The Million $ Solution to a Trillion $ Problem

We have a real issue on our hands here in America, we value education like gold, but we don’t have the gold to pay for it. It’s shiny and exciting and of course everyone and their neighbor wants it but we simply don’t have the money.

The only logical way to pay off this debt is for people to make significant gold post-graduation. Unfortunately that is not a story that plays out all that often.

Something interesting is brewing and it just might work:
You may never have heard of Student Loan Genius, Peanut Butter, Tuition.io or Gradifi, but soon you will.

Welcome to the 401(k) of college tuition. The big idea is to create a student loan contribution plan that will allow employers to help employees pay down their student debt faster. It works much in the same way as a 401(k), except instead of saving for retirement the money goes directly to paying down student loan balances.

The idea underlying all four startups is to create the next wave of employee benefits for a new generation. A generation that is woefully concerned with their student loan debt and for good reason. The fact is an average student graduating from college will leave school with about $30,000 in loans.

Why Student Loan Contribution Plans will work:
Student loan contribution plans are positioned to grow rapidly because the 4 key stakeholders impacted by a service like this all have specific needs that have not been well addressed to date by any existing services or financial products.

Here are the needs of each stakeholder.

1. The students: Recent graduates are looking for help as they leave college with seemingly insurmountable levels of debt that prevent them from saving for retirement, starting a family and getting their financial future off the ground.
2. The Employers: As American culture continue to evolve, company loyalty continues to diminish forcing employers more than ever to provide more employee benefits to create attractive workplace environments that promote employee retention.
3. The Government: Student debt is growing fast enough to concern the government that funds many of these student loans, and since it’s a hot button issue politicians have incentive to find and adopt legislation to promote better management of student loan debt.
4. The Startups: The business model is simple, provide employee loan verification and payment software to employers for a monthly per head fee that is quite lucrative.

What the gains look like for the stakeholders:
All four parties stand to benefit from student loan contribution programs. Here’s what those benefits look like.

1. The Students: The students coming out of college from undergraduate who utilizes a program such as Peanut Butter would stand to save over $4,000 in interest over the life of their loans by having their employers help pay down those loans more rapidly. And that number exceeds $5,000 in savings for MBA, JD and LLB grads.​

2. The Employer: The recently completed Millennial Benefits Preferences Study showed that millennial employees would stay at their company 36% longer if their company had a student loan contribution program, which can help reduce the $11 billion lost annually to employee turnover. As Peanut Butter’s Founder and CEO, David Aronson puts it employers need to continually adapt and, “Deploy incentive packages that drive the highest return for their investment in people.

3. The Government: Student debt is growing fast enough to concern the government that funds many of these student loans, and since it’s a hot button issue politicians have incentive to find and adopt legislation to promote better management of student loan debt.
4. The Startups: The business model is simple, provide employee loan verification and payment software to employers for a monthly per head fee that is quite lucrative.

The different flavors of student loan contribution programs:

Each of the four main players in this space bring their own unique approach to the table of how they see their companies working to solve the student debt crisis. Let’s take a quick look under the

Student Loan Genius was started by three guys including the current CEO, Tony Aguilar out of Austin Texas. Tony and his team believe they could save each employee with student debt several thousands of dollars with their program, which is unique in its approach. They offer an analysis of your debts and provide 70 different ways to pay down your debt most effectively with the help of your employer.

One really intriguing option Student Loan Genius is now offering is an employee 401(k) match program. Essentially Tony and his team want employees to be able to have their student loan payments made directly from their paycheck like a regular 401(k). And for every dollar an employee puts toward their loan, the employer matches it in the form of a 401(k) contributions. It’s creating an opportunity for employees to build their wealth while paying down their debts.

Gradifi founded by Tim DeMello out of Boston, sells the Student Loan Paydown Plan, which is differentiated in that not only do employers make contributions on your behalf, but employees also earn reward dollars for paying down their debt, which gets applied to their monthly payments as well.

​Peanut Butter, the newest player to the space started out of Chicago in November of 2015 by David Aronson. His goal is to provide a straightforward service that allows for loan verification and payment management and also provides reporting services to help quantify the cost saving impact of the program. And if you’re wondering where the name came from, it’s the only food the founder David was able to afford during college. Very fitting.

Tuition.io to date has already raised over $8 million in venture backing including significant funding from MassMutual Ventures. It has already helped young employees to organize over $2 billion in loans since 2013 and has seen typical users increase their monthly payments 4–8%. CEO Brendon

​McQeen started the company after graduating from Columbia in 2012 with student loan debt and not knowing what his repayment options were. He is touting their service as a secure, compliant and scalable solution and all signs point to this being quite true.

Though Gradifi out of Boston, Peanut Butter out of Chicago, Tuition.io out of Santa Monica, and Student Loan Genius out of Austin all have their own flavors of student loan contribution programs, the same guiding principles underlie all of their business models.

The pay per head business model is highly profitable and selling through the employer channel makes for an efficient and scalable business.

In the world of Fintech, there are an innumerable set of new age innovative firms that have a great product or service to provide customers, but few have a great product or service and a way to be a viable and profitable business too. That’s why the student loan employee contribution space is such an exciting one to watch.

​And adoption is promising…
In 1982, just over a year after the I.R.S. issued the rules around funding 401(k) plans, early adopter companies included Johnson & Johnson, PepsiCo and Honeywell.

​Similarly, Student Loan Genius’ early adopters include the likes of Intel, Kellogg’s, VMWare, Lenovo and Boeing.

It’s not surprising that Fortune 500 companies with tens of thousands of employees would adopt programs like these first as they have the most to gain in finding ways to increase employee retention.

The fact that these student loan programs are following a similar trajectory to that of the 401(k) is promising. By 1996 the adoption of the 401(k) plan based on early success observed at larger firms like J&J was in full swing with over 30 million employees already enrolled in 401(k) plans. Adoption in the student loan space over the next 10–15 years resembling the 401(k) market in any way will spell success for these young firms.

Gradifi’s CEO Tim DeMello is already seeing a significant ramp up in adoption. His Paydown Rewards Program will be rolling out to over 100 companies and 100,000 total employees just this year, including over 15,000 employees from PwC alone.

There is also the potential that these large firms like PwC and Boeing can help lobby to pass The Employer Participation in Repayment Act or the Higher Education Loan Payments For Students and Parents Act (HELP) to allow employers to pay a certain portion of pre-tax dollars to employees on a yearly basis to pay down their student loan debt or help parents save for their children’s education similar to how 401(k)’s work.

If they can help pass this legislation that is currently mulling its way through Congress this employee benefit can really become the 401(k) of the millennial generation.

And with backing from seed funders and in the case of Student Loan Genius the VC arm of Prudential, one of the largest life insurance, retirement and investment management firms in the world, the prospects for growth are coming into focus with all signs pointing upwards.

It seems clear to me that we are about to witness a seismic shift in how we view student debt and employee benefits over the next 10 years. And the real winners are not going to be just the employees who pay down their debt, but the four companies that are sitting in the right seat at the right time to capitalize on a hugely profitable opportunity.

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