student loans:

• Refinancers & Loan Providers: These companies propose to aggregate and refinance existing student loans. Refinancing is eventually executed in-house or through a traditional player. They aim at providing:
  • better interest rate
  • lower monthly payment
  • single counterparty
• Rates comparison / Marketplace: After filling out a single form, students receive several offers from traditional players.
• Employee benefits: Some fintech firms propose payroll services to employers to match the employee’s monthly installments.
• Aggregator / Advisor: The only company in this category offers a platform to view all outstanding debts on a mobile app; an algorithm then proposes solutions to optimize the student’s situation.
• P2P lending: Although P2P lending was not originally designed to cover student loans, some users have been using these platforms to refinance their debt.

• Some notable names in the sector, which have received attention (and substantial seed money) from investors are:
• SoFi generates revenue estimated to be north of $500mn.
  • In its latest financing round this year, the company raised $500mn from the Qatar Investment Authority.
  • An IPO is expected for 2020 or 2021.
• Laurel Road has already refinanced $4bn of student debt.
  • The company was acquired by KeyBank (KEY US) in April 2019.
• LendingTree (TREE US) operates the leading online loan marketplace.
  • In July 2018, it announced the acquisition of Student Loan Hero for a total consideration of $60mn in cash.
  • Before the deal, Student Loan Hero had refinanced $3.5bn in student loans for 200’000 borrowers.
• Goodly is still an early-stage start-up that raised USD 1.3mn in its series A financing round.
  • It proposes to automate student loan repayment through a matching contribution from the employer
  • Only 4% of companies use such employee benefits, but estimates indicate that 32% will do so by 2021.

Catalysts:

• Interest rate: The rates charged by the Federal Government hardly match the recent evolution of the long-term rates.
  • The spread provides compelling opportunities to companies who can leverage their technological advantage and their lighter cost structure.
• M&A potential: Fintech companies are disrupting traditional financial companies by offering platforms with better user experience.
  • Traditional players must adapt to these new entrants who are gaining market shares and eroding the margins of the well-established companies. The most natural solution will be through partnerships or M&A activity.

Risks:

• Politics: a significant change to the system could take place, impacting Fintech companies focusing only on student debt.
  • The current situation is not sustainable and could put the U.S. economy at risk in the future.
  • The three leading Democrat contestants in the 2020 presidential race have made significant proposals, that go as far as wiping out 75% of outstanding debt or offering free education.
• Image/communication: Fintech companies could be perceived as capitalizing on social misery.
  • When a private entity refinances a federal loan, the borrower loses certain rights, e.g., access to the Federal Student Loan Forgiveness Program.
  • Moreover, people who need to refinance their loans are often those who are likely to be already in delinquency or who go through life difficulties – unemployment, divorce, disease, etc.