This week two Finovate Startup alums launched the
services they demo'd a month ago at our conference:

• June 2: CheckingFinder from FirstROI/BancVue
• June 4: Friends & family student loan facilitator, GreenNote

We'll start with GreenNote and look at CheckingFinder tomorrow. Although I'd seen the GreenNote demo, since it was in closed beta, I hadn't had a chance to use it until earlier this week.

My first impressions are favorable. The site helps students reach out to family and friends to put together a "personal loan consortium" to finance educational expenses (also called a "pledge drive"). While GreenNote does not currently provide access to funds from outside the student's own network of friends and family, the service does offer tools to solicit loan pledges via email. It also collects the resulting loan pledges from interested parties, then sets up and services the resulting loan. 

The process:

• Students solicit loan pledges from their network, and hopefully the networks of their network
• Interested friends, family, or anyone else who's received a loan request from the student (either directly, or through forwarding) create a GreenNote account and make loan pledges (minimum $100)
• Once the loan is funded (minimum $1,000, no maximum), GreenNote verifies enrollment, collects the money, and packages it into a single loan agreement with the student
• When it comes time to repay the loan, lenders can choose to forego the principal and/or interest and gift it to the student, lenders will also be able to lower the rate

The terms:

• Loans are deferred for up to five years while the borrower is in school, then initiate a six-month grace period before repayment begins
• Interest accrues during the deferment period
• Repayment is over a 10-year period, meaning that lenders must commit their money for 15 years
• The rate is currently 6.8% fixed, but GreenNote takes 100 basis points of that, so lenders receive a 5.8% return (which they can elect to lower at repayment time)
• GreenNote charges a 2% loan fee at funding, with a minimum of $49

Coming soon:

• Allow third parties to browse loans they might want to fund (e.g., alumni)
• Facebook integration

Analysis
At first glance, it looks like an expensive way to put a nice wrapper around funds that have already been made available by the student's family. And certainly, if mom and dad are providing the bulk of the cash, it's not necessary to pay 2% for a promissory note. For most loans, you can do that for less at online paperwork specialists such as Virgin Money or LoanBack.

However, the power of GreenNote's model is tapping into the friends of friends, and the friends of those friends, and so on. As a student puts together an email pledge drive, recipients are encouraged to pass the request on to appropriate parties who might be willing to participate. For example, Pat who is headed to Michigan State, knows Jon whose uncle is a successful alum of the school. Jon's uncle, who'd be highly unlikely to simple write Pat a check, might be very interested in putting a few thousand dollars into a long-term 5.8% deposit that earns him a fair rate of return and helps someone go to Michigan State.

GreenNote is well thought out and well implemented. The main problem though, is finding enough deep pockets willing to put thousands of dollars on deposit for up to 15 years with no guarantee of repayment.

Financial institution opportunities
Lenders have taken some heat recently as they've cut back on student lending during the credit market turmoil. A bank or credit union could gain some positive PR by facilitating this type of lending among their own customer base and community. It could be built from scratch or potentially in partnership with GreenNote.

Background
GreenNote is backed by Menlo Ventures, among others, and has an impressive board and advisors including prolific blogger and partner at Glenbrook Partners, Scott Loftesness. Bill Harris of Intuit, X.com (now PayPal), and Passmark (now RSA) fame is on the board. The launch was covered this week by TechCrunch, VentureBeat, and C|Net among others.

GreenNote homepage (5 June 2008)

After talking to founder Asheesh Advani on several occasions, we expect Virgin Money (US) to become a disruptive force in the student loan business. And with college costs rising and financing options declining (see previous coverage here), there's a need now for new approaches.

Against that backdrop, I was thrilled to see a link to Virgin Money's press release (here) in a Payments News roundup this morning. I eagerly fired up the blog editor to write about it, but quickly realized it was not the product I was hoping for.

While it's a good line extension, it's not so new (think Diet Coke adding lime). Student Payback is a well-named service to formalize friends & family loans to students, something the company already did with its Handshake and Handshake Plus services (see note 1).

The main difference, and why it costs $100 more, is that Student Payback allows up to 10 increases in the original loan amount with no additional fee. For example, each semester a new loan can be added without needing a new loan doc each time.

Analysis
Strategically, Student Payback appears to be right on the money. It allows VM to better target the P2P student loan market with the eventual goal of moving upstream, graduating from merely formalizing existing loan agreements, to actually brokering multi-party financing deals. For example, initial seed money could be from mom and dad with help from government/school programs. Then as the student progresses through their studies, additional financing could come from Virgin Money partner bank(s) and/or individuals/organizations with an interest in helping students at particular schools (eg. alumni) or those entering certain fields. Scholarships, grants, internships and other related activities could also be thrown in the mix.

Anyway, there's lots of opportunity especially with the growth of social networking and the exit of several large student lenders. Two startups showed new solutions at our Finovate Startup conference several weeks ago: GreenNote and SimpleTuition. And there are others entering the market such as Fynanz (previous post here) and Qifang, a Chinese startup TechCrunch wrote about in February (here).

Note:
1. See our Online Banking Report on P2P lending for more information.

It's been awhile since we've had an installment of What NOT to Do! (note to self: think of a catchier title). There have been a number of candidates in recent weeks, but the winners are HSBC, M&T, and TCF, which have elected to get out of the federal student-loan business (FFEL) (see notes 1, 2).   

Although overshadowed by the Bear Stearns debacle and other unpleasant economic news, these three banks managed to make the first page of Thursday's Personal Journal section in The Wall Street Journal (here) as well as a number of regional news sites (here and here).

It's a difficult time for financial companies (except Visa of course), so I understand how it would be appealing to exit this relatively low-profit market until the credit markets calm down. However, what's a sound short-term financial decision could be a public relations and brand image disaster.

If there's one thing most Americans believe in, it's the importance of education. Sen. Kennedy's recent statement from the Senate floor provides a sample of how the general public views student loan support or lack thereof (the full text of the March 8 address is here):

Americans are anxious about their economic futures. They’re seeing volatile markets, disappearing jobs, home foreclosures, rising debt, and declining benefits. Now the crisis in the credit markets stemming from irresponsible lending practices in the mortgage industry may impact their ability to secure student loans at fair rates so their children can go to the college of their choice.  

With consumer confidence down, investors losing faith in the financial markets, and Congress pointing fingers at mortgage lending practices, this is not the time to exit a business that's associated with all things good about our country. It's like saying you're temporarily eliminating charitable contributions until the economy picks up. 

If there is something fundamentally unprofitable with student lending, by all means pull back, raise prices, redeploy resources, lobby Congress, whatever you have to do to save the bottom line. But unless you are in dire financial straits, don't risk your brand's reputation by turning your back on a market segment that needs your support now more than ever. 

What to do
This is a perfect opportunity for banks and credit unions to distance themselves from the big banks pulling out of student lending: 

• Develop a multi-media campaign, "we're on your side" that reaffirms your support of higher education through all that you do: scholarships, internships, donations, and a variety of loan options.
• Contact the local press and reiterate the above points and make executives available to speak to the strategic importance students and student loans are to your company.
• Release a microsite that serves as resource for students weighing financing options.

Notes:

1. We have less of an issue with the smaller lenders that have exited the FFEL program including: Boeing Employees Credit Union, First Niagra Bank, Spokane Teachers Federal Credit Union, and Kansas State Bank of Manhattan (see the full list of dropouts at FinAid.org here). Smaller financial institutions, with less of a brand name to protect and fewer resources, may have to make the hard decision to exit an unprofitable product line. 

2. The graphic image is for effect. We do not expect HSBC to close their online Student Center, although it will need a major redo, and quickly.

It's alternative lending week at The Wall Street Journal. First on Wednesday, Jane Kim profiles person-to-person lenders Prosper and Lending Club (here). Supporting market forecasts came from our earlier work at Online Banking Report (see Online Banking Report #127, and note 1, 2). 

Today, Anne Marie Chaker looked at Web-based student loan marketplaces (here). Each market works differently, but the basic approach is to get detailed info from the prospective borrower, then provide the borrower with a variety of specific loan options from specific lenders. In the case of College Loan Market and Student Loan Scout, a full application, including credit check, is required. But that allows participating lenders to offer firm financing quotes, similar to LendingTree's approach in the broader loan market. Apparently, this student loan sector is seeing increased activity, and scrutiny, due to the recent conflict-of-interest scandals at a number of college financial aid departments. 

Here are the links to the student lending specialists named in the article:

• College Loan Market <collegeloanmarket.com>
• eStudent Loan <estudentloan.com>
• Insight by Graduate Leverage <graduateleverage.com>
• Simple Tuition <simpletuition.com>
• Student Loan Scout <studentloanscout.com> **Not yet open for business**

Of the five, only eStudentLoan has an inviting appearance, with big orange "Web 2.0" students and parents buttons and the all-imporant name-dropping of its lenders along the bottom (see screenshot below).

Notes:

1. Our original forecast was published in OBR #127 in March 2006; the model was updated and the forecast increased by about 5% in November 2006. The updated numbers were cited in the Wall Street Journal article. We are increasingly bullish on the space and will publish updated forecasts this fall.

2. Also mentioned in the WSJ article: CircleLending, Loanio, and Zopa.

After a slow start, with no new entries during its first week, the student loan blog from Wells Fargo is off and running. Since its Sep. 5 launch, the site has averaged about two posts per week, each running 300 to 400 words, a good length. (See inset for jump page to the bank's two blogs, <blogs.wellsfargo.com>)

Furthermore, the writing is surprisingly good, with little corporate-speak, a trap that's so easy to fall into when every word has to be approved by a team of attorneys and compliance officers. Interestingly, the one off-topic post, written by the freelancing college-student mom, Caroline Hansen, was pulled from the site a day or two after it was posted. Either her step-daughter, or more likely, Wells Fargo management didn't like the story about her new tattoo.

The site is obviously aimed at parents, with warnings about credit card abuse and an instructive post about transferring money online to pay for a $573 book tab (ouch!).

While the bank does a good job of not blatantly pitching its products, it seems that most links within the posts lead to a wellsfargo.com page. The blog would have more credibility, and readership, if it linked to more outside resources.

Wells Fargo launched its second blog today, The Student LoanDown  <blog.wellsfargo.com/ StudentLoanDown>. The site, which is not yet mentioned on the main Wells Fargo site, is designed to offer guidance on the student loan process (click on inset for closeup).

The first post claims they won't try to sell anything. It's a claim not technically accurate since there are several links to the corporate lending site, and a position that's not really necessary. As long as you are upfront about the corporate affiliation, it's OK to highlight your own products and services PROVIDED it's done in a way that is both interesting and useful.

The website is powered by Six Apart's Moveable Type and launched with just a single post from two of its four listed authors. Wells Fargo joined the so-called blogosphere back in March when it launched an odd site called Guided by History, a look back at the 1906 San Francisco earthquake and what we can do today to be better prepared for natural disasters.

While that site is pure community service, The Student LoanDown hopes to educate students and parents while driving more business to its student loan unit. Live less than 24 hours, it's too early to give it a full grade, but here are our first impressions.

Pros:

• A bank that blogs, and one that will provide good PR, regardless of whether students like it
• Even if it looks a bit hokey, you can tell the bank put an effort into the design, unlike Bank of Internet (see NetBanker Aug. 31)
• A good cross-section of authors, one from marketing, one who's a May college graduate, one communications consultant, and a bank-sponsored, literacy-program manager (where are the guys though?)
• Full bios and pictures of the authors
• Comments are open (but moderated of course), which is a good feature provided the function is used. The bank will probably have to do some subtle encouragement, perhaps with employees, to get some Q&A started

Cons:

• There are only two postings, neither of which offered anything useful or interesting; try to launch with something interesting, even if it's a blatantly commercial sweepstakes
• The design is a bit hokey; Trey Reeme over at OpenSourceCU called it, "a little on the MySpace side with a WF feel" (hint: that is not meant as a compliment)
• The content needs more pizazz

--JB

If you are looking to boost student-loan volume, you had better postpone that summer vacation. The upcoming July 1st interest-rate boost has created much FUD (fear, uncertainty, and doubt) for borrowers. The reason: existing borrowers have the opportunity to lock in the current rate of 5.3% on Stafford loans or 6.1% on PLUS if they consolidate their loans and refinance prior to July 1. After that, most lenders will raise rates on these loans by almost 2% to the new rate caps of 7.14% and 7.94% respectively.

Unless you already have resources in place, it's probably too late to participate in the student loan refi boom. However, a high level of activity will continue through July and August as students and their parents look for money to cover that big tuition bill in September.

With the vast majority of college-bound teenagers using search engines, online marketing is a powerful way to find prospects. However, you won't be alone. A Google search today for "student loan" had 87 advertisers bidding on the term (see screenshot above). So it's going to take more than a simple ad buy to break out from the online crowd.

The top 10 advertisers on Google today for "student loan" (11 am PDT search from Seattle ISP):

1. NextStudent.com (across top)
2. loantolearn.com (across top)
3. AstriveStudentLoans.com (across top)
4. National City (right)
5. CollegeLoanSite.com (right)
6. GMAC Bank Funding (right)
7. ScholarPoint.com (right)
8. MyRichUncle (right)
9. Key Bank Education (right)
10. EducationFinancePartners.com (right)

MyRichUncle
If you look through these top advertisers, you'll see a number of innovative techniques for capturing loan applications or leads. One of the big innovators, advertiser #7, MyRichUncle (see screenshot right), has recently earned positive PR by announcing that it will continue to price its Stafford and Plus loans 1% to 1.75% BELOW the new July 1 maximum rates. The company even earned a nice Jane Kim sidebar in today's Wall Street Journal.

Aside from its pricing and memorable name, MyRichUncle also does a good job of succinctly summarizing the available options and steering borrowers into the correct program. It even offers a Preprime loan option for students without credit histories or co-borrowers.

--JB

Continue reading "MyRichUncle Discounts Student Loans" »

Wells Fargo is running a student loan banner on top of the financial aid category at Yahoo!
dir.yahoo.com/Business_and_Economy/Companies/Education/Financial_Aid/Lenders/

Access Group
www.accessgrp.org

The Access Group (Wilmington, DE) is a nonprofit organization that offers a series of “Access” branded college loans for graduate students, in addition to standard Stafford loans. All loans are made by National City Bank (Cleveland, OH; $64.3 billion; 1.4 million ATM cards).

* Depends on credit history; ** Aggregate maximum across all government and private loans; *** Time to repay after graduation

Crestar

www.servusfinancial.com/crestar

Crestar has developed the “eSeries Loan Program” including eMax Educational Loan and eCon Consolidation Loan. The online application resides on its vendor’s server, Servus Financial.

American Express

www.americanexpress.com/edloans

AmEx’s student loan Web.

American Express (New York; 42.7 million cardholders) has one of the more user-friendly student loan Web sites. It features explanations of various loan programs, online applications, a PLUS loan preapproval form to see if your credit qualifies, and a Second Look feature if your credit doesn’t cut it.

It still uses too much jargon and could use additional detail in its explanations. It also has a flaw in its repayment calculator at www.americanexpress.com/edloans/step/sheets/docs/staf.html The lesson here is to test your calculators. Even the most rudimentary usability testing would have uncovered the AmEx flaw.

The Flaw: The repayment calculator is an important financial tool for the college-bound. It tells you what your monthly payment will be after you graduate. AmEx’s flawed calculator can easily return results 75% or more too low. Users are asked to enter estimated college costs for up to five years of school. But if you neglect to change the “number of years in school” from its default setting of one, the repayment calculator ignores all your college costs after the first year. AmEx should reprogram the calculator to assume that if an annual cost is entered, the student is planning to attend school that year.

www.eStudentLoan.com

Screen 3:

Output from LoanFinder at eStudentLoan.com. This is where the company makes its money, matching borrowers with lenders. Everything else on the site merely acts as a funnel into LoanFinder.

After completing a five-step questionnaire about loan preferences, four lending programs are selected. In this example loans from Bank of America, First Union, Educaid, and Crestar were offered as solutions. The site makes it easy to compare loans with detailed pricing and payment info.

The Product: eStudentLoan delivers information, resources, and lender links to help students and parents in navigating the myriad options for financing a college education. The primary commercial function of the Web is as an “alternative educational loan marketplace” to assist borrowers in finding and comparing financing alternatives and/or supplements to government-sponsored loans (Stafford and Plus). The business model is somewhere between GetSmart (referrals only) and The Lending Tree (completed applications delivered to preselected bidders).

Lenders: The company had four original sponsoring lenders, and has added two more since launch. More are expected to come on board very soon. ð

Source: Company, 12/11/98 *loans by National City Bank

**division of The Money Store, now owned by First Union

Pricing: Web services are free to users and educational institutions. Lenders pick up the tab. The company won’t reveal its pricing except to say there are numerous marketing opportunities ranging from a relatively low-cost graphical enhancement within the general listing of student loan lenders, to joining the six lenders participating in LoanFinder. Kaff hopes to add two to seven new lenders during the next three months.

Screen 1: eStudentLoan.com segments visitors into graduate, undergraduate, or high school students. There are also sections for parents, lenders and financial aid (f.a.) professionals.

1. Prospective students, or their parents, are greeted at the front door (screen 1 above) and invited to select the appropriate door into the Web:

•  graduate student
•  undergraduate student
•  high school student
•  parent
•  lender
•  f.a. professional (financial aid)

2. After entering the appropriate door, users are greeted by a screen containing the navigational options. Dominating the Web real estate is a graphic funneling users into the LoanFinder (middle of screen 2 at right). Sponsor logos appear on the bottom of the screen.

3. After selecting LoanFinder, students are greeted with a 15-question profiler, divided into five screens with links to help along the way. Questions revolve around the educational status of the applicant, amount of money requested, repayment preferences, and loan pricing preferences (e.g., fees vs. rate). It takes less than two minutes to answer the questions.

Screen 2: Users are funneled towards the LoanFinder.

4. After submitting the loan profile, eStudentLoan presents up to four alternative loan options for the borrower to consider (see screen 3, above).

Screen 4: Users select the loan programs of interest, then lenders contact users by phone and/or email.

5. After selecting one to four lenders, users complete a request form (screen 4 above) asking to be contacted by the lenders. Alternatively, eStudentLoan provides hyperlinks directly into the education loan areas of the lenders’ Web sites, so borrowers can start a dialogue immediately with the lender.

6. Leads are electronically sent to participating lenders so they can contact the prospective borrower by telephone and email (users can opt out of telephone contact if desired).

Contact: Brian Kaff is CEO/founder,
(301) 951-3252, briank@estudentloan.com .

According to the Tower Group, the alternative educational loan market amounts to just $2 billion annually compared to the government-backed market of $30 billion per year. But the $2 billion number doesn’t include “indirect borrowing” by parents. For example, increased usage of credit cards, equity lines, cash-out mortgage refinances, 401(k) loans and so on

Mr. Kaff has put together an impressive marketplace. Anyone who could land six large lenders such as First Union, Bank of America, and American Express to participate in a start-up, must know a thing or two about sales.

He seems to be listening to his advisory board of private- and government-sector educational lending experts. One board member, Herm Davis, co-author of Financial Aid for Dummies, authors an advice column at eStudentLoan.com (screenshot right).

From our conversation, Mr. Kaff seemed sincere in his overriding goal of demystifying the college financing process. He said that after studying the process for 18 months he is convinced “only about 300 people (in the U.S.) understand the process.” He wants to deliver a quality product and plans to grow at a moderate pace to maintain quality. He seems less interested in a financial killing than doing a good job for both lenders and borrowers.

He dismisses an IPO, saying the alternative educational loan market isn’t big enough for that. We’re not so sure about that. With more than 10 million students currently enrolled in post-secondary educational programs, this is a sizable market.

The challenge, for any start-up, online or off, is generating traffic and establishing a trusted brand name. Kaff declined to discuss marketing plans or budget, but it appears he lacks the financial backing to close a portal deal or make a huge splash on the Web. It’s only advertising presence to date is on GoTo.com (above).

Look for eStudentLoan to partner or merge with better-capitalized efforts, such as GetSmart, Lending Tree, or even Intuit. But, he may be able to bootstrap enough traffic to make a go of it as an independent entity. He’s off to a great start. 8

Herm Davis, co-author of Financial Aid for Dummies, pens an advice column on eStudentLoan.com.

GetSmart Launches a Student Loan Referral Center

GetSmart launched its Student Loan Finder in November. Currently, all referrals go to just a single lender, American Express, but the company expects to bring additional lenders into the program shortly. AmEx does not have an exclusive. Note: the Education Financing Alternatives option (forth bullet above) links into GetSmart’s Home Equity Loan area.

Contact: Peter Gilbert, is VP Membership Services, peterg@getsmart.com , (650) 524-1805.