With the U.S. Department of Education’s recent finding that approximately 9 percent of student loans are in default, and in response to a growing $1 trillion market, Social Finance, Inc. (SoFi) has stepped in.
“It was really an opportune time to intersect social and finance,” said Mike Cagney, SoFi CEO, of taking a different approach to financial services.
Cagney elaborated that SoFi addresses the need for students to meet their financial commitments at a reasonable interest rate. The business is structured around raising funds from alumni and dispersing them to current students, creating both a financial and social return.
At Stanford, SoFi originally chose to target the Graduate School of Business (GSB), where about 65 percent of graduate students borrow funds. SoFi raised approximately $2 million from 40 alumni and dispersed the funds to students. The approval process for the loans was similar to that of a standard loan, requiring a credit check and some background information.
A major draw of the program is the vested interest that financiers have in the students themselves as well as the potential for alumni mentoring and interaction. Although SoFi does not provide direct one-on-one financing, many students and alumni have taken advantage of SoFi’s online networking platform to form a social community, according to Cagney.
Another appeal of SoFi lies in the numbers. SoFi’s loans provide funds at a fixed interest rate of 6.24 percent, which is very competitive with other financing options. Students generally take advantage of a low interest of approximately 4 percent for federal Perkins loans, but they are often left with a debt gap that they must address at a later time. The Stafford loan is an example of an option that students might turn to, offered at 6.8 percent.
Compared to SoFi’s 6.24 percent interest rate (which can be lowered to 5.99 percent for students using an automatic payment option), these loans are much less attractive and burdensome.
Benjamin Kessler, a current user of SoFi finance, praised the company.
“Compared to other student loan programs, it’s far and away the best” with regards to the mutual benefits of the loan as well as the fixed interest rates, Kessler said.
Kessler is part of the SoFi pilot program that has prospered at Stanford. The pilot program worked with a group of 100 GSB students. The company plans to run refinancing programs at other elite institutions such as Harvard, MIT, Kellogg Business School and Wharton during the next few months and hopes to expand to 40 schools over the next year.