A Texas startup specializing in loans to students at computer-coding boot camps announced Wednesday that it has raised $11.5 million in seed capital.
The fundraising round by Skills Fund is the latest example of the rush by online lenders to seize the opportunities presented by the rapid rise of programming boot camps across the U.S.
The boot camps are full-time educational programs that typically last for only a few months and justify their hefty price tags with the promise of high-paying jobs for graduates. Lenders such as Pave, Upstart, Earnest and Affirm are also making loans to enrollees in these programs.
The loans are technically unsecured consumer debt, not student loans, because the borrowers are attending educational institutions that are not accredited. So borrowers who file for bankruptcy may be able to rid themselves of the debt.
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Just last week, the U.S. Department of Education announced that students at boot camps that partner with accredited colleges may be eligible for federal student loans through a new pilot program.
But it is unclear how much of the loan demand that new program will satisfy. For now, private lenders are the main option available for enrollees who cannot cover the $10,000-plus tuition.
Initially, six coding camps will provide Austin-based Skills Fund leads on prospective borrowers, though the recently formed company expects to add to that list. An estimated 16,056 people are expected to graduate from coding boot camps in the U.S. and Canada in 2015, up from 6,740 last year, according to a June survey by Course Report.
Skills Fund is vetting partners to ensure that their instructors are qualified, there is demand in the workforce for the skills they are teaching, and their graduates are landing in good-paying jobs, according to Chief Executive Officer Rick O’Donnell.
“You could almost say we’re underwriting the boot camp,” O’Donnell said in an interview.
O’Donnell said that in the mainstream higher-education system, there are usually no negative repercussions for either the school or the accrediting body when students are unable to find work and subsequently default on their loans.
“We’re trying to change all those incentives,” he said.
O’Donnell argued that Skills Fund, through its vetting process, is playing a role similar to an accrediting body. The lender will absorb some of the loss when a borrower defaults, but the boot camp will also take a hit, he said.
The programming boot camps are marketing their courses to millennials who are seeking a career boost. The target demographic is well encapsulated on the Skills Fund website, which features a photo of a heavily tattooed, mustachioed young man.
Much of the firm’s new seed capital is being provided by Iowa Student Loans, a nonprofit student lender, and none of it is coming from the partnering boot camps, according to O’Donnell. He said the money includes some equity funding but will predominantly be used to fund loans.
The loans will be issued by SouthEast Bank, a $780 million-asset institution in Farragut, Tenn. The involvement of a bank enables borrowing by residents of all 50 states.