Joseph Gracia & Principle Interest

Feb 2

Cahoots has always prided itself on the entrepreneurial spirit emanating from the building here. As found on our website, “Our cultural foundation is born from a common perspective of taking risk, getting stuff done, seeking our personal best, and having a positive impact.” While we have so many entrepreneurs working here, we got the chance to speak with one particular guy, Joseph, who is officially launching a BRAND new venture, Principal Interest. Principal Interest is focused on tackling the issue of Student Debt.

How we always start, what’s your background and how did you end up in the Ann Arbor/Michigan?

I was a philosophy undergraduate at Bates College, a small liberal arts school. Then I got my masters over at Cambridge in the U.K. After that, I worked as a strategy consultant in London then transferred over to their Chicago office. Soon after that I joined Opower, and that’s when I became fascinated by the power of behavioral science, especially with how it relates to technology and software. I was at Opower for four years, running their Behavioral Marketing and Design team. I then moved to Boston and joined another startup, WHOOP, a wearable technology company working with many of the best athletes in the world. I built out and ran the product team there for three years. I moved to Ann Arbor this spring because we wanted to get closer to my wife’s family, and because I had an opportunity to get back into the behavioral science space, which was very attractive to me. I joined ideas42, a non-profit behavioral science consulting firm, in April 2018 as an Entrepreneur in Residence with the explicit agreement that I would move to Ann Arbor and create a mission oriented company leveraging behavioral science. ideas42 developed a venture lab to spin out companies that couple behavioral science with software and it became the perfect opportunity for starting a new venture.

Once you got here, how did you stumble upon Cahoots?

Coming from the coast, I definitely noticed there’s a truth to Midwestern kindness, especially when I was networking. When I reached out to people there was a much higher hit rate and everyone was very enthusiastic to help however they could. After networking and speaking to about 50 people in the Greater Detroit area, I became friendly with another Ann Arbor entrepreneur and he recommended Cahoots. After working here for a bit, I can say it’s been tremendously helpful, especially the community here. The other day I had a few legal questions on the entity formation process and I literally ran into a lawyer who specializes in this field in the elevator.

So what exactly is Principal Interest and how are you trying to address the issue of student debt?

To give a little perspective, 45 million people currently owe more than $1.4 trillion in federal student debt. This is the largest consumer debt category only behind housing. Around 4 million students every year graduate with federal student debt. This system has protections in place; such that this should be an opportunity for students to use this debt to build-up their credit and financial profile. However, over 10% of student-borrowers are in default on their student loans today. Research from an economist at Columbia University shows that around 40% of student-borrowers will default at least once over the life of their student loans. This creates a system where, rather than being an asset, the student debt tanks borrowers’ credit. This limits their ability to access other financial services like auto loans and credit cards after they leave school.

Schools have a vested interest in their student-borrowers avoiding default as they are tracked by the Department of Education on how many of their students default after leaving school. If a schools’ cohort default rate climbs above 30%, they could potentially lose access to all federal loan funding for their students. This is where Principal Interest can help. We partner with schools and provide the schools with exit loan counseling, which schools are federally mandated to provide to their student-borrowers. We then work with their students through our digital and automated system to help student-borrowers establish healthier payment habits from the start. For student-borrowers this will help put them in a better financial position at a crucial part of their lives. For schools this will lower their cohort default rate, putting them in better standing with the Department of Education. For Principal Interest, it lets us build relationships with young adults at the key point when they’re leaving school, entering the workforce, and will need guidance on additional financial services like bank accounts, credit cards, auto loans, etc.

Where did you come up with the idea of Principal Interest?

At ideas42’s venture lab, one of the crucial things we consider with a new venture is if this is an area where behavioral science can be used to both do good and provide a competitive advantage. While researching this space we noticed data showing that the less a student owes when they leave school, the more likely they are to default. For example, a student with less than $5,000 in federal student debt is twice as likely to default as a student that owes over $100,000 when they leave school. This made us realize that this is more than a purely financial issue and there’s a lot of behavioral elements in play.

We then started to look into some of the behavioral pitfalls that really hinder students during the repayment process. For example, right now students are all automatically put on the same repayment plan. And studies show that default options (meaning the standard choice, not financial default) have a massive influence on borrowers’ choices. This creates a situation where student-borrowers end up in a repayment plan that doesn’t make sense for their financial situation. We can address this, and many other behavioral elements, through our exit loan counseling process. Our design nudges and empowers students to actively choose the right repayment plan for their situation. This is one example and there are a number of behavioral levers we can use to help students establish better repayment behaviors.

I sometimes here the ‘kids these days’ trope, with a perception that young adults are financially uneducated or uninformed on the importance of paying off their loans. Looking at it from a behavioral perspective, however, one of the key issues is that we’re all very busy and, as humans, we have real limits on our attention span. The key here isn’t to increase financial education, it’s often addressing the issue of limited attention. So the goal of Principal Interest is really to be active and helpful in their lives during the moments when they are thinking about their loans. We are here to remove the friction and allow them to easily take the best actions to stay in good financial standing.

What can we expect to see from Principal Interest in the next year?

We just kicked off our research and design process and plan to launch with the graduation season in the Spring of 2019. From there we’re going to continue developing as many school partnerships as possible and iterate on the product throughout the year. The second major release of the product will then come in early 2020.

Where did your drive the for the company come from?

When I was at Opower, I really saw the power and the benefit of being a double bottom line company where it’s a for-profit entity that is very mission-driven. Also, the opportunity to help tackle a real problem is really exciting and motivating. This is an opportunity where we could be helping literally millions of student-borrowers establish healthy financial lives from the start. Especially when looking at the opportunity in the US and how poor financial health can really undermine opportunity, the prospect of being able to move the needle on this problem is really exciting to me.

Until next time…