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Is crowd funding the future of borrowing?

Kelly Dilworth

If you’re fresh out of college and saddled with student loan and credit card debt, pledging a portion of your future earnings to a group of backers in exchange for a clean slate may not seem like such a bad idea.

As soon as you sign up, your debts will be wiped clean — or at least significantly reduced — and you’ll have the freedom to pursue projects (such as starting a new business or photographing your way around the world) that you wouldn’t have been able to do if you were still subject to monthly loan payments.

A number of companies have cropped up in recent months promising to let you do just that. The 1-year-old company Upstart, for example, allows aspiring entrepreneurs, artists and would-be graduate students to post glowing profiles of themselves to a website to court backers who can help fund their dreams in exchange for a fraction of their income.

Is crowd-funding the future of borrowing?

“Founded by ex-Googlers, Upstart lets you monetize your future potential,” writes the company on its website. “Your backers provide capital today, which you repay as a small fraction of your income for either five or 10 years. Your backers are investing in you, not your idea or your business.”

The program is choosy about who it lets participate and tries to predict ahead of time how much a young “upstart” is likely to make in 10 years. Recent grads are expected to pay up to 7 percent of their income annually for five to 10 years. But if their income falls below a certain threshold, they can get a temporary reprieve and defer their payments for up to five years. (If they’re especially impoverished and make less than $20,000 per year, they may also qualify for a special exemption that defers their payments indefinitely.)

If a participant defaults on his or her payment obligations, then the company may convert the remaining balance into a traditional loan with a hefty 14.99 percent interest rate (just below the national average APR for credit cards).

A similar, 10-month-old company called Pave promises to do much the same thing. Aspiring athletes, artists, grad students and business owners with decent credit scores (660 or above) can apply to become a “Pave prospect” and hawk their dreams on Pave’s website. The percentage of income that Pave prospects share with their backers is capped at 10 percent and, like Upstart, Pave doesn’t require prospects to repay the full amount they raised.

Both programs are strikingly similar to Oregon’s “Pay It Forward” experiment, with an important exception: Unlike the state university system’s pilot project, which is designed to fund every student in the program, regardless of their potential, the Upstart and Pave models are exclusive and reward the recent grads with the most impressive resumes and strongest ability to promote themselves.

That supposedly makes participating in the programs a less risky bet for backers and a potentially sweet deal for young people with big ideas but limited finances. However, it also means that crowd-funding models such as Upstart and Pave are limited in their scalability.

In this week’s New Yorker, James Surowiecki argues that crowd-funding programs could be an important step forward for student lending. “Upstart may succeed or it may fail, but the principle behind it is unlikely to disappear,” writes Surowieki. “The old way of borrowing was predicated on a world in which the job market was stable and everyone had a steady income.” However, “That world of work is changing. The way we finance it needs to change, too.”

Surowieki may be right. But it’s important to make clear that crowd-funding programs that pay down the debts of the nation’s best and brightest are only going to work for a small portion of the population. Not everyone is cut out to be a successful artist or entrepreneur; nor does everyone want to be his or her own boss or work in a high-earning, high-stress career.

Perhaps an aspiring teacher, journalist or public servant who’s struggling to pay back a student loan will also be able to convince enough investors that such noble pursuits are worth gambling money on, despite the meager returns the investor is likely to get back. But I wouldn’t bet on it.

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