WASHINGTON – New online crowd-funding firms are tapping into an alternative lending market for MBA students, a small fraction of the $1.2 trillion student loan market dominated by government-backed traditional lenders.
Social Finance Inc., or SoFi, and CommonBond Inc., are among the online crowd-funding startups that connect Masters of Business Administration students with their universities’ alumni networks. The firms convince alums to invest in school-specific funding pools and the loans are then distributed to applicants.
The new crop of lenders arrives as the cost of a college education continues to soar, while starting wages for new graduates remain flat and families scramble to rebuild savings’ in the aftermath of the Great Recession.
These companies are trying to cultivate a niche market where they hope to minimize defaults by focusing on low-risk MBA students.
“Not only is it the market we know very well, it also happens to have pretty strong earnings prospects and employment prospects,” David Klein, CEO of the CommonBond, said of the graduate students that his company favors.
A former MBA at the University of Pennsylvania’s Wharton School, Klein dropped out of his program to co-found CommonBond with partner Michael Taormina. He said he is still paying a high rate for his own student debt.
Part of what his company does is to provide loans that seek to correctly reflect the risks of financing MBA students by offering them lower interest rates than those provided through federal loans. The company rewards investors in the loan pools with 4 percent to 6 percent returns.
Currently, student borrowers financing their education with loans from SoFi, or CommonBond pay between 6.05 percent to 6.94 percent as a fixed rate, including origination fees. In comparison, federally backed direct loans for graduate students charge an interest rate of 6.21 percent, according to StudentLoans.gov. But the additional origination fee for the federal loans can go as high as 4 percent.
However, the federal government provides student borrowers some appealing protection terms that the private market may find hard to match. When borrowers are in challenging economic situations, federal student loans can offer a deferment or income-based repayment, allowing borrowers to postpone or reduce loan payments. In some cases, the deferment can last for up to three years.
SoFi’s CEO Mike Cagney said the company does not rule out similar relief for its borrowers. He said SoFi also offers career support that helps borrowers land new jobs when they are seeking employment opportunities after losing work.
The two online loan firms have borrowers from more than 20 business schools at Columbia University, Yale University, Harvard University and other colleges.
This year, the market outlook for business school graduates showed signs of modest growth. About 86 percent of companies plan to hire MBA students, up from 80 percent, according to a recent survey by the non-profit Graduate Management Admission Council. And the projected median starting salary for MBAs in the United States in 2014 is $95,000.
The two companies don’t have short-term plans to expand their loan programs, which currently serve only MBA students. But they are looking at the refinancing market, where there are still relatively few private players.
Cagney believes that out of the entire $1.2 trillion student debt market between $200 billion and $300 billion can be addressed through private refinancing solutions. SoFi already expanded its refinance service, which used to be limited by degree and school, to all the college graduates who already have a job.
In CommonBond, refinancing products make up almost 80 percent of their business. And the company’s CEO Klein said they plan to expand it more than 200 schools.
By Lingjiao Mo