Loan hacks


When Exal Iraheta found out he had defaulted on a $17,105 student loan, his first reaction was dread.

"I immediately was like, what am I supposed to do?" he said. "You feel like you're sinking. Instantly."

Though Iraheta works full-time as a media adviser at his alma mater, the School of the Art Institute of Chicago, the 27-year-old Logan Square resident said he is barely making ends meet. He has rent and medical bills to pay, a credit card in collections and about $120,000 in other student debt. His parents, who co-signed all his loans, are in no position to help. His credit is too poor to qualify for new loans.

After a few months of wrangling with a collection agency, he turned to a venue he knew well: the Internet.

"Social media was something I had already embraced," he said. "At that point, I was like, let's do this. I don't have anything to lose as it is."

In October, he created a profile on the crowdfunding site GoFundMe to ask for money to pay off the defaulted loan. In less than a month, he had raised more than $3,800.

Online social networking has skyrocketed in popularity and utility over the past few years, at the same time outstanding student debt has passed the $1 trillion mark and triggered talk of a crisis. As digital natives consider creative ways to pay down their debt burdens, options have emerged that until recently did not exist. Using online social networks and private donors in place of traditional financial institutions, borrowers now can refinance, bargain, crowd-fund or wage-garnish their loans away—unorthodox, but relatively untested, ways of dealing with an industry has been stagnant for decades.

"I'm always up for ideas that are innovative and that might help," said Heather Jarvis, an attorney and advocate for student borrowers based in Wilmington, N.C. "In general, the social media platforms and the alternative ideas coming up are a good thing ... I also often wonder to what extent any of those things will really make a huge difference."

Student debt almost tripled between 2004 and 2012, and the average student loan balance per person rose 70 percent, according to a report from the Federal Reserve of New York. The federal Consumer Financial Protection Bureau estimates that more than 7 million borrowers have defaulted on a student loan.

In other words, Iraheta is hardly alone.

Eric Metelka, a Columbia University business school graduate living in Lakeview, refinanced most of his six-figure business school debt through SoFi, a startup that works with alumni networks to refinance loans privately. The 2-year-old company, whose name is an abbreviated nod to "social financing," offered him a 4.42 percent variable interest rate over 10 years. He likes the lower rate—the rates on his original loans averaged 7 percent—and describes his experience as consumer-friendly.

"Sallie Mae is gross, for lack of a better word, right?" said Metelka, 28. "They're cold. You go on the websites, the websites are hard to navigate."

User-friendliness is only a fraction of the overall problem to Chris Long, a certified financial planner in Wicker Park. Once the loan documents have been signed, he said, the damage is done.

"There's a limited amount that people can do once you've incurred it," he said. "It can't be discharged in bankruptcy. It's a tragedy that we're allowing 18-year-olds to make decisions that affect the rest of their lives."

Jarvis warns against refinancing federal loans in particular, since in doing so, borrowers may lose certain options and safeguards that apply only to government loans, such as the Income-Based Repayment plan and the Public Service Loan Forgiveness program. But she's not necessarily opposed to getting creative.

"It remains true that the private sector is more likely to get innovative and kind of do cool stuff," she said.

That's what Upstart claims to do. The startup, founded last year, loans money to promising candidates who in turn promise to pay back a certain percentage of their future earnings.

"Tuition is up, and student loans are tricky things," said Brigitte Bradford, head of marketing at Upstart. "How do you get people up and going and confident at an earlier stage? ... We address this very directly."

Laura Renner, a University of Chicago business school graduate, paid for her International MBA with about $150,000 of student loans.

"My monthly payments are about the size of a mortgage," said Renner, 34. After getting more than $40,000 in Upstart funding this summer, the Bay Area resident says she can focus on growing her business without worrying about bills. Once she starts earning $30,000 a year or more, she'll start paying about 4 percent of her income to her backers—some of whom she says she has met in person to talk about her career plans.

"It was untested," she said of the Upstart model. "But it was appealing, too. ... Every startup has that risk, right?"

Not everyone can get SoFi or Upstart funding; SoFi determines eligibility through credit scores and other financial factors. Upstart requires good credit and a favorable debt-to-income ratio, and it takes into account applicants' standardized test scores and other "indicators of future success," according to Bradford, to determine how much funding they can get.

"Those two startups are basically geared toward Ivy League students," said Casey Wallace, co-founder of education crowdfunding startup Piglt. "If you went to a state college, you're probably not going to end up getting that person's investment." (SoFi works with alumni of 100 schools, some of which are state universities.)

To Stephen Dash, the Internet has been a democratizing force. The former JP Morgan investment banker founded joinStampede, which in March gathered more than 30,000 borrowers to collectively refinance private student loans. Each borrower who refinanced saved an average of $6,038 over the life of his or her loan, according to Dash.

None of it would have been possible without a certain level of comfort with social media.

"Five years ago, the joinStampede campaign would have been a disaster," Dash said. "It wasn't too long ago that people didn't trust putting an email into a website."

Despite the potential upsides of creative loan financing, the underlying problem of student debt remains unsolved, observers say.

"The cost of college has gotten out of sync with what most people can afford," said Long, the certified financial planner in Wicker Park. "There's a structural disconnect between the colleges and the students and the parents' ability to pay for that. We shouldn't have to resort to people begging on the Internet or selling their future earnings off to investors."

Student loan startups to know:


Launched: Fall 2011

How does it work? Alumni of certain schools pool their money so students and recent graduates of those schools can apply to have their loans paid for with money from that pool; the alumni then lend the money back to the borrowers at lower rates.



Launched: August

How does it work? "Dreamers"—people or organizations looking for education-related funding—create profiles to ask for money and promise rewards in return. Minus processing fees, all the funds raised for student loans go directly to the loan financers, rather than the borrowers.



Launched: March

How did it work? Gathered 30,000 people to bargain for refinancing private student loans at lower interest rates. After eight weeks, some of them were able to get refinancing through CU Student Loans, a group of not-for-profit credit unions.



Launched: April 2012

How does it work? Potential borrowers raise money on the Upstart platform and then agree to pay their backers a certain percentage of their incomes for a set number of years. | @crepeau

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