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New Student Loans For A New For-Profit Education Sector

President Obama tours the Louisville-based tech company Indatus with Indatus president Philip Hawkins, left.

Coder Bootcamps. Accelerated Learning Programs. New Economy Skills Training.

Whatever you call them, these new players in higher education are multiplying. The intensive programs say they can teach job-ready skills in technology, design and related fields. In record time.

In three or four months of really long days, students with little prior experience are getting up to speed in the latest programming languages with Hack Reactor, General Assembly or Dev Bootcamp. Typically, the cost is $10,000 to $20,000.

The sector predicts 16,000 graduates this year, compared with 48,700 bachelor's degree recipients in computer science. Many go on to six-figure jobs in the software industry.

One fan of these programs is President Obama. In March, the White House announced the TechHire initiative to help communities recognize, and hire, bootcamp graduates in order to close the famous "skills gap."

"There's a lot more we can do together to make sure that more Americans benefit from a 21st century economy," Obama said to the nation's mayors. "Folks can get the skills they need in newer, streamlined, faster training programs."

These programs are also notable for what they're not. They're not publicly funded. They're not traditionally accredited. That means they can't offer federally subsidized student loans or Pell Grants.

So what if you want to quit your dead-end job and move to the East Bay or Silicon Alley to crush code? You could tap your savings or put it on credit cards. That favors those with family or personal resources.

Perhaps as a result, enrollment in the bootcamps is predominantly male, white, and people with some prior college experience.

As of the past year or so, another option has emerged. You can now finance your bootcamp education through a startup student lender such as Skills Fund, Pave or Earnest.

"Most of our programs have guaranteed financing," says Shawn Drost, a cofounder of Hack Reactor. "We ship the private lenders our sheets of graduates and defaulters and they end up charging like 10 percent interest, and students pay it back within in a year." He says about half his students take advantage of these private loans. General Assembly says it's 15 to 20 percent.

A new company, Affirm, has just this week entered the bootcamp lending business. It says it will lend to riskier bootcamp borrowers at annual interest rates up to 20 percent.

"It's progressive underwriting," says VP Brad Selby, who previously worked at Paypal (Affirm CEO Max Levchin, a Paypal founder, is well known in the tech scene). "We want to approve more people."

Affirm looks at publicly available information, including LinkedIn profiles, to assess risk. They also check applicants' bank account usage, with permission.

Yet another Silicon Valley lender, Upstart, offers one of the more controversial takes on student financing: what is called a human capital contract. Students at a data science bootcamp program called Metis can apply for funds in exchange for a percentage of their future income.

All this educational and financial innovation is coming at an interesting moment. The for-profit college sector as a whole has been facing government crackdowns, lawsuits, and declining enrollment.

One of the biggest recurring accusations made against companies like Corinthian Colleges has been of predatory lending — that they pushed students to borrow private loans, often directly from the college itself, and that students had little hope of repaying the money either because the graduation rate or the market value of the degree was so low.

At the same time, for-profit colleges have been heavily dependent on federal student aid, so much so that the government created the 90-10 rule, specifying that at least 10 percent of their revenue had to come from some other source besides student loans and Pell Grants.

The perception right now is that the bootcamps are providing a much better deal for students than the typical for-profit program. Both the educators, like Drost, and the lenders, like Selby, like to use the financial term ROI — return on investment.

The accelerated programs report graduation and job placement rates above 90 percent. Of course, these are no more independently verified than similar numbers reported over the past decade by for-profit colleges and technical schools.

And here's where it really gets interesting. The old players are starting to move into the new market. In 2014, Kaplan Inc., the owners of Kaplan University, purchased Dev Bootcamp and cofounded Metis. And just this month, the Apollo Group, which operates the University of Phoenix, has invested in bootcamp program called the Iron Yard, based in South Carolina.

Perhaps coincidentally, just as these legacy companies move into the bootcamp world, the Department of Education has signaled its willingness to make traditional student aid available to short-term programs.

The most likely way this could happen, according to The Chronicle of Higher Education and several sources, would be through partnerships with accredited colleges. The Department of Education is holding a meeting this month with some industry players.

In the meantime, some bootcamp founders are sounding a note of caution. While they like the idea of broadening access, they're nervous about the details.

"We're really proud of the fact that this industry we've helped build is getting this attention and focus," says Jake Schwartz, the cofounder of General Assembly. "We just want to make sure that we're very careful in how we roll out this process of getting the government involved."

Citing some of the persistent problems in for-profit colleges that are dependent on subsidies, he adds, "This industry is still nascent and I don't want it to become a gold rush land grab for government money. That's the worst that could happen."

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