Hey everyone! First post here.
Personal intro… I have spent the last 9 years as a consumer internet-focused venture capitalist, and just recently decided to leave the industry to focus on entrepreneurial projects. Currently, my research attention is being split between the Terra ecosystem and putting together an NFT collection. While I explored starting a non-crypto based startup as well, I have just found that the passion, pace of innovation, opportunity for impact, and coolness is way higher in the crypto world and I am a particularly huge fan of Terra. I am in the process of moving to NYC and look forward to meeting founders / crypto people / Terra people in the NYC area.
I spent the last month studying the student financial aid space in the U.S. and how I might leverage crypto to offer better products to people. I wanted to share my learnings and see if anyone had questions on the market, feedback on the different crypto explorations I’ve listed below, or additional ideas about how Terra might be useful for creating new products in this student financial aid space. Ultimately, I couldn’t find a viable idea, and I’ve (at least temporarily) decided to move on from the market, but I still thought it could be a worthwhile discussion for anyone who is interested.
To be honest, I am nervous to “come in hot” like this without making any prior contributions to the community. I shot a very quick note about this idea in the Pylon telegram channel and quickly and rightfully was trolled for my approach, which I imagine came across as uninformed. But this is a learning process, and I hope to earn trust over time. I imagine this post might still be a bit “off” from a successful post to this forum. If that is the case, I’m open to understanding how I contribute more effectively in the future.
Enough with the throat-clearing - here is a quick summary of (1) the market, (2) the potential crypto applications.
Student Financial Aid - Market Overview - Loans and ISAs
Understanding student loans and the “student debt crisis”
Market size: $1.6T of student loans are outstanding in the U.S. today. $100B+ of new loans are originated each year. That number has increased dramatically over the past decade, due to (1) rising tuition costs, (2) more Americans attending college and graduate school, (3) easier access to student loans. This loan balance is larger than both credit card debt outstanding in the US and auto loans outstanding in the US. It is the second-largest debt market behind mortgages.
Sources of Capital: 90% of these loans are funded by the Department of Education, aka the federal government. 10% of loans are private loans funded by large banks, regional banks, and online competitors such as SoFi and CommonBond
Inefficiencies: The government will offer the same loan to you regardless of your major/degree. This is a big area of inefficiency. Private loan companies are not allowed to incorporate your school or degree into their underwriting.
The falsity of the "student debt crisis: The reason “student debt crisis” is in quotes above is because, while the media makes a huge deal about how awful this increase in student loans is, the reality is that this entire system actually works just fine. The average college student who takes out debt pays about 7% of their monthly income towards their debt and interest payment. This is a very achievable payment and the ROI on attending college or graduate school in the U.S. still makes TONS of economic sense. The media tends to focus on (1) the headline number, which ignores the fact that the ROI on a college education, even when taking out a loan, still works, (2) sob stories about people who drop out of college and still have debt to pay, or graduate students who took out large amounts of debt for an unusable degree (e.g., film school) and are left with no options. While these are serious and difficult issues for students, they are corner cases for the broader market, which works well for both students (who earn more by taking on debt to fund their education) and for the government (they are effectively using US debt to invest in building a more skilled workforce).
Notable startups in the space: The most notable startups in the space are online providers of debt, such as SoFi, Commonbond and Earnest. Earnest was acquired for $250M, and Commonbond is alive, but hasn’t broken out the way that many other fintechs have. SoFi is now a $10B company whose biggest business is student loans, but most investors are more interested in their ability to build a large digital “super app” that offers multiple services. They also likely would not have succeeded if not for an off-market $1B investment from Softbank many years ago. They focused on the most profitable customers in this sector, which are graduate students, who both take out large amounts of debt but also are more likely to pay back vs a typical student. Other notable startups - Splash Financial (Kayak for finding better rates/terms for student loans - doing extremely well), Mos (hire a financial advisor to help you find the best financial aid options), and Payitoff / Spinwheel (Plaid for student loan information).
Latest financial aid innovation = ISAs (Income Sharing Agreements)
The other bucket of innovation in this space are Income Sharing Agreements. Instead of taking out a loan, a student will attend school for free and agree to pay a % of their income, typically 10% or so, afterwards.
While many people agree this is a better way to finance education because it does not leave students with debt, I have open questions on how to make this model work and scale profitably and successfully. Challenges with scaling this are: (1) long time before investment and payback, limiting IRR, (2) tends to attract lower credit-quality students who don’t pay back successfully, (3) for bootcamps who are funded by ISAs, requires the Bootcamp to put in serious effort to place students (4) with greater scale, quality of student and job placement tends to deteriorate.
Different Ideas for innovating in this market with crypto
I figured that there must be a way to apply crypto to this market to come up with good solutions, but I haven’t come up with anything that feels like it will really work yet. Some of the ideas I have come across are:
1. Construct loans using crypto infrastructure, saving cost: This is what Figure has proposed via their Provenance blockchain. The argument is that by eliminating the custodian and other elements required from banks who construct loans, companies can create loans more cheaply and pass those savings on to customers. I spoke to a number of people about this, and it feels that loan construction on blockchain is pretty far from maturity.
2. Allow DeFi investors to fund student loans and ISAs: I moved on from this idea because (1) most loans in crypto today require overcollateralization, and I didn’t see a way around this and (2) students today typically pay APYs of 4-8%, which would be unattractive for the typical DeFi investor.
3. Take cash issued to students from loans, use DeFi to farm it, and effectively allow them to have their loan interest free: This felt like a bit of a hack, and not something to build a company around. It’s essentially creating unnecessary amounts of leverage and seems like a poor source of capital for what would effectively be a crypto hedge fund.
4. Create a DAO that gives out scholarships to students: This is actually a cool idea that I only recently saw and started thinking about. Right now, it’s not something I’d be interested in pursuing because, while it feels like it could be successful, it doesn’t feel like a big enough improvement on the current student financial ecosystem, basically just a different-and-maybe-slightly-better scholarship
What I’ve learned and why I am now pursuing other ideas
Ultimately I’m moving on from the space because (1) I couldn’t find something fundamentally broken with financial aid today. Yes, people like to complain about it, but the ROI of taking out a loan to be able to go to school to earn more money than a student would otherwise fundamentally works for the majority of students and (2) I couldn’t figure out how crypto would help solve this problem. As I discussed the problem with some people who are more knowledgeable about crypto than I am, the feedback I received was that most of the innovation that’s needed in crypto today comes from improving the ecosystem itself, rather than trying to apply the tech to existing traditional markets.
My new approach has been to dive deep into a couple of crypto communities and allow the ideas to come more organically. Right now the projects I am spending the most time with are Terra and the NFT community Hashmasks.
What are the responses I’m looking for from this forum?
If you have your own ideas about how to use Terra to improve the student financial aid market, I’d love to explore them with you, either in a reply to this thread or through another medium. It’s very likely that someone else will think of a way to make this viable that I may have missed.
If you have feedback for me on better ways to approach this problem, or better ways for me to engage with this community, please let me know. Even though I’ve come to the conclusion to move on for this, an explanation of why my ideas didn’t work that are more sophisticated than my own are still really helpful. Same goes with posts like this–what works best?
Please message me or interact with me on Twitter (https://twitter.com/upekkha_terra) if you’re interested in jamming or collaborating. I am actively looking for co-founders. I bring access to capital (can access $3-5M in funding to start), a great network, and a lot of other strengths, and am looking for a technical crypto native as a compliment to me.
With respect and open-mindedness,