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A Vested Interest

Peer-to-peer student loan model harnesses passion of alumni

By Toni Coleman




When it comes to student loans, Uncle Sam and commercial banks can be so dispassionate, disinterested, and impersonal. They just want the balance paid and don't really care if the borrower gets a job.

Alumni, on the other hand, do care. That's the idea behind Social Finance, or SoFi, which provides alumni-funded student loans.

"You have a pre-existing community of people who have deep feelings toward the school and current students. Many do well and have money to invest," says Dan Macklin, vice president of business development at SoFi, recounting how he and three co-founders came up with the idea as students at Stanford University's Graduate School of Business.

Macklin and his co-founders launched SoFi after they graduated in 2011, raising $2 million that summer from GSB alumni to provide loans for GSB students during the 2011–12 academic year.

The company expanded this year, with alumni at 45 U.S. institutions, from Babson College in Massachusetts to the University of Utah, collectively contributing $80 million to finance loans to students at their alma maters. Loans available at an institution are limited to what alumni at that school invest.

When the Stanford students approached Jack Edwards, director of financial aid for GSB, about offering student loans, his concern—one shared by officials at other institutions—was that the program would cannibalize alumni giving. However, alumni can take funds from their individual retirement accounts and reinvest them in SoFi loans. That's money that would have been off limits to institutions, Macklin says.

The investment return rate will depend on the repayment and default rates. Alumni investors, who naturally want to recoup their funds, have a vested interest in seeing these student borrowers succeed. "Students are reaching out to alumni, getting advice on starting a career. Alumni are doing more than just putting in the money; they're in a position to help that student after graduation," Macklin says. "We hope to reinforce the relationship between alumni and students."

SoFi loans mimic several benefits of federal loans, including an income-based repayment option, and the top interest rate of 6.49 percent can be lowered if students make automatic payments while still in school or refinance upon graduation.

Edwards says, SoFi "benefits my students because it offers another competitive loan product."

About the Author Toni Coleman

Toni Coleman is the interim editor in chief of Currents.

 

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