Affirm, the young but ambitious financial startup launched by PayPal co-founder Max Levchin, is wading into the huge and messy world of student lending.
The two-year-old online lender on Tuesday will formally unveil its next product: loans for people to attend coding and other tech boot camps run by General Assembly, Bloc, and Kaplan. The idea is to help recent college grads--Millennials, if we must use that word, and Affirm embraces it--get tech skills that can get them better jobs, vaulting them out of unemployment or underemployment.
The new program also marks the start of a potentially ambitious expansion for San Francisco-based Affirm, which so far primarily has offered online installment loans to help people finance big e-commerce purchases like mattresses or furniture.
Financing professional development classes is a relatively small step into the $1.3 trillion U.S. student lending market, as the company readily admits. Executives call Affirm’s new program as much a fact-finding mission as a product expansion. “Part of it is us starting to get close to education to understand what’s going to happen,” says Brad Selby, the company’s vice president of merchant services.
“Traditional student lending is a very quirky and curious animal,” he adds. “None of us at Affirm would profess to understand it really deeply.”
In terms of expanding into financing full undergraduate or graduate degree programs, “there’s so many changes going on, I’m reluctant to suggest that we’re going to go hard-charging into traditional educational lending,” Selby says. “But if there is a space to go in and make trouble for the incumbents, we will do it.”
Student loan debt is a huge problem, one juiced by high tuition and recession-era high unemployment. The government is by far the biggest student lender, holding roughly 93 percent of U.S. educational debt, according to data firm Measure One. Many big banks and other traditional lenders have dropped out of the market in recent years, and the remaining private companies are facing increased regulatory scrutiny, especially from the Consumer Financial Protection Bureau.
So depending on your perspective, that leaves a window of opportunity for startups that want to get into student lending, or makes them seem foolish for trying. Affirm is among those betting that it’s the former; it will compete with other financial startups, including Earnest and Climb, to offer the loans through the boot camp companies. Longer-term, especially if Affirm expands into more traditional student lending, it may find itself competing with incumbent financial giants Sallie Mae, Wells Fargo, and Discover.
Affirm is selling its services through General Assembly, Bloc, and Kaplan’s Dev Bootcamp and Metis. There is no revenue sharing agreement or other financial arrangement between Affirm and its educational partners, Selby says.
Most of the programs run for about 10 weeks and cost about $10,000, Selby says, adding that Affirm is offering deferments of up to six months from when borrowers first receive some of the loans. Ideally, someone would take out a loan to pay for the course, complete her training, and get a high-paying job before she would have to start repaying her debt, he adds.
Still, that’s the best possible scenario, because some of Affirm’s interest rates are steep--up to 20 percent. (Its lowest interest rates start at about 6 percent.) Selby says that Affirm’s relatively high rates mean that the company can lend to people who otherwise wouldn’t qualify for loans from more traditional, risk-averse student lenders.
“We’re coming at it from a very high approval perspective. That 20 percent-rate student probably isn’t going to be getting a loan from the competitor,” he says, adding that a 20 percent loan translates into a “ultimately not that many dollars--and it’s available, as opposed” to a lower-priced loan for which it’s more difficult to qualify.
That’s Affirm’s general mission: Levchin wants to take on the big banks that won’t lend to young people or others without much established credit, as well as to create a more transparent kind of financial company.
“We focus on transparency and honesty--not so much the rock-bottom price, but clearest explanation and very simple understanding of what’s really going on, what these loans are like, and when do they end,” Levchin told me last month.
Affirm started rolling out the educational finance pilot about five months ago. Selby would not provide much in the way of numbers, including either the number of loans made so far or loss rates on those loans.
The startup in May said it had raised $275 million, much of which was debt to expand its lending programs, Levchin said.
*This article has been updated with additional information about Affirm's interest rate ranges.