Boston-based Gradifi, a two-year-old startup focused on turning student debt repayment into a standard employee benefit, has been acquired by San Francisco-based First Republic Bank.
Financial terms of the deal were not disclosed.
Gradifi — which offers a software system that makes it easy for companies to set up a student debt repayment program and deliver payments directly to their employees’ lenders — will become a wholly-owned subsidiary of First Republic (NYSE: FRC).
The company will remain in Boston and continue to operate under its own brand, two arrangements that Gradifi CEO Tim DeMello said were key to the decision to sell. DeMello said five different financial institutions have approached Gradifi about an acquisition since 2015.
“We just started to think about what was best for the business and us in the marketplace,” DeMello said in an interview, regarding the decision to sell Gradifi. “We want to be that fintech startup, but we really want to have strong financial backing because we don’t want to have any of the potential customers to have concerns about financing.”
DeMello will stay on as CEO of Gradifi.
Gradifi has signed on large customers like PricewaterhouseCoopers, Natixis Global Asset Management and Penguin Random House. First Republic Bank became a customer in August and said in a press release Monday that it was expanding its implementation of Gradifi’s repayment service.
“We completely support Gradifi’s mission in assisting with the country’s student loan challenge,” said Jim Herbert, the bank’s chairman and CEO, in a statement. “They have become a market leader with their outstanding team, innovative repayment programs, and state-of-the-art technology. As education costs and student loan debt continue to rise, offering a student loan repayment benefit for employees is increasingly valuable.
First Republic, a San Francisco-based bank that caters to the wealthy, has grown rapidly in Massachusetts in recent years. As of June 30, it had $5.6 billion in deposits in the state, a 21 percent increase over the previous year. Since 2011, its deposits have more than tripled in Massachusetts. It has three branches in Boston and another in Wellesley.
First Republic plans to invest in Gradifi, allowing it to open offices in cities like New York, Los Angeles and San Francisco, as well as increase its employee count in Boston by 30 to 40 percent in the next year, DeMello said. Gradifi currently employs between 25 and 30 people.
Gradifi had raised $5.5 million in angel funding, DeMello said in a previous interview, leaving investors with 30 percent of the company, DeMello with 60 percent, and employees with the rest. All shareholders have now been bought out, with DeMello saying that none of his angel investors made less than 72 percent in an annualized rate of return.
Gradifi isn’t the only startup offering employers a way to set up student loan repayment plans. Competitors include Tuition.io in Santa Monica, which counts Fidelity Investments as a customer, and fintech startup SoFi, which began offering a debt repayment benefit program in September.
Employer-sponsored student debt repayment programs do not currently benefit from any tax advantages, so employees must pay income taxes on the extra money their companies are sending their way. But Gradifi and others are lobbying Congress to pass legislation that would change that.