A Tampa company is about to roll out technology that offers investors and borrowers a chance to attack mounting student loan debt.
The company, RedPerit, has developed Defynance, an initiative that tackles the student loan crisis by refinancing existing student loans through an income sharing agreements. That’s an arrangement in which an investor repays a student loan upfront and the former borrower contractually agrees to share part of his or her income with the investor.
Defynance has developed an algorithm to predict the correct percentage of income that will be shared and the terms of the arrangement, said Farrukh Siddiqui, president and CEO of RedPerit.
The company has started to build a pipeline of people interested in refinancing their loans, and plans a private beta test starting March 15.
RedPerit’s overall goal is financial services more socially responsible, Siddiqui said.
“Debt is a big problem. Financial services are built on debt and that gets a lot of people into trouble, especially when things go bad,” he said. “The solutions we are coming out with are designed to be more balanced and fairer, and to not take advantage of people when they are going through a tough time in life.”
Defynance is the first initiative to come out of RedPerit, which describes itself as a socially responsible advisory group. The company has three core functions:
- To develop products and services like Defynance that are tackling issues within the financial services sector
- To support an associated nonprofit organization, SORIN (Social Responsible Innovator) that aims to create a network of companies that agree to play by the rules of social responsibility
- To advise and consult companies that want to join the network.
Social responsibility can have different meanings. SORIN’s standards define it as purpose, which includes making decisions in the best interest of both internal and external stakeholders and contributing to charities; responsibility, which takes in ethical behavior and fair competition; and transparency, which means reducing and minimizing fine print and addressing social and environmental performance, among other things.
Defynance is a step in that direction, Siddiqui said.
It will refinance student loans for people who are out of school and working.
“What we would do is pay off the loan, and in return that person agrees to share a small portion of their income for a certain amount of time,” Siddiqui said. “During that time, there’s lots of protection built in to the way the income share program works. If they lose their job, there’s no income to share, so payments are paused. Once they get back on their feet, payments continue again. And, as opposed to a loan, there’s no interest accumulating, so the problem is not compounding during that time. It just pauses and they can continue to make payments after they get another job.”
The “income sharer” is contractually obligated to share their income.
“Because it’s not based on debt, if they don’t work and they don’t have a job, they’re not obligated to pay that back. But if they’re working and not making payments, then they would be in default because they would be breaking the agreement,” he said.
There’s a risk and an upside for investors.
“The investor takes the risk of someone maybe losing their job and not making payments for a certain amount of time, but the investor also is rewarded for taking that risk because most people’s income grow over time. So even though the income share is fixed the return to the investor will increase over time because income will be growing,” Siddiqui said. “If everything happens normally they will end up paying more than what was financed and that will be the return or the profit for the investor.”
RedPerit and Defynance originate the contracts and service them, making money through a servicing fee.
RedPerit, with five employees, was in stealth mode while doing research and development on the product concept and algorithm. The company has elevated its profile in the last couple of months, participating at the Synapse Summit and at Startup Week Tampa Bay, where it placed second in the Friday Startup Showcase.
Siddiqui and others who are not active in the business provided the initial capital for RedPerit. There’s a family and friends funding round underway now.
“We want to delay more until we have the product launched, piloted the marketplace and have some revenue and start showing a positive track record and momentum. Hopefully, we’ll maximize our valuation and deal terms down the road,” Siddiqui said. “If things are going well, by this time next year we’ll be ready to start growing and scaling the business.”
For the private beta test, he wants to hear from anyone interested in either side of the equation — a student borrower who wants to become an income sharer or an investor.
“I don’t know how many refinancings we’ll do in the private beta, but we’ve outlined the process for underwriting and approving people and service them afterwards, so we want to test that out to make sure that process is good. We want to test the algorithm,” he said.
“And during this time, we’ll set clear expectations with the people refinancing that they are early adopters, and we need feedback to learn from them so that we can continue to refine user or customer experience.”