SoFi brings alumni investors into the lending mix.
Tuition costs continue to rise at a pace faster than inflation and with the current weak economy offering yet another drag on personal finances, many students are taking out loans to fill in the financing gap. The result is that while students are able to complete their education they often find themselves deeply in debt, with loan payback extending well into their careers.
Bringing Alumni and Students Together
A new lending model has been launched, one that brings alumni stakeholders into the lending mix. Social Finance, Inc. or SoFi has tapped alumni investors at nearly 40 colleges and universities across the United States to provide funding for college students. These dedicated school-specific lending funds are available to students at Stanford University, Duke University, Babson College, the University of Chicago and other institutions, and are offered at low, competitive rates. Upon graduation, students begin paying their loans back and investors receive a financial and social return.
SoFi is a new program, one that started at Stanford University’s Graduate School of Business in Fall 2011, raising and lending out roughly $2 million. The pilot community had 40 alumni and nearly 100 students. Ben Kessler, an MBA student and a SoFi loan borrower, said a combination of SoFi’s affordable rate and unique form of access to the school’s alumni set the program apart. “The SoFi application process was easy and its loans are among the best on the market,” he said. “In addition, I have received some great practical advice from alumni investors who have a direct economic interest in my success.”
Alumni Funding Preserved
Schools benefit from SoFi as a new lending source is open to their students. Worries that alumni might divert their personal giving to the lending program are largely unfounded as alumni can contribute directly through their IRAs. This allows investors to reap a return between 5 and 8 percent while still making contributions to the school. Importantly, SoFi allows investors to connect directly with students, perhaps enabling alumni to help students with shared interests such as nursing, engineering or physics.
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Mike Cagney, SoFi CEO launched his student loan model to offer students a new option in the $1 trillion student loan industry. Said Cagney, “Between the government – which accounts for 93% of student lending, students and schools, no single party is particularly vested in the others’ long-term success. What is missing is a community solution where the interests of all members are aligned. Alumni provide the missing ingredient as they care deeply about both the students and the reputation of their alma mater. Through the SoFi Community Loan Program, alumni have a financial incentive for the students to succeed above the existing natural affinity that already exists. High default rates directly affect alumni, meaning they are incented to keep the school accountable to its product – the education the students receive – helping to ensure the students’ debt at graduation is commensurate with the value of their degree in the job market. And the community persists beyond any particular loan – this is a long-term engagement.”
Deeper Penetration Expected
SoFi is aggressively seeking to expand its program with hopes of bringing its student loan model to other schools as fast as it can. With thousands of degree-granting schools nationwide, the challenge is there to meet the need. With alumni stakeholders providing the funding and students connecting with their investors, a whole new way of networking appears to be unfolding. Clearly, this could disturb the entire student lending industry, perhaps changing the way that people borrow money to further their education.