Americans are paying down their auto loans and home mortgages. But one kind of debt is rising fast -- student loans. And it’s a heavy burden for many young borrowers. Now, a New York City startup called Pave is offering a new funding model for people at the start of their careers.
It’s an unusual deal. Instead of borrowing money, young “prospects” get a pile of cash from a group of “backers,” to pursue some goal -- directing movies, for example.
In exchange, the prospect agrees to fork over about five percent of their income for the following decade.
The backers have no guarantee they’ll make a profit. They could even lose money. But if the young go-getter does become the next Jerry Bruckheimer within a decade, investors could get rich.
“When you’re young you have initiative, you have energy, you have you have ideas, talent, but you don’t have resources,” says Sal Lahoud, co-founder of Pave. “So it’s about connecting those two stages of life. Between an accomplished backer and a young prospect for the mutual benefit of both.”
Terrance Ross is one new prospect. He’s 22, and he graduates college this spring. With a total of $20,000 from eight backers, he plans to travel to Kenya and start his career as a journalist.
“The way I will see Africa is different from someone who is much older than me,” Ross says. “To be able to do this now is exciting.”
But even if he finds a steady job in journalism, Ross could draw a pretty modest salary. So what makes his situation different from indentured servitude?
“I actually think it’s the opposite,” Pave's Sal Lahoud says. “You are giving young people...the financial freedom to basically pursue their passions. I think loans, on the other hand, dictate choices” because borrowers must repay their debt, plus interest, in full, and on a fixed schedule.
In recent years, there have been many attempts to reinvent the way we pay for big projects, through crowdfunding and peer-to-peer loans.
Anya Kamenetz, author of the book "Generation Debt," remembers a lender that connected student-borrowers with wealthy funders back in the early 2000s. It was called MyRichUncle.
“Very quickly the model that they were trying to do -- which is like what Pave is trying to do now -- they found that they couldn’t make it couldn’t work financially,” Kamenetz says. “So they switched over to more conventional private lending.”
A few years later, MyRichUncle folded.
Kamenetz believes Pave may face similar pressures. But there is one thing she likes about the program: you can use the money to just get started on your career. You don’t have to get a degree.
“I remember talking to friends of mine who got MFAs in playwriting, MFAs in novel writing. If only they could have gotten money just to sit down and make the thing that they needed to make, they would have been much better off, they would have saved a lot of money,” Kamenetz says.
So far, eight young people are participating. They’ve each raised between $3,000 and $50,000. And Pave is looking for more prospects.