When a startup known as Social Finance raised an astronomical $77.2 million last week to expand its new lending model to colleges and universities across the United States, it seemed almost too good to be true.
For the founders, social is the missing ingredient in the way that loans operate. By taking advantage of social networks, SoFi is turning wealthy alumni into lenders who pocket a check every month. Students connect with real people (not faceless banks) and default less, and SoFi can offer them a fixed interest rate of 5.9 percent. It’s far lower than a private bank loan or Federal Stafford/PLUS loan.
The value proposition is obvious to students and alumni, said Mike Cagney, the company’s cofounder and CEO. For us, the opportunity is to fix a broken market. Read more about the company’s recent fundraise here.
It’s the ideal testing-ground for SoFi: Many alumni are engaged, entrepreneurial, and have cash to spare. Before I jumped on the SoFi bandwagon, I had a few questions for Cagney about the challenges of launching a new lending model, and where the company plans to go from here.
Mike Cagney: We piloted the idea during my fellowship at the GSB, but I have been thinking about this problem when I was in the hedge fund world. [Cagney is the cofounder of Cabezon Investment Group, a global macro hedge fund] At Stanford, everyone was talking about the intersection between social and finance.
We raised a $2 million fund and lent out $20,000 dollars to 100 students. We were able to deliver a lower loan rate and return a piece to SoFi. After, we sat down with the students and alumni to talk about how we could connect them. On the back of that success, we expanded to a broader number of schools and expect to be in 250 in a couple months.
Cagney: No one has defaulted, yet. There are a few things worth mentioning here: If your income falls below a certain level, or if you’re unemployed and can’t pay your payments, they are deferred out for you. There are the same protections from a legal standpoint as private education loans. We’ll use similar methods to collect, like a civic action. Ultimately, the alumni are taking the default risk. But if a student defaults, their alumni network will see to that – their reputation will be at risk.
VentureBeat: Not all students are the same. Stanford students have a higher earning potential and a lower rates of student loan defaults. How much could you really learn from that pilot?
Cagney: It’s a unique place to pilot, but you can get myopic that the rest of the 30 day payday loans in Crete world looks like that – it doesn’t.
Cagney: We like this whole egalitarian interest rate. That said, there are schools where the default rate is so high, it would never work. If you can’t get SoFi to work in your school, you might want to look long and hard at what the education costs relative to the opportunities it brings.
Cagney: We raise money from alumni, put it in the fund, and collect a management fee of .75 percent and service fee of .5 percent from the fund. We were a revenue-generating business on day one.
Cagney: The next thing we’ll do is set up an alumni fund for international students to attend school here in the U.S. Further down the road, we may expand to other countries, but I don’t have the luxury of thinking that far ahead.
Cagney: We’re not that granular yet. Each school has its own fund, which serves both undergrads and grads. But if a student wanted to go into the nonprofit world when they graduate, and an alumni wanted to support them, there’s a capability to be specific about ways to help.
Cagney: They are. I think it went a long way to validate the thesis of what we were trying to do. Steve Anderson from Baseline is an alumni investor in the Stanford Fund. [Anderson is also an investor in the series A and B rounds] It gave him a front row seat, and he got a check every month on his investment.
Cagney: We’ll build out the customer support side of the business. Also, we plan to set up a balance to prefund loans. When we go into a school, we will set a dollar limit. We will stop when we can raise enough alumni capital to take our million dollars out. It gives us a balance sheet that can make us aggressive.
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