New social finance site for student loans
An overview of how social finance website SoFi works. SoFi is launching an experimental new, community-based student lending program that provides students with lower cost loans and school alumni with a unique investment opportunity.
Kai Ryssdal: As we've said a couple of times on the program, there's a whole pile of student debt out there -- close to a trillion dollars in all. There are those who see that and say it looks an awful lot like the next big credit bubble looming over us.
And there are those who see it and say 'investment opportunity.' Starting next year, alumni of universities like Yale, Berkeley and Virginia Tech will be able to pool their money and lend it to students at those schools. And in return, pocket a share of the interest.
From the Education Desk at WYPR in Baltimore, Marketplace's Amy Scott reports.
Amy Scott: Ben Kessler paid for his first year at Stanford business school with a $50,000 loan from Citibank. This school year, he turned to a new company called Social Finance, or SoFi, for $50,000 more. He liked the low, fixed interest rate of about 6.25 percent, and the fact that the money came from Stanford alumni.
Ben Kessler: They’ve really helped put me in touch with the right kinds of people to help make my business track more successful.
Today SoFi announced it’s expanding to about 40 schools -- ones with high graduation rates and low default rates. Alumni will invest in a fund, and that fund will lend money to students.
Jonathan Edelman was one of the early investors in the Stanford business school fund. So far he’s made a five percent return. He says the Stanford connection may give students an extra push to pay the money back.
Jonathan Edelman: I think you feel less committed to, you know, Wells Fargo, than you might to your fellow alumni and graduates of your university.
SoFi is taking a page from peer-to-peer lending sites like Prosper and Lending Club. Mark Kantrowitz edits the financial aid website finaid.org. He says those sites haven’t made a real dent in the student loan market -- they’ve only lent about $100 million in the last few years.
Mark Kantrowitz: Most of the students that I hear from in peer-to-peer education loans don’t get funded, and rarely get funded for the full amount.
Kantrowitz says private loans have fewer protections than federal loans for borrowers who have trouble paying. But co-founder and CEO Mike Cagney says SoFi offers something traditional student loans don’t. Alumni may pressure universities to make sure students aren’t taking on more debt than they can handle.
Mike Cagney: If they’re graduating students with untenable debt burdens, it’s going to negatively impact their alumni community directly through the financial return.
SoFi will take applications this summer for students enrolling in the fall. The company expects to lend at least $150 million next year.
I’m Amy Scott for Marketplace.