Regardless of the court’s decision on the cancellation of some student ldebt, a trillion-dollar mess remains—and, circling it, a cohort of startups looking for opportunity amid the crisis.
on March 2 that it had raised $3.1 million in a seed round led by XYZ. The company, founded amid the payment pause in 2021, relies on a provision in the Cares Act, a federal economic relief package addressing fallout from the Covid-19 crisis. It lets employers make tax-free contributions of up to $5,250 per employee annually to pay down federal or private student loans. Still, it’s a benefit that hasn’t been adopted widely by employers.
Don’t expect investment in these startups to transform or end the student loan crisis. “This is still a drop in the ocean, and quite a measured bet by investors,” says Carla Napoleão, innovation analyst at Dealroom. Startups might see a need for disruption in the medium to long term, Napoleão says, but “in the short term, the unfortunate truth is that debt, particularly debt collection, often does well in a downturn.
It’s not surprising to see so many startups flood the space when there’s so much earning potential. That doesn’t mean it’ll solve the student debt problem, says Dalié Jiménez, director of the Student Loan Law Initiative at UC Irvine. “We haven’t fixed the underlying problem: How do we finance higher education?”
Because some of these startups focus on helping people pay for loans they have incurred by making payment plans, refinancing, or getting small employer contributions, they don’t tackle the root affordability issues. And startups advertising themselves as seeking to help people burdened by debt are still playing in a frustrating system. “It’s very hard to do good,” in a moral sense, by building a business on student loan debt, says Jiménez.
Startups may not be in a position to tackle the underlying causes of rising tuition costs and inflation. Biden’s novel, but precarious, widespread debt-relief plan is caught in the same tangle. As long as there’s a booming business around student debt, there will be entrepreneurs looking to help out—or cash in.
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