You may recall my earlier post about SafeStart, a product which for a fee provides students with an option to access an interest-free credit line should they encounter a hardship situation within the first five years of repaying their Stafford loan. You may recall the list of questions that I raised at the end of that post. I had a follow-up call with the management team of Jeff Harris (CEO), Peter Lesburg (CFO) and Carlo Salerno (EVP External Relations) who had reached out to me to provide answers to these questions.
Here is an edited transcript of our conversation:
1. How widely available will SafeStart be during the initial rollout?
SafeStart will initially rollout their program to borrowers at 600 schools. These will include all types of school programs, including for-profit, community colleges, degree and certificate programs and four-year private and public schools. I did a quick scan this morning and found in the state of New York that SafeStart was available at New York University and Columbia University but NOT at the Katherine Gibbs School or Monroe College’s Bronx Campus. Management makes no secret of the fact that they do utilize statistical models to determine not only pricing but also which schools they will offer the product at.
2. How is SafeStart funded?
BridgeSpan Financial (the operating company for the SafeStart product) is in the process of closing their initial financing to fund their operations. While they wouldn’t name particular investors it would appear that their initial round of financing is coming from friends and family, which is not all that uncommon for start-ups. Regarding the commitment fees that are collected, management noted that a percentage of the fees will be set aside to create a reserve. This reserve would only be tapped when borrowers need access to their line of credit. This reserve fund was described as “inviolate” and the funds would be released back to the corporation only after the draw period had ended. In addition, management indicated their belief in a “margin of safety” in financing their operations and would overcollateralize their balance sheet to be able to withstand “worst case” scenarios.
3. How is SafeStart regulated?
BridgeSpan Financial will be regulated as a consumer lending company. As such, they will be regulated on a state-by-state basis. Given the time and expense to get registered, SafeStart will be rolled out to additional states over time with a focus on larger states as well as states that have been hit hard by the economy. I found on their site that some schools in Texas and New York are currently eligible for the SafeStart program.
4. What is their pricing model?
SafeStart has not set finalized pricing yet. Early media reports indicate a 4% to 7% commitment fee will be assessed based on the Stafford loan amount to be covered. This range should be expected to change over time as additional states are brought on board. These rates will be set for the academic year on a school-by-school basis, so all students at a given school should expect to pay the same commitment fee percentage.
In addition, the company will employ a Good/Better/Best pricing model based on the debt management services and financial literacy tools desired by the borrower. One of the benefits available at the Best designation is a 30% rebate of the commitment fee if the borrower either does not draw down the credit line during the five year draw period OR prepays the line prior to the end of the draw period.
5. Can a borrower wait until his/her senior year and sign up all of their student loans at that point?
For the first year only, borrowers can purchase SafeStart for all of their outstanding Stafford loans. Beyond the first year, borrowers will be required to purchase SafeStart at the same time (what is the time period?) that they are taking out their Stafford loan.
6. How does SafeStart plan to invest the float?
Like an insurance company, SafeStart generates immediate cash flow, in the form of the commitment fees when borrowers pay upfront in order to receive a future benefit (in this case an interest-free line of credit). Management indicated that they had partnered with an experienced investment management firm and that they would be using high-grade fixed income securities (“safest securities that we can find”) which and that they would match fund their liabilities. This means that we would purchase securities where the duration of the security matches up with the time of when they would need it to be available.
7. How concerned is SafeStart about borrowers who access their credit lines and their ability to repay the SafeStart loan?
Management indicated that they hope to mitigate this risk by allowing borrowers to repay their credit line over a 60 month period and only after the five year draw period has ended. As an example, if a borrower took out SafeStart to cover $20,000 of Stafford loans, their monthly payment would be about $230 if they chose a 10 year repayment period. If they accessed their SafeStart credit line for a full year of payments that would amount to $2760 that they owed. The borrower would need to repay SafeStart this amount over a five-year period or less than $50/month.
8. Will SafeStart be relying on the school channel or going direct-to-consumer to market their product?
According to management, SafeStart will initially be relying on the direct to consumer channel given that the rollout is occurring right in the midst of peak borrowing season. For 2010-11, management indicated that they would move more to the school channel while also approaching organizations, associations and cause groups that focus on access to education. In addition, they plan on approaching alumni groups as well as additional channel partners. Their site currently lists SimpleTuition, a loan comparison site and FinAid on their site as Additional Resources. They have certainly received quite a few media mentions in the last week which should increase awareness of their product.
Here were a few additional follow-up questions that the management team answered in email form:
9. What, if any, IP or business process patents do you have to protect yourselves from competition?