Mr. Joshi, who was working at Loanscribe Co-Founder Jason Doshi’s mortgage company, was describing mortgage refinancing to his sister who was in her last year of medical school residency.
“My sister asked, ‘why can’t you do this with my student loan?'”
Every semester, many American college students have to re-apply for a new student loan, whether it be for larger amounts for tuition or smaller amounts to help them get by, Mr. Joshi said. Interest rates go up and down so by the end of seven years, a medical student has to manage as many as 14 different loans.
“I couldn’t believe the complexity and confusing nature with how it was organized,” Mr. Joshi recalled.
So in 2012 the friends began discussing business models. Early in 2013, knowing there was a market for this they began to reach out 2012 started talking to potential investors and advisers.
The gun sounded and for the next 15 months Loanscribe ran a marathon.
“It was a very hard and tiring experience,” Mr. Joshi admitted. “We traveled to a lot meetings and spoke to a lot of people.”
“We never launched a startup before. You are creating a business model. Based on all the responses we got from other people we had to pick and choose which ones we worked with. We had a lot of self reflecting to do and had to modify our whole model a few times.”
Along the way, the partners found more than a few inefficiencies in the current student loan system.
“In the current system, undergraduates get the best rate. It makes no sense,” Mr. Joshi said.
“There is no risk-based pricing model. It is nothing to say someone who is going to be a doctor has less risk than some other degrees. They have a 99.8 percent employment rate.”
“Apart from job security they have substantial income as well. So when we went to investors with our research the information was really obvious these clients are the best clientele to have. They deserve a rate that is more aggressive than the rest.”
Loanscribe’s research revealed 86 percent of graduating doctors have an average of $186,000 in debt as they begin their careers. They can expect to pay around 7.8 percent interest with a 10-year amortization period.
Loanscribe’s interest rates for a 10-year fixed loan range between 4.5 and 5.5 percent. “Even if your credit score is bad you are saving more than two percent,” Mr. Joshi explained.
Loanscribe also offers amortization periods ranging from five to 20 years.
“The federal amortization period is always on a ten-year fixed loan,” Mr. Joshi said. “For a ten-year period, that doctor will be paying at least $2,000 per month.”
“Say a doctor has a gross monthly income of $12,000. It is not uncommon for them to pay $2,800-$3,000 a month in student loan repayments. So if one-fourth of your monthly income is going to repayment there is little left for a car loan or a mortgage, let alone experiences and other things.”
“At that point a doctor’s mentality is ‘I’ve worked very hard for a while I want to be able to afford nicer things, have a better lifestyle’, and they just cannot afford it.”
The configuration of the current student loan system is a negative incentive for innovation, Mr. Joshi said.
“When Sallie Mae issues a new loan they carry five percent risk. That gives them a huge reason to dish out as many loans as possible because they are not worried about the repayment strategy. The system is so abused. There is a trillion dollar crisis.”
Student loans cannot be discharged in a bankruptcy, Mr. Joshi later added.
That leaves the solutions to the private sector and there is one key factor which would stimulate that innovation, Mr. Joshi said.
“There needs to be a securitization market, and like Fannie Mae it create an incentive for private markets to work on finding a solution. Perhaps before it was improper but now its a clear risk based formula. Students need to know that becoming a communications or political science major from a private university leaves them at a higher risk for default.”
Even with a well thought out business model, Loanscribe had to overcome skepticism in a climate looking for a clear and certain end game.
“Investors said mortgages are safer because there is collateral and it is a clear market,” Mr. Joshi said. “If anyone wanted to invest in a mortgage company they could look at numbers and decide. That isn’t present with student loans – there’s no clear end.”
“The federal government knows default rates and which degrees are in demand. We came up with a clear underwriting system.”
Loanscribe consulted with many different groups and one which provided valuable feedback were financial planners, a group, which like Loanscribe, seeks to get their clientele actively participating in the economy, contributions America can use right now.
“The effect (of graduates earlier participation in the economy) is substantial,” Mr. Joshi said. “I know that because I talk to many financial planners who have reached out to us.”
“Financial planners really like the 15 and 20-year fixed products. It provides their clients with more available funds.”
Investors soon asked Loanscribe to include all graduate degrees in their underwriting criteria. They are all eligible now.
Early in 2015 Loanscribe will unveil a new website which will state which type of amortizing product is right for an applicant and it will show them how much they can afford for a mortgage. The program is based on default rates and demand in the marketplace for jobs.
“Any student can easily put in basic numbers and get a clear indication,” Mr. Joshi said.
Two years of work has started to pay off in a platform which is attracting interest and meeting a need, including the one which led to Loanscribe being created in the first place.
“In November 2013 my sister was the first applicant,” Mr. Joshi said.