Private Loans & Universities

At macro level, this is just the result of increasing funding gaps for state and small private institutions.

One student loan company has invited college and university officials, and their spouses, to attend an education conference — in the Caribbean this February, all expenses paid. Another pays universities bonuses based on how much their students borrow. Others gave away gifts like iPods at a recent conference for financial aid administrators.

With rising tuition and lagging government aid making private student loans a big and increasingly competitive business, these are some of the ways lenders are courting universities in hopes that they will steer students their way.

Students took out nearly $13.8 billion in private loans in 2004-5, more than 10 times the amount borrowed a decade ago, according to the College Board.

The key to this business is university financial aid offices, which compile lists of “preferred” lenders, sometimes as few as two. Students rarely comparison shop and rely on those lists.

Financial aid administrators say they pick lenders with the most competitive terms, not the most appealing giveaways. But some have questioned such arrangements — and whether students are getting the best deals.

NY Times Article (free reg required)

At a micro-level, GLS faces the same issue. We list a certain study abroad loan provider on our site for no particular reason except we found them first. We certainly do not get give-aways at our size (!) But, given this, makes me wonder if we should look for some additional options to list on our site.

Student lending overall is a pretty decent sized business (study abroad just a sub niche) with a good deal of M&A the last couple of years...

The most innovative firm in the space is:

My Rich Uncle

They took some heat early for their "equity" based lending model (e.g. you them back with a percentage of your future earnings). I doubt that is actually enforceable (13th Amendment), but who knows

1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

In any case, they have come back to more traditional debt instruments and seem to be gaining traction.

Their PrePrime product they just launched is really interesting. Trying to use non-traditional criteria (e.g SAT scores, etc) to underwrite students with a limited credit history. Risky, but if they get it right and own the formula and have a few years lead on everyone else with underwriting data, that is a great product that they could grow or license or sell to one of the big guys.

Needless to say, every incumbent should launch a pilot of something similar since they are in a much better position given their volume to test such a thing and can take the risk, but they won't because that is how incumbents act. They will sit and let someone else finally prove the model and then pay through the nose to buy it.

Posted on October 24, 2006 and filed under Education.