"Rates for PLUS loans, which are for graduate students and parents, rose to 7.60%" [1]
7.6% interest for 5 years on a $30k loan is $43,269.57.
However that is:
- a government loan where default rates don't directly drive the interest rates
- effectively subsidized by the govt
In your situation you must have much higher costs of capital from capital markets than the government's t-bill rates of 2.5% [2]. Especially given that your product is effectively equivalent to a unsecured loan in the eyes of wall street.
Then compound that some percentage of students don't make the $50k income requirement in the first year or two after the program and others who are even further delayed. We can equate this to a traditional default rate except the are no negative consequences to your student for delaying (in comparison to traditional default which hurts their credit), all the while your cost of that original capital keeps growing.
Given that your upper bound repayment is 50k and most students won't make more then $100k their first couple years out, then that is an effective interest rate of 11% if the 50k is paid over 5 years.
All in, you guys have a tricky problem. That is unless you can get as good as Sofi at picking which people to finance, i.e. Those that will immediately many >100k and with a quicky increasing salary. But Sofi has it easier bc they just cherrypick all the Stanford MBA grads who already have high paying jobs and first refinance their Debt. You on the other hand have to forecast accurately who will be successful.
Total capital cost isn't that much though. 1k students at $30k is $30M. You can easily raise VC to cover that (actually already raised $48m [3]) and don't need traditional capital markets / wall street to prove the idea. Only when you begin to have 20k+ students would you need traditional debt facilities. Thus, isn't your cost of capital just giving the VC ownership in the company instead of a repayment cost of capital (for now at least)?
7.6% interest for 5 years on a $30k loan is $43,269.57.
However that is: - a government loan where default rates don't directly drive the interest rates - effectively subsidized by the govt
In your situation you must have much higher costs of capital from capital markets than the government's t-bill rates of 2.5% [2]. Especially given that your product is effectively equivalent to a unsecured loan in the eyes of wall street.
Then compound that some percentage of students don't make the $50k income requirement in the first year or two after the program and others who are even further delayed. We can equate this to a traditional default rate except the are no negative consequences to your student for delaying (in comparison to traditional default which hurts their credit), all the while your cost of that original capital keeps growing.
Given that your upper bound repayment is 50k and most students won't make more then $100k their first couple years out, then that is an effective interest rate of 11% if the 50k is paid over 5 years.
All in, you guys have a tricky problem. That is unless you can get as good as Sofi at picking which people to finance, i.e. Those that will immediately many >100k and with a quicky increasing salary. But Sofi has it easier bc they just cherrypick all the Stanford MBA grads who already have high paying jobs and first refinance their Debt. You on the other hand have to forecast accurately who will be successful.
Total capital cost isn't that much though. 1k students at $30k is $30M. You can easily raise VC to cover that (actually already raised $48m [3]) and don't need traditional capital markets / wall street to prove the idea. Only when you begin to have 20k+ students would you need traditional debt facilities. Thus, isn't your cost of capital just giving the VC ownership in the company instead of a repayment cost of capital (for now at least)?
[1] https://www.nerdwallet.com/blog/loans/student-loans/student-...
[2] https://www.treasury.gov/resource-center/data-chart-center/i...
[3] https://www.crunchbase.com/organization/lambda-school