POP: Edly Inc

Hello centrifuge community,

we’re excited to make a full proposal below.

The TLDR is that we’d like to immediately finance $7M of assets on-chain with our existing investor capital, simply using Centrifuge as tokenization as a service.

Our hope is that the community supports our initial vision and is willing to work with us in bringing ethical student lending on-chain. In doing this, we believe that both Edly and Centrifuge will be a foundational element in solving today’s broken, >$2 trillion dollar student debt system.

I. Overview:

  • Business Name: Edly
  • Current AUM: $100M
  • $ Volume of Transactions Completed Last 12 months: $35M
  • Target Launch Date: Jan 1st 2024
  • Location and Team Size: NYC, team of 12
  • Years in Operation: Four
  • Historical Loan Tape (years): 4 years of performance so far, 12%-15% APR depending on pool.
  • Key Professional Partners (legal, accounting, operational, technical, structuring): Morrison Foerster, Dentons, US Bank (Trustee), Nelnet (Servicer), Finwise Bank (Bank Origination Partner)

II. Business Strategy – Business Details and Go-to-Market Strategy:

What makes your approach unique within your industry?

Edly is unique within student lending in that it does not contribute to the $2 trillion student debt crisis.

Higher education and skills training are expensive and the delta between tuition costs and the amount covered by scholarships and federal funding creates the “funding gap.” Traditional loan products do a poor job of filling the funding gap unless the borrower has a wealthy co-signer. For everyone else, the inability to pay for college results in delayed graduation (as they work through school) or abandonment of their degree pursuit.

Edly IBRs provide affordable funding for this critical need - without requiring co-signers.

The instrument Edly uses is Income Based Repayment Loans (“IBRs”). The fundamental feature of this product is that students only pay an affordable percentage of their income (e.g. 7%) until termination of the agreement through reaching one of the contracted thresholds (total payment count, total dollars paid, APR paid). The instrument is flexible, including features like no payments required while either unemployed or earning a salary below a floor (e.g. $30,000 per year). As such, there is alignment of interest between the students and Edly with respect to risk of success.

Private student loan companies typically require co-signers and high credit scores because they only underwrite a limited view of credit – one without considering the students themselves, their education choices, or the context of the job market. On the other hand, Edly specifically underwrites education decisions, analyzing data provided by resources such as the Department of Education to accurately predict student financial outcomes. Edly can therefore provide funding to a much wider group of students by excluding the co-signer requirements common in private student loans.

In line with the aim to promote cost-effective access to education, Edly encourages students to exhaust all lower-cost forms of educational funding first (e.g. grants, government loans, and certain cosigned

private bank loans). Edly IBR Loans can then be used to supplement the remaining gap in tuition funding needs.

While interest-based loans will leave students saddled with mounting debt, which over 85% of students will never be able to repay, Edly’s income-based repayment model scales to meet student’s changing needs, without compromising investor interest. Students pay an agreed percentage of their net income for a predetermined period.

Benefits for students:

  • No interest accrual
  • Repayments scale to changes in income
  • Max payment capped at 2.25x
  • Finite term length - 84 months

Because of these benefits, Edly has amassed over $600m in interested students. Importantly, however, ethical does not mean unprofitable. Over the past 4 years, Edly has proven a track record of 12%-15% APR across its $100M in fund-held IBRs.

Why are you a good partner for Centrifuge?

  1. Compelling yield: Edly offers competitive yield packaged within an ethical product, addressing one of the largest, and most universally recognized social problems of our era.

  2. Large market: Today’s student debt market is greater than two trillion dollars and growing.

  3. ESG and Public Optics: Through Edly IBRs Centrifuge is well positioned to tackle this 2 trillion dollar opportunity as a part of the solution, not a perpetuator of the problem.

How do you differentiate yourself from competitors?

Edly is by far the leading issuer of private student IBRs globally by volume and performance. There is no comparison. Competitors like Sallie Mae and Ascent only offer interest-based student loans, with the majority of loans needing a cosigner. If a student does not have a cosigner, the student either has to take on an absurd APR, or not receive funding at all. Edly steps in to provide affordable funding without the need for a cosigner.

On the federal level, student loan programs continue to push towards what they call income-driven repayment (the same as income-based repayment). President Biden introduced the student loan debt plan that would enable millions of borrowers to cut their monthly federal payments by more than half with income-driven repayment.

The Education Department’s proposed rules would revise one of its existing income-driven repayment plans — known as REPAYE — in which borrowers’ monthly payments are tied to their income and family size, and after a set number of years, any remaining debt is forgiven.

Unlike Biden’s one-time initiative to cancel up to $20,000 in federal debt, which has been stymied by legal challenges, the new repayment plan would become a permanent fixture of the student loan infrastructure and apply to current and future borrowers.

For those aspiring to secure additional funds beyond the federal offerings, Edly stands as the exclusive solution. Moreover, Edly doesn’t just provide financial support; it presents a viable avenue for addressing the systemic flaws ingrained in student lending through the implementation of Income-Based Repayment plans. Edly’s unique approach involves direct underwriting of students, ensuring that funding is extended only to those demonstrating the potential to successfully repay their loans. This distinctive alignment of interests between students and Edly not only facilitates financial support but also serves as a robust mechanism to curtail the accumulation of unpaid student loan debt.

How is your entity financed today, what are the current sources of capital?:

  1. Equity raised: ~$20M

  2. Debt raised: Edly has no debt on our books, we are all equity-backed. Loans are financed primarily through forward flow or warehouse agreements.

What is your entity’s revenue/fee model?

III. Business Strategy – Capital

We aim to launch the pool as a unitranche, with the possibility of introducing some tranching mechanism in the near future, as detailed below.

Please explain the source(s) of, and ability to scale, your first-loss junior (TIN) capital in the pool:

With a pipeline of ~$600M/year in loan interest, originations can be increased if there arises investor appetite for higher risk in crypto markets. Though we plan to initially offer only a unitranche pool, there may arise creative ways to tranche in the future.

Please explain the source(s) of, and ability to scale, your senior (DROP) capital in the pool:

Private credit-focused investors, with a pipeline of international demand yet to have been met. $35M in origination last year, on track for ~$60M in origination this year.

Capital relationships and how much you will bring through Centrifuge KYC to invest in either senior or junior tranche of your pool:

Strong relationships with several credit-focused investors interested in asset-based private credit and structured credit. Starting with an Edly Pool on Centrifuge of $7M in a single tranche. All $7M is made up of a group of investors that are existing financing partners of Edly

IV. Business Strategy – DeFi

Outline why DeFi is important to your business strategy:

  • Initial State / DeFi Primitive Layer: Edly holds the belief that all financial instruments will invariably be brought on chain. In line with pioneering novel debt solutions, Edly wants to champion decentralized technological advancement as well. From an investor perspective, on-chain products offer greater liquidity, ease of transfer, and better ownership management. bringing assets on-chain. We also hope to expand access to these assets to the broader, more global body of on-chain participants. Moreover, on-chain strategies may open the opportunity to create revenue through trade flow which can in part be shared with the students allowing them to benefit from their positive performance.

  • Redemptions: In order to accommodate on-chain investors who want liquidity, EduEx is in a unique position to utilize an Edly managed warehouse as a way to work with on-chain investors. Exact details will have to be solidified with Edly, though we are open to offer a solution to on-chain investors, as opposed to our traditional off-chain investors who lockup capital for ~6 years.

  • DeFi Application Layer: We would like to utilize the DeFi IBR primitives to expand into a student debt application layer. This could include:

  1. USD Scholar (USDs): an overcollateralized stable asset partially collateralized by IBR loans. This initiative would expand the buy-side market for on-chain IBRs to not only include those interested in on-chain student debt, but also the billions of dollars of stable asset owners seeking yield.

  2. IBR Retail Market: we believe there is public interest in supporting students, similarly to how there is interest in supporting startups and other initiatives through crowdfunding.

Articulate why Centrifuge’s community and protocol is a fit for financing:

Edly, and IBR student loans are a rather novel product in the student loan market. That being said, the federal government continues to push for income-driven repayment plans (same as IBR), signaling a shift in the student loan market as a whole. Edly has a first-mover advantage in the private market but struggles at times to find traditional private credit investors interested in such a new asset class, regardless of the returns history IBRs have shown. Centrifuge can help Edly access a brand new investor base for IBR student loans, leading to higher origination volumes and a higher impact on the cohort of students who need funding the most, all while returning investors with above-average private credit returns.

V. Structure: Risk & Terms

Please explain the key risks inherent in this opportunity and asset class:

  • Structural changes in the labor market resulting from some innovations such as AI - Edly has pivoted the certificate product from majority STEM (coding schools) to majority Nursing and Vocational schools, which is where there is a higher probability for success and employment in today’s market.
  • Counterparty risk: Edly relies on servicers to facilitate repayment.
  • Competition increases: other student loan originators such as Sallie Mae are yet to make a dent in the IBR market. Edly needs to move quickly before others catch up.

Pool Size & Pipeline:

  • At Launch: $7M in an edly managed warehouse (Edly WH Holdings LLC.) holding investor loans

  • 6 Months after Launch: $12M

  • 12 Months after Launch: $20M

  • Origination Pipeline Details: EduEx can access origination volumes in excess of outstanding forward flow agreements from existing investors. Higher origination volumes will enable EduEx to tokenize more IBR loans. Last year saw ~$35M origination, and next year projected ~$60M. We hope to access liquidity from both on-chain investors as well as off-chain investors interested in using an on-chain product to onboard.

Asset & Rates:

  • Asset Type(s): Income Based Repayment (IBR) student loans
  • Average Ticket Size: $10,000
  • Average Asset Maturity: 6 years
  • Expect Default Rate: ~20%
  • Expected borrowing rate on unitranche (on-chain): 12%
  • Expected lending rate to end borrower (off-chain): 7% of income, up to 2.25x payment cap. Yearly APR cap of 21%. APR range typically falls between 9%-18%.

Thank you for posting this POP application.

I just have some questions:

~20% looks quite high default Rate isn’t it?
What’s your strategy in case of default?

What’s the reason to use only one single tranche instead of two: senior with lower risk and more protection (with lower APY) and Junior - high risk with bigger APY?

Hello to @Jordan and the Edly team!

I think this is an awesome proposal. Kudos to you and your team for bringing significant funding to the table. In the market environment that we’ve been in over the past year, this has always been a sticking point for prospective issuers. Current onchain capital markets are weak, and so bringing offchain funding is critical for success.

For that reason alone, I think this proposal has a lot of merit. While the asset itself and the business model is certainly interesting, there are ceratinly many other factors the community should consider:

  1. Launching a pool always takes time and coordination with the core team engineering resources. Does the community think this is worth the time and effort?
  2. What is the potential growth opportunity for this issuer? In line with the above, the more likely a pool is able to grow, the more obvious it is worth the time and effort. This is a question about the forseeable market for IBRs and student loan originators, and how Edly plans on expanding.
  3. Is this a “good deal”? Always difficult to answer, but I think its imperative the Centrifuge platform has pools who’s yield is worth the risk and for whom the issuer is a quality counterparty.

@Jordan, would your team be interested and willing to engage the Credit Group? I’d like to see your proposal move to a POP and allow the community to voice their opinion, but as this a non-traditional asset class, I strongly suggest engaging a review from the Credit Group in order to move forward.

  1. 20% is high, though it is a conservative prediction and has not detracted from the performance of our stated APR over the years. Our base of borrowers is more susceptible to default given the fact the majority of them do not have a cosigner, but Edly employs several initiatives to mitigate this number. Edly works with servicers to ensure payments are being made on time. However, students may not be aware that making late payments or failing to make payments can negatively impact their personal credit. Edly continuously looks for solutions to aid students in making payments and educates them regarding financial literacy and the loans they received. We launched our Student Success Initiative, focused on educating students about credit history and financial literacy, while introducing them to ways in which they can automate payments. We use GradReady and other resources to facilitate this learning. One key initiative we are launching is Employer Pay.

Section 2206 of the CARES Act modifies Section 127 of the Internal Revenue Code so that employers can pay up to $5,250 to repay employee student loans during the pandemic emergency period beginning March 27, 2020, and later extended through December 31, 2025. The amount paid is tax-free to employees and tax-deductible for the employer. This program differs from traditional Student Loan Repayment Programs (SLRP) offered by many employers in that the CARES Act relief is entirely tax-free to the employee, whereas SLRP payments are fully taxable. Employer Pay is one way in which we aim to address potential credit losses, while providing an attractive tax benefit for both the employer and student.

  1. We are open to exploring tranching though we plan on our original $7M to be a unitranche as the rest of our products are. This $7M is a pool of some of our historically higher-performing loans, so we don’t see a need to tranche this pool. That being said, Edly only is able to accept around 5% of applicants to receive a loan. This is because our underwriting guidelines are strict in order to meet investor risk profiles. Only the highest quality students are accepted, though if there arises an appetite for higher risk in on-chain markets, we may be able to accept more applicants. Edly saw ~$600M in applicant demand last year, ~$35M were accepted.

@akhan I appreciate your support and enthusiasm!

Re: credit group: We are open to speaking with any relevant parties! Please let us know who is best to connect with and next steps in the process.

@yieldkollector Credit Group Strategic Lead

@Jordan I moved your post to the Centrifuge Governance → Proposals subsection and added the relevant tags.