Twenty-six million Americans are waiting to see if the US Supreme Court will allow a plan to cancel some student debt to move forward. Regardless of the court’s decision, a trillion-dollar mess remains—and, circling it, a cohort of startups looking for opportunity amid the crisis.
Some 100 startups have launched to try to build businesses on the mountain of US student debt, more than half since 2016. Companies focused on student financing have raised more than $4 billion in the past five years, according to data from Dealroom, which collects data on startups. They cover a range of business models. Online bank SoFi has a service for refinancing student loans, Peanut Butter helps companies offer student loan assistance as a worker benefit, and Chipper helps people find the most efficient way to pay down their loans or get relief.
Student debt will remain a problem regardless of the Supreme Court’s ruling on President Biden’s plan to forgive up to $20,000 per borrower. The court heard arguments last week, after several states and two borrowers sued to block the debt relief. The plan could wipe out $400 billion in federal student debt, but borrowers owe a total of $1.76 trillion in federal and private loans, according to the US Federal Reserve. It’s held among 45 million people, and students now graduate with an average debt of $25,000.
The student lending industry has gone largely undisrupted. Companies like Sallie Mae (which began as a government entity servicing student loans) and its spin-off Navient have dominated. Loan refinancers have sometimes been problematic lenders, making money off people who sought lower interest rates without understanding the fine print of loan consolidation.
Meanwhile, the debt mountain has grown, fueled by rising tuition costs and reduced or flat investment in public universities by state governments. Startups centered on college debt have endured a three-year hiatus on federal student loan repayments during the pandemic. But when loan payments come due again, likely this summer, some of these startups may find their moment to grow has come.
“There are still a lot of unknowns” about what will come of debt relief, says Chauncey Hamilton, partner at venture capital firm XYZ, which has invested in Highway Benefits, a platform that helps employers contribute to paying off their employees’ student debt. “It’s at a tipping point where a lot of these companies that have been heads-down, building, will have exciting business in the next few months because of this looming, humongous debt problem,” she says. (Disclosure: Hamilton worked on the business side of WIRED until 2013.)
Widespread student loan relief in the US once felt out of reach. It was championed by progressive politicians but seeped into the platform of the more centrist Biden. With the Covid-19 pandemic came a moratorium on federal loan repayments. Just 9.1 million borrowers made any payments on their halted student loans between April 2020 and March 2022. Biden announced the debt forgiveness plan in August 2022.
The pause has allowed people to pay down other debts, save money, and improve credit scores. It has also brought an opportunity to take pause and question the broken economics of the US higher education system. The federal government is expected to lose nearly $200 billion on student debt rather than profit from it, while large firms have raked in profits.
The moratorium also affected some student loan refinancers and other companies that had built businesses on college debt. In January, SoFi CEO Anthony Noto said that the refinancer’s student-loan-related business had “declined meaningfully” since loan payments were paused. SoFi is doing just a quarter of the student loan refinancing business it did before March 2020, Noto said.
The majority of student debt is in federal loans. Refinancing can lower interest rates, but shifting debt into privately held loans during the payment pause would have been a poor financial decision. People who refinanced federal loans to private ones are not eligible for the debt relief plan, payment pause, or other federal loan safeguards.
But SoFi is still growing, thanks to other aspects of personal finance it manages. And the company’s stock rose last week after Supreme Court justices expressed skepticism about the legality of the loan forgiveness program. The company did not respond to a request for comment on how the student loan pause has affected its refinancing business.
Startups built on the student loan ecosystem have continued to raise new investment, despite the payment pause. Highway Benefits announced 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. “Because the fundamental thing—the way we think about how to invest in higher education—is flawed.”
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.