What Are People Saying About SafeStart?

SafeStart, a new start-up, is getting a lot of buzz.  It was written up Friday in Inside Higher Ed and also had a mention in the New York Times on Saturday.  Here is how the company's product works (please note that timeline below is copyrighted material © 2009 BridgeSpan Financial LLC):

Here is additional material on their website:

SafeStart is a program that will lend you money, interest-free, to help you make your student loan payments after graduation.  Learn more

Millions of students each borrow thousands of dollars every year to finance a college education and the typical borrower entering a 4-year college program this year will leave school with more than $25,000 in loan debt.  Unfortunately, more than 1 out of every 3 borrowers will fall behind on their student loan payments.

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Here is what some folks in the industry had to say in the Inside Higher Ed article:

• Lauren Asher, president of Project on Student Debt:  "But on the whole, she said she was "skeptical" of the relative benefits of the service compared to the new federal option. Since many of the students who might choose to sign up for SafeStart are those at risk of missing payments, they might be eligible for loan forgiveness through government programs, Asher said. "There are other options in place that don't require you to spend more money.... In some cases, IBR does completely erase financial repayment."
• Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Project, noted that "the devil is in the details," and that the program as of now leaves a lot of questions to be answered. This being the case, she views SafeStart as less of a safety net and more of a deferment program. She noted that after the five-year draw window is over, depending on whether a borrower utilized a line of credit, that borrower could end up having to make loan payments and repayments to SafeStart for the line of credit at the same time. This creates further risk after the five-year safety period is over."
• Tonio DeSorrento, attorney at Orrick Harrington Sutcliffe:  "As SafeStart hits the market, proving its worth to wary borrowers may be the hardest sell, DeSorrento said. "The biggest challenge will be selling people on their own fallibility, convincing students that one day they might be among the people who have trouble making payments," he said, noting that although few foresee themselves missing payments, 82 percent of borrowers have some sort of complication in the first year out of college. Because SafeStart requires an up-front fee, students would need to purchase the plans before ever missing any loan payments."
• David Levy, director of financial aid at Scripps College:  "[He] said that for him to endorse a private program, he would have to know all of the details of how it would affect students. Although he did not have enough information to assess the benefits or liabilities of SafeStart, the program to him sounded like "home mortgage insurance" for students. "Schools are very cautious about endorsing commercial products until they have all the facts," he said. "We encourage [students] to maximize federal aid eligibility before turning to private commercial products, which tend to be more costly."

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So, let's talk about their business model.  How is SafeStart going to make money making no-interest loans? 

Like an insurance company, SafeStart charges a upfront premium to Stafford loan borrowers.  This premium provides borrowers with an option to access a line of credit (for up to 36 months) should they run into a hardship situation within the first five years after they graduate.  Like an insurance company, SafeStart will have "float" in that they will collect these commitment fees years before they would need to make good on the line of credit, should the borrower fall into difficulty.  They will profit from their ability to invest this "float" and earn returns on it. 

SafeStart will also benefit from their requirement that a student MUST graduate in order to earn their Loan Repayment Protection (as they call their line of credit).  This helps them in two ways.  According to the American Enterprise Institute only about 55% of college students at four-year colleges graduate within 6 years (the SafeStart in-school period is also 6 years).  The good news for SafeStart is their potential customers will be "overconfident" that they won't be the ones who don't graduate.  After all, who starts college expecting not to graduate?  So, assuming that  the profile of SafeStart's clients roughly matches the overall college population, about 1/2 of their clients who pay the upfront commitment fee WILL NOT BE ELIGIBLE to access the line of credit since they won't graduate. 

Which takes me to the second point, which is that students who don't graduate are also the ones most likely to have difficulties in repaying their student loans.  As Sallie Mae noted at a 2008 FBR investor conference one of the keys to loan repayment is graduation.  Here is what they had to say about their experience with private loans:  "If you don't graduate it will represent a very difficult collection process."  I imagine that graduation is similarly important in predicting repayment of Stafford loans.  Since non-graduates won't be receiving any of their SafeStart benefits, this will significantly reduce the demand for SafeStart's line of credit since graduates are much less likely to run into problems and if they do, they are likely to have much shorter periods of unemployment.  So, that one decision to exclude non-graduates has quite a beneficial impact for SafeStart (although customers who don't graduate may not feel that way when they reread their agreement and discover they are not eligible). 

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So, is SafeStart a good deal for students? 

Without all the details that is a difficult question to answer.  However, here are just a few of the questions that I would want to have answers to before even considering it: 

• How widely available will SafeStart be during the initial rollout (i.e., will they be cherry-picking low default schools or providing this service to wide range of schools)?  Looking at cumulative 2002 cohort default rates through 9/30/08 indicates why this matters:
  • Proprietary:  25.2%
  • 2-year public:  21.1%
  • 4-year public:  8.5%
  • 4-year private:  6.9%
• How is SafeStart funded?  The website notes that it is being provided by BridgeSpan Financial LLC, of which limited information is available.  Given that borrowers are paying a commitment fee now for the ability to access a credit line years down the road, they should want to know what the financial condition of BridgeSpan is to ensure that they will be there when you need them.  I would want to know how what reserves they will be keeping on their books for each commitment that they sell to ensure there is "a margin of safety."
• How is SafeStart regulated?  Their business model has aspects of an insurer (a premium and float that they will invest) and other aspects of a bank (make interest-free loans to borrowers as necessary).  This is important as it will define how much capital they will need to keep on their balance sheet to ensure that they can make future commitments.  This will also help
• What is their pricing model?  The site helps somewhat here:  "In general, SafeStart costs $40 to $60 per $1,000 in Stafford loans. The price for the typical first-year borrower will be $25 per month for 12 months. This price varies depending on several factors, including the SafeStart plan selected, the school attended, and underlying economic conditions."  I would want to know how they vary pricing by school and what is meant by underlying economic conditions. 
• Can a borrower wait until his/her senior year and sign up all of their student loans at that point?  Allowing this would minimize the risk that a student doesn't graduate, which is a big deal since non-graduates are not able to access their SafeStart line of credit. 
• How does SafeStart plan to invest the float?  I would want to see an investment policy guide to ensure that they were taking a prudent approach to investing the commitment fees that they are receiving since this is the money that will be used to fund the lines of credit in the future. 
• How concerned is SafeStart about borrowers who access their credit lines and their ability to repay the SafeStart loan?  Remember that at the same time these borrowers will need to make payments on their existing Stafford loan using the most aggressive 10-year repayment (see Deanne Loonin's point above).  To what degree is SafeStart propping up these borrowers in the first five years only to watch them struggle later?  
• Will SafeStart be relying on the school channel or going direct-to-consumer to market their product?  

Related articles:

• Finaid.org:  Loan Repayment Protection

Related posts: 

• SafeStart:  A Follow-Up Conversation

       

Comments

[Shannon Gallegos]

While the Institute for College Access & Success is an advocate of the Income-Based Repayment plan, Lauren Asher was misquoted in the Inside Higher Ed piece - she is quoted as saying “[IBR] does completely erase financial repayment” when she said that "IBR eases the financial burden of repayment." We are seeking a correction.