That said, to take the maximum award comes with an agreement to pay 7% of my personal income over ten years. At this point, I'm not sure if I'm willing to personally take that amount of financial risk for the startup. I'd rather get my name out there somehow so that I can convince someone to invest in me at a return rate determined by their personal opinion of me rather than the opinion of a computer algorithm.
Maybe one way to get my name out there is to ask for a smaller Upstart loan, and try to attract some mentor/backers in addition to investment-only backers. And maybe that smaller award could retire my student loans. Last time, the question was how much my income needed to increase to justify a large loan. This time, the question is whether I should use one loan to retire another assuming conservatively that Upstart has no effect on my ten year income, which I conservatively estimate at marginally above the level at which I could defer my Upstart payments (i.e., $30k).
If I don't take an Upstart loan, my ten year income is:
G - d
where G is my gross income, which the parameter d discounts for my student loan payments over that ten year period. Given a ~$30/year gross income, my ten year gross income is $300k. So
G = 300,000
Note from last time that my student loan payments over ten years after graduation are $14,549. So
d = 14,549
My current student loan balance, however, is ~$11,305. If I make a request for that amount, I will have to pay Upstart a proportion p of my income over a ten year period. So my gross income given my decision to take the Upstart loan is
(1 - p)G
I should take the Upstart loan if my ten year income under that scenario is greater than if I didn't take the loan. Expressed as an inequality, as substituting p = p* as the threshold proportion of my income below which it makes sense to retire my loans, this means
(1 - p*)G > G - d
which, after rearranging, becomes
p* < d/G
Although this is a very simple analysis, it helps to get some intuition from the result. The higher my loan repayment relative to my gross income, the higher the proportion of my income I should be willing to pay to Upstart since I'll end up paying less to them than I would to Uncle Sam. Anyway, plugging in d = 14,549 and G = 300,000 yields the threshold proportion.
p* < 14,549/300,000 = 0.0485
Under my current funding rate, Upstart only asks for 2.39% of my income over ten years, which is lower than the threshold above. So under my current assumptions, it pays to do the Upstart.
Note that I have to check up on my ten year loan repayment estimate. But I'm pretty sure that my monthly payment would not be affected by the income-based repayment option. The only question is whether I've calculated the ten year payment correctly. If I underestimated the ten year payment, it's no problem because I would just be underestimating the threshold proportion. If I overestimated the ten year payment, that's a potential problem.
So let's say that I was the luckiest student alive and paid 0% interest. Then threshold proportion becomes
p* < 11,305/300,000 = 0.0377
So it still pays. But there's another potential problem. What if I underestimated my ten year income? What is the maximum amount of income I can earn before it doesn't make sense to do the Upstart? We can check this by rearranging the inequality, substituting p* = p = 0.0238, d = 14,549, and G = G*, then solving for G*, which is
G* < d/p = 14,549/0.0238 = 611,302
Interestingly, this is less than the ten year income that Upstart projects for me in their income chart tool (which you can access once they approve your profile). Upstart has incentive to report an overestimate of your income to make you feel good, but it also has incentive to report an underestimate because it would show lower monthly payments and make you more willing to opt in. But let's hope that Upstart is honest and just reports what their algorithm estimated for your future income.
Of course, I'm assuming in this analysis that Upstart will have no effect on my income. So long as I get a mentor/backer, I doubt Upstart will have no effect on my income. The trouble is, I don't know what effect it will have. Probably a positive one if I connect with a good, high profile mentor. Plus, if I get a high profile mentor out of Upstart who could help me raise startup capital for SoundCheks, it gives me a networking opportunity I otherwise wouldn't have.
So here's what I am going to do. I am going to do the Upstart to retire my loans. But the message of my profile will be that, while I'm only using Upstart's loan feature to retire my loans, my real interest is in developing relationships with people who can help me start my business. Because in the end, it's not just about the money. It's also about chasing a dream about a kickass idea.
I hope this post helps other potential Upstarts make their decisions. I also hope it demonstrates to my potential backers that I know how to make good decisions with the help of s