Social Finance Inc., or SoFi, an alumni-funded student loan start-up that had a test run at Stanford University?s business school last year is looking to expand its brand of fixed rate private student loans to schools across the country.
SoFi, an evolved peer-to-peer lending operation?? really a community group-to-group lending operation, according to SoFi chairman and CEO Mike Cagney?? last year raised $2?million from 40 Stanford business school alumni, who invested an average of $50,000 each. The money was loaned to 100 graduate business students, who borrowed roughly $20,000 each. The private student loans will be repaid, with interest, to compensate investors and provide funds for future lending. Although the initial test-run loans at Stanford have yet to be repaid, SoFi is reaching out to alumni at three dozen institutions in an attempt to convince them to fund similar private education loans for students at those schools.
SoFi?s plan is to originate $150?million in student loans this year between the schools and the company said it will begin taking applications in June for new student loans for undergraduates and graduate students for the 2012?13 academic year. SoFi?s private student loans of between $5,000 and $100,000 will come with a fixed interest rate of 6.24?percent, which can be reduced to 5.99?percent if borrowers make automated payments?? both lower interest rates than the current rate for unsubsidized federal Stafford loans and possibly for subsidized federal Stafford loans if the 3.4?percent interest rate is allowed to double to 6.8?percent this summer. SoFi also plans to make consolidation loans of up to $200,000 with fixed interest rates of 5.99?percent, which, according to SoFi, is below the federal consolidation rate for most borrowers.
Alumni can invest directly in the school-specific loan pools, which have an anticipated annual rate of return of at least 5?percent after fees?? assuming no losses, which would happen if students defaulted on their loans?? or indirectly through a tax-favored option like an IRA. Investors also get a ?social return? by helping to further the reputation of their school and help its graduates succeed, Cagney said (?SoFi Tapping Alumni to Help With Student Loans,? The New York Times, April?3, 2012).
Mark Kantrowitz, financial aid expert and founder of FinAid.org, said that SoFi will likely encounter several challenges, including the economic feasibility of making student loans at below 6?percent. And since it might be difficult for SoFi to raise all the funds it needs through alumni, it would have to open its doors to outside, non-alumni investors at a difficult time for capital markets. Kantrowitz also expressed skepticism that SoFi will significantly reduce the risk of defaults, even though SoFi?s plan to ?cherry pick? by focusing heavily on graduate and business students may help. Additionally, although SoFi?s private loans may have lower interest rates than some federal student loans, SoFi?s loans don?t offer the repayment, deferment, and forgiveness options that are available with federal loans.
SoFi said that it will initially focus on offering its private student loans at schools with low default rates and high graduation rates. SoFi said that 100?percent of funds for undergraduate loans would come from alumni while consolidation loans would be funded by alumni and outside institutional investors, such as banks. The company said its goal is to have at last 50 alumni contributing to each school?s loan pool.
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