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February 05, 2013 at 09:02 AM
College tuition costs skyrocket just as yields nose-dive; combine the two and you may have something.
SoFi, a startup based in San Francisco, is shaking up the student loan market at the time when it’s sorely needed. With four-year tuition approaching the price of a comfortable suburban home, four alumni from the Stanford Graduate School of Business have stuck upon an idea to offer loans at lower costs that are then bundled to investors.
According to Dan Macklin, students like the savings and investors like the yield.
“The origins of the idea came from four students in the Stanford School of Business,” explains Macklin, the firm’s cofounder and vice president of alumni relationships. “We were struck, as were many of our classmates, by the high borrowing costs of student loans, especially at the graduate level.”
He notes that 93% of all student loans are made by the federal government. Stafford loans at the graduate level have an interest rate currently of 6.8% for a direct loan and 7.9% for a Grad PLUS loan. It’s considered quite high in today’s low-interest-rate environment, where mortgages are being refinanced at historically low rates.
Because Stanford is located in the heart of Silicon Valley, the partners noticed the “new and creative ideas going on in the form of crowdfunding and crowdsourcing,” Macklin says, before adding it isn’t quite right for the student loan market.
“The finance industry is a two-way relationship; people deposit money with a bank with really no idea what the bank will do with it, and the bank makes loans and customers really have no idea what will happen to the note after that or if it will be sold off,” he argues.
SoFi process, he counters is very transparent. It’s an idea that relies heavily on social networking—media and otherwise. The key is to involve school alumni and other interested investors—someone with a child enrolled at a particular school, perhaps.
“In the summer of 2011, we began with $2 million from 40 investors and made loans to 100 Stanford Business School students. We have since expanded to 79 schools and $100 million. This year, we expect to $800 [million] and we’re broadly on track to reach that now that we’re one month in.”
Macklin notes that although they reach out to schools to explain the concept, they don’t need the institution’s blessing, as students can borrow from wherever they like. The company is currently seeing $10 million of demand, on average, each week.
