It’s generally agreed that higher education in the United States has gradually become more and more unaffordable. Students are dependent on external financial resources for which many of them do not even qualify. Students that are able to secure a loan often have to take on debt they can’t really afford. And if they don’t eventually land a job with enough income, they are saddled with debt for a very long time.
Much of the problem is that most student loan companies are not concerned with the overall financial well-being of their students, who often feel stuck trying to repay a loan they cannot afford, without a backup organization that will help them figure it all out. We can see that in the figures. The student loan debt in the U.S. has just reached $1.6 trillion dollars, and more than quadrupled in the last 15 years.
With the student debt crisis getting out of hand, the topic has become a semi-permanent issue in the news.
Launching next week is a new startup under the Y Combinator accelerator called Blair, which aims to address this seemingly intractable problem.
Blair finances college students through what’s called “Income Share Agreements” (ISA). Students receive funding for their tuition or costs of living and in turn pay back a percentage of their income for a fixed period of time after they graduate. Repayments adjust to individual income circumstances; by deferring payments in times of low income, Blair protects the downside of the students.
It thus provides students with an alternative to debt, which is tailored to their individual circumstances to ensure affordability. Blair’s underwriting process is based on the future potential of a student and not their credit score or co-signer, which could be a deal-breaker in traditional settings. Blair’s competitors are traditional student lenders: Sallie Mae, SoFi, Earnest, Wells Fargo, Citizen Bank and other banks. ISA companies include Vemo Education, Leif, AlmaPact, Lumni and Defynance.
In contrast to traditional student loan companies, Blair relies on being more aligned with the financial incentives of students, the idea being that it supports students in improving their employability by placing them in internships early, giving them access to industry mentors and coaching them individually on their career prospects.
The founders came up with the idea from personal experience. Constantin Schreiber, one of the co-founders, is on an ISA himself, as are a lot of the company’s friends. They stumbled across the problem of student debt over and over again while studying in the U.S. and noticed a stark difference between their friends in the U.S. and their friends in Germany. The main reason is that 40% of the students at their alma maters in Germany use Income Share Agreements to finance their studies. They plan to use their experience from Europe and make ISAs more widespread in the U.S.
Students apply for funding on the website, and within minutes get a personal quote. If they accept the quote, they receive their funding within a couple of days, which they can use to pay for their tuition or cost of living. Once Blair issues the funding, it crafts a holistic career plan for each individual student and starts supporting them in landing the internships and jobs they want. This includes, for example, optimizing their application documents, preparing them for interviews or connecting them to mentors in their target industry. For context, they batch students together in funds and let external investors invest in the funds.
It receives a cut of the student repayments and carried interest if a student fund performs better than the target return. Additionally, it partners with companies that hire talent through the platform.
Blair has raised the first fund for 50 students and disbursed money for the first 10. The rest of the students will receive their money within the coming weeks. After YC’s Demo Day the company will deploy a larger fund that will support 200 additional students.
“Our underwriting model is unique since we have based it on data from concluded ISA funds in European countries,” says co-founder Mike Mahlkow.
“In the last two weeks, we received applications for funding totaling more than $4 million. Many of our students come from underprivileged backgrounds, often without any support network. Our goal is to build a human capital platform where individuals can access capital based on their future potential instead of their past and investors can participate in the upside potential of individuals in an ethical way,” he adds.