The emergence of code schools has also spawned an industry of alternative lenders that specialize in giving shorter-term loans to students.
Tuition at code schools costs an average of $11,469, according to Course Report, an industry research company.
Because these schools are not eligible for federally-funded student loans offered at low interest rates, alternative lenders have filled in the void.
One of the biggest players in the market is Austin-based Skills Fund, which was founded in 2015 by Rick O’Donnell and Joseph Kozusko as an alternative lender to code schools or “boot camps” that teach programming languages, or other skills in demand by technology companies.
Unlike a lot of other startups, Skills Fund didn’t raise money from venture capitalists and instead raised $1.5 million to get started from its partner, Iowa Student Loan.
Skills Fund executives say their firm is different from other lenders because of their rigorous vetting of the code schools they work with. Skills Fund asks that each school submit detailed information on the job placement rates of graduates, among other criteria.
O’Donnell compares Skills Fund to an accrediting agency that ensures students are going to schools that have a track record of placing students in tech industry jobs. But unlike traditional accrediting agencies, O’Donnell says Skills Fund’s revenue doesn’t come from member institutions.
“They have no incentive to kick schools out,” O’Donnell said. By contrast, Skills Fund has stopped working with schools that it believes don’t deliver good outcomes for students, he said. “
Our incentive is really to make sure borrowers do well and pay back their loans,” O’Donnell said.
Skills Fund also insists on making the schools have some skin the game, O’Donnell said.
“When we fund loans, a portion of the tuition money sits in an escrow account,” he said. After a student has graduated and landed a job, the school will get that last remaining portion of the tuition. If a student graduates and cannot pay a loan back because he or she hasn’t found a job, Skills Fund says it offers hardship plans. If a student can’t make those hardship payments then they go into default.
The company said the percentage of students who have defaulted on their loans is in the “low single digits.”
Skills Fund also charges all students the same interest rate — either 8.49 percent or 8.99 percent, depending on the school being attended, the company said. The company does check applicants’ credit scores, but does not use income or employment data in the loan process.
However, a recent study by Course Report compared the rates various alternative lenders were offering to code school students, and Skills Fund offered the highest rate. O’Donnell said that data is misleading, because those are the starting rates, and the actual rate a student is charged can be higher.
On its website, Skills Fund lists about 50 code schools it works with, including local schools Hack Reactor and Galvanize.
Skills Fund’s Austin headquarters are downtown. O’Donnell said they chose Austin because it’s a “great town to recruit talent” and has several code schools. The company employs 17 people and is growing.
“We’ve doubled each year in terms of loan volume, revenue and head count and we expect to keep doing that,” he said.