It’s June, which means school is just getting out. For new college grads (and post-grads), that means the pain of paying back student loans is just about to begin.
Student loans are a busy topic lately. The total debt and default rates in the industry are sky-high. President Obama has been sparring with Congress over federal-loan interest rates. And last week, Sallie Mae, the largest education-finance firm in the U.S., said it will split into two companies—one to service federal student loans, and one to make new private loans.
Bottom line: there’s tons of confusion (and debt) to go around, and in the meantime, paying back student loans continues to be a pain for lots of people.
For entrepreneurs, this smells of opportunity.
“Education finance hasn’t changed at all in 20 years,” says Derek Kaknes, the co-founder and CEO of Prime Student Loan, a startup in Boston. “Lack of competition breeds a lack of [cash] for recent grads.”
Prime Student Loan wants to provide some new competition. Namely, it tries to help recent grads find better interest rates so they can refinance their loans and ultimately save a lot of money. “Once you make your first three payments,” Kaknes says, “you should go to Sallie Mae and say, ‘Cut my rate or I’ll refinance.’”
The company’s website asks graduates to enter basic information about their loan, background, education, and employment. It then runs an analysis and makes a recommendation about how to refinance the loan and whom to do that with (a private lender or credit union with a better rate, say). Prime Student Loan isn’t a loan originator or servicer, and it’s not a bank; it gets referral fees when people refinance their loans.
To get out there in the market, the startup is working with financial aid offices, alumni groups, and employers. So far one of its sweet spots is helping law-school grads cut their monthly payments, sometimes by half. And for private loans, cutting one’s interest rate down from around 9 percent to, say, 5.5 percent can result in savings of about 30 percent over a 10- to 15-year payback period, Kaknes says.
Kaknes, a former investment banker, sees a lot of opportunity in cutting education costs for eligible grads. Not surprisingly, so do others. “People recognize there’s a storm coming here,” he says. “There’s going to be opportunity.”
Indeed, a number of other startups have popped up around the country, including SoFi (Social Finance), CommonBond, Student Loan Hero, Tuition.io, and LoanLook. They have various approaches, but the common theme is helping people manage their loan repayments more efficiently. (They also tend to target MBAs and others with high income potential, for obvious reasons.)
Prime Student Loan got started about a year ago and has raised $250,000 in seed funding from CommonAngels. The company went through the MassChallenge startup program in Boston last summer, and it’s still pretty small. (Disclosure: CommonAngels is an investor in Xconomy.)
While the overall financial climate may be cyclical, the problem of student debt doesn’t appear to be going away anytime soon. “We don’t know what will happen to interest rates, but we need to get our ducks in a row here,” Kaknes says.
His company also represents another approach in the broader field of education technology that is evolving fast, particularly around Boston. A focusing theme for many local companies seems to be reducing the cost of an education—whether that means textbooks (Boundless), international tuition payments (peerTransfer), or world-class lectures (edX).
As Kaknes puts it, “The biggest thing holding back edtech these days is advances in education finance.”
