Certain online companies like Kickstarter, IndieGogo, and Upstart have allowed people to use the Internet community to raise funds for their projects and passions called crowdsource funding. Witnessing the success behind many of these projects, CommonBond and SoFi have developed a crowdsourcing solution to the student debt problem.
CommonBond and SoFi are funding graduate students with their school loans at a lower APR than other competitors like federal loans and bank loans. Both offer students education loans at a 6.24% APR and also offer students the option to refinance their current loan at 5.99%. In most ways, the two companies are very similar.
Both are funded by alumni communities of accredited investors. Starting in 2012, CommonBond only offered loans to MBA students at the University of Pennsylvania’s Wharton School of Business, but is looking to branch out to other schools. The founders — David Klein, Michael Taormina, and Jessup Shean — are Wharton School alumni dedicated to helping Wharton School students lighten their financial burden. SoFi, founded by a group of Stanford Graduate School of Business alumni, provides loans for current students and graduates from 79 higher education institutions including some of the nation’s more well known schools — like Stanford University, Harvard University, Cornell University and some smaller institutions like Pomona College, College of William & Mary, and Haverford College.
Dan Macklin, SoFi co-founder, said the company’s investors really like the business model, but added that investments made are not solely based on ROI.
“We saw our fellow (Stanford Graduate School of Business) students grappling with high rates, poor customer service, and a general lack of options. So we wanted to do something,” said Dan Macklin, SoFi co-founder. “We are also bringing alumni into the solution. This is a group of people who want to help their schools and we are giving them a way to do that.”
Macklin acknowledges that SoFi is not “the” solution to the student loan crisis, but he does see his company as “one” of the solutions to the problem.
“We offer students and recent graduates more choice when borrowing money,” he said.
Unlike the federal government, SoFi and CommonBond are able to pinpoint their target market.
With the average student debt reaching $27,253, the default rate has reached 15.1%, according to a recent report by the Los Angeles Times. But this default rate includes the defaults of all college students across the nation. SoFi and CommonBond have been able to avoid the high risk of default by focusing on low-risk lending.
A Broken System
“Frankly, we think the student loan system is broken,” Klein said. “The federal government prices student loans the same for everybody, and private banks price student loans with a large risk premium because they’re still shell-shocked by the financial crisis. We believe the current market is over pricing the risk of credit-worthy borrowers. So we built a platform that better prices that risk.”
Klein said he ran into the same financial problems every student runs into when pursuing their graduate degree and knew there needed to be another solution.
“When I was applying to business school, I knew the tuition was going to be expensive, but I didn’t realize the cost of financing my education was going to be so high,” he said. “My options for low cost fixed rate student loans were nonexistent. I was astonished. I was also poised to do something about it.”
One user of the social funding student loan process is Tom Pae, who is currently pursuing his MBA at the Columbia Business School. Pae is a SoFi borrower who had previously taken on federal loans through Sallie Mae.
“The loan application process through SoFi was 10 times easier, more user friendly online and easier to navigate through the website, [and] felt more connected than the Federal Loan option,” he said.”
He added that he is able to interact with someone via phone or email at SoFi, something he wasn’t able to do with his previous lender.
“SoFi has the mindset and reaction time of a startup but taking on huge, audacious problem sets that normally only the federal government or a very large, wealthy financial organization could manage,” Pae said. “It’s not that hard of a decision on whom you want to manage your loans.”
SoFi has more than 1,000 borrowers from various institutions who must meet certain underwriting criteria in order to be accepted for a loan. Macklin said a focus on financial education is an essential component for preventing students from taking out loans in excess of what they can repay.
“All constituents must be involved in this process — from financial aid offices to parents, from private lenders to the government,” he said. “Students should have the information to decide for themselves whether a degree and the loans they’d take out to fund it are worth it to them.”
The company created a tool to help students better manage that decision called a Know Before You Owe Calculator, which helps each potential borrower understand the costs behind their choice of school, major, and city of residence.
“Do the math and see what you’ll pay versus other loans,” Pae said. “The numbers don’t lie. But besides that, remember that you’re making a connection and a long term agreement with companies when you take out a significant loan. I’d rather make that connection and agreement with companies that have my future in mind, not just my wallet.”
Klein said his faith in his company and the social lending industry has strengthened from seeing the impact it is making on students’ lives.
“Each time one of our student borrowers describes the impact we’re having on their lives, in terms of financial benefit or the supportive community we are providing, it inspires more confidence in our vision for a community-based and socially-responsible finance industry,” he said.
CommondBond has taken its financial responsibility and let it evolve into social responsibility on several levels. One of its business models is its Social Promise which funds the education of a foreign student-in-need for a full year for every degree fully funded through the company.
“Inspired by pioneering companies like TOMS Shoes and Warby Parker, we partnered with the African School for Excellence to be the first company to bring the ‘one-for-one’ model to education,” Klein said. “This is our global Social Promise. Our local Social Promise is to improve financial literacy and economic mobility in the U.S. For every new school we bring our graduate loan program to, we are funding financial literacy programming in that city. Financial literacy has proven to be one of the most effective ways to break the cycle of poverty and improve economic mobility in America. We are uniquely positioned to play a role in improving people’s lives through financial education.”
The company has already launched its first literacy program at KIPP Charter Schools in West Philadelphia when it launched the program at Wharton Business School.
Second Chance Opportunity
Gil Eyal, a 2011 MBA graduate from the Kellogg School of Management at Northwestern University, is another user of the social lending space who refinanced his student loans ranging from 6.5% to 8.5% APR into one loan at a 5.99% fixed rate through SoFi.
“It allowed me to convert my 10-year loans into a 15-year loan, thereby reducing my monthly payment to a more manageable amount,” he said.
He added that the experience hasn’t just left him with a lower rate, but also has allowed him to engage with a lending company that seems interested not only their clients’ money, but their lives.
“It is such a refreshing experience to have someone you can speak with who is genuinely concerned with finding the best solution for me as a client, instead of just brushing me off or telling me to submit a trouble ticket, which is what happened with my original lender,” he said. “(SoFi) sent me a questionnaire asking me what they can do for me. How can they help me?”
Eyal’s previous loans were federal student loans which were handled through Nelnet, a student loan provider. His first experience with SoFi had some mishaps, but it was the company’s wherewithal to handle the matter that proved the company’s loyalty to their client.
“When SoFI sent the federal government the checks to cover my loan, they were for some reason forwarded to the wrong loan management company instead of Nelnet,” he said. “After badgering them time and time again, Nelnet told me there was not much they could do about it and sent me on a wild hunt to get the other provider to reimburse SoFi and then send them new checks. I was very concerned because I had a new loan from SoFi while I was still being charged monthly by Nelnet. SoFi heard this and told me not to worry about it. They would handle things with the other provider and send new checks before they got reimbursed. They did.”
According to Pae and Eyal, it’s not only saving money that they prefer, but also the benefits that could never stem from taking a loan from a bank or the government. Since both crowdsourced funding companies are supported by alumni communities, each borrower has a network of likeminded business professionals looking to lend a helping hand and not just a loan.
“I visited SoFi’s office in San Francisco with a few classmates at Columbia Business School,” Pae said. “Not only were they welcoming, but they even launched an Education Startup Happy Hour to connect with Columbia grads and other entrepreneurs in the Bay Area. That was amazing. There had to be close to 100 people networking and exchanging ideas with each other that night. The event was just one way to connect current students with those who graduated from Columbia to include other successful entrepreneurs who wanted to meet more of us. Show me another loan originator that could, or is willing to do something like that in such a short time frame.”
Eyal added that SoFi CEO and co-founder, Mike Cagney, reached out to him to get his thoughts on his experience and offer his assistance if needed.
“He offered to open his rolodex to me and help me in any ways he can,” he said. “I haven’t taken him up on it yet, but I will when the time comes.”
As of November, SoFi had $130 million worth of loans in process involving all 79 schools ranging from undergraduate and MBA loans to undergraduate, MBA, and law degree refinancing. The company also boasts a 100% loan repayment thus far. CommonBond disbursed $2.5 million worth of loans to more than 50 Wharton MBAs at the beginning of this year. The company is planning to disburse $100 million to 20 other MBA programs this spring.
Pae doesn’t just see the company as a better means for financing his education, but as a chance to help in the education of others.
“What a great way to connect those who graduated and those who are going through school,” he said. “Alumni are paying it forward, literally. Also, it’s a cycle—I’m 100% sure that I’ll put my money into SoFi for the next generation of grads once I graduate.”
As crowdfunding companies for random projects continue to launch, it should be expected that crowdfunding companies for student loans will keep pace. If the success of Sofi and CommonBond are any indication of the future of student lending, astronomical student debt and default rates may one day become a thing of the past.