Skills Fund Aims to Be Accreditor, and Creditor for Coding Schools
The creation of Skills Fund, the Austin, TX-based startup that makes loans to people enrolling in coding and Web development bootcamps, started with two ideas.
The first is that students should have access to loans that are easy to understand and that state the terms of the loan—such as knowing exactly what interest rate they will pay—up front. Second, the quality of the school should also impact whether the lender will give a student a loan.
Thus, Skills Fund, an alternative lender that researches both the school and the borrower who attends it to determine who to lend to, was born. Last week, the program received $11.5 million in seed funding to help it start making those loans. The funding round was led by Iowa Student Loan, a nonprofit that has provided $2.6 billion in federal and alternative student loans.
While the Skills Fund has some basic credit requirements for students who want to borrow money—if you recently defaulted and on another loan, you probably won’t meet them—the company also underwrites the loans based on the quality of the bootcamp and coding school, a factor that is perhaps more important, according to founder and CEO Rick O’Donnell. If a school meets its requirements, most of the students who attend can get a loan.
The idea behind it is that most of these students are leaving a job in order to get the training to gain a higher-paying one, O’Donnell says, so they should be measured based on what their education can help them achieve. “By doing our due diligence with the schools and partnering with them, we’re able to price the credit on the back end in a way that doesn’t differentiate the interest rates for the borrower,” he says.
Skills Fund announced six programs (Dev Bootcamp, Metis, Galvanize, Hackbright Academy, CodeU, and Sabio) last week as its “partners.” That means that the schools meet a group of quantitative metrics and qualitative criteria that Skills Fund has set.
“What we really needed was an accreditor for quality assurance of the innovative higher ed space,” O’Donnell says. “We’re really trying to help identify the best programs, and then provide a really high-quality financing tool to expand access to those programs.”
The need for financing these short-term programs, which on average cost $11,000 and can last for multiple months, has become more pronounced as the programs expand their reach nationally. The number of students expected to graduate may double to 16,000 this year, according to market research website the Course Report. Xconomy’s Bruce Bigelow reported last week that San Francisco-based training program Dev Bootcamp is expanding to San Diego, where it will offer a 19-week training course, in just the latest move in a growing, national competition among coding educators.
In order to get a loan from Skills Fund, a student must attend one of its “partner” programs, which the company has vetted as a quality school. The fund will soon be adding more schools to the list of six it has approved so far, O’Donnell says, though he said he couldn’t provide more details about which schools or when they’d be added.
Skills Fund does due diligence research into a variety of metrics, O’Donnell says, including the school’s completion rate, dropout rate, graduation rate, how long it takes students to find a job after graduating, the salary of those jobs compared to other salaries in the local area, and whether the school is teaching skills for jobs in high demand, among others. Other qualitative measures, such as who the instructors are and their pedigree, are factors too, he says.
There are two base loan products that approved schools can offer their students: a three-year loan with an interest rate of about 8 percent, and a five-year loan with a rate of about 10 percent. Then, Skills Fund works with each school to create customized options depending on the needs of its student body, such as the possibility of making interest-only payments for a period after graduation or larger loan amounts to cover housing costs, O’Donnell says.
“If I was borrowing money, what would I want to experience? That’s what we’ve tried to build,” he says.
While building something based on what people want is a good measure for success, O’Donnell also has plenty of experience in both the financial and education markets to add credibility. Before O’Donnell moved to Austin to run the Acton Foundation for Entrepreneurial Excellence, a program that offers an MBA in entrepreneurship, he was the head of all consumer protection agencies in Colorado, as well as the secretary of higher education in the state.
The two-pronged idea of the Skills Fund making loans and performing background research about bootcamps came about while O’Donnell was working for another bootcamp, Cambridge, MA-based The Fullbridge Program. At Fullbridge, which O’Donnell came to after it acquired a business he ran, he was trying to develop a lending tool to help students, who might take a leave of absence from their job, pay for tuition for the business-skills building bootcamp.
While working on it, O’Donnell realized that there was a related factor that often was unanswered, but played a large role in these bootcamps: If students are going to take loans out to pay for these programs, how do they know the programs are good?
With Skills Fund, O’Donnell has developed a company that does work similar to college or university accreditors. Skills Fund takes no money from the schools, though, instead earning its revenue from the interest that students pay.
Skills Fund does not reap all 8 to 10 percent of annual interest. It will get investors in from the capital markets, such as private equity firms or hedge funds who are seeking higher returns from relatively safe investments, to provide the money to make most loans. (O’Donnell declined to name the exact type of investor he works with.) Skills Fund’s banking partner is SouthEast Bank of Tennessee, he says.
Skills Fund obviously has a bevy of competitors in the fast-rising, hot fintech lending market. Earnest offers refinancing of student loans, and there are many more generalist lenders such as Affirm or Fundbox. O’Donnell says those lenders aren’t competing with him in the coding space, and instead are trying to replace larger banks.
“They’re different than creating a bespoke lender to serve the needs of a very specific and an important, emerging education sector,” he says.