Another Low-Cost MBA Loan Option

by John A. Byrne on

CommonBond co-founders Michael Taormina (left), David Klein and Jessup Shean

David Klein had a great resume when he applied to the Wharton School last year. He had worked in consumer finance for American Express after a stint at prestige consulting firm McKinsey & Co. where he advised clients in financial services.

Yet, even his own background in finance didn’t quite prepare him for the high cost of loans to pay for his Wharton MBA. “I knew it was going to be expensive, but I didn’t realize that the costs of financing would be so expensive,” says Klein.

Average blended interest rates on student government loans were 7.7% and even higher from some private banks. “I thought these are unnecessarily high rates of interest,” he adds. “In the investment markets, yields and returns were incredibly low. There is a huge difference between what investors get and what students have to pay.”

What immediately occurred to Klein is that lenders weren’t accounting for the low risks of funding an MBA student at a top school. The ten-year loss rate on student loans at the best business schools is a mere .7%. “That is investment grade risk,” says Klein. “The general population actually has double-digit loss rates, more like 20% over the ten-year period.” But prevailing interest rates on both government and private sector loans for MBA students at highly ranked schools fail to reflect the lower risks.

The light bulb went off.

Klein had only just begun Wharton’s MBA program in the fall of 2011 when he began to think about creating a company that would make loans to low risk MBA students at slightly lower interest rates than currently available. The funds for the loans, moreover, would largely come from MBA alumni of the schools.

ANOTHER LOAN STARTUP, SOFI, CLAIMS IT ALREADY HAS $130 MILLION IN LOANS IN PROCESS

The idea wasn’t entirely new. In fact, a year earlier, a Stanford student in the school’s Sloan Program came to similar conclusions and launched SoFi, short for Social Finance, that began doing the same thing in June of 2011 (see Disrupting The MBA Loan Market) in San Francisco. As of November, SoFi said it had $130 million in loans in process at 79 schools of business and law at loan rates of between 5.99% and 6.49% with no origination fees.

Klein brought the concept into one of his first classes at Wharton, a course in entrepreneurship taught by assistant professor Ethan Mollick. The idea quickly gained momentum when he partnered with two classmates, Michael Taormina, who had worked in asset management for J.P. Morgan, and Jessup Shean, who had worked at the law firm of Fried, Frank on debt private placement. Shean graduated with a JD/MBA degree from Penn Law and Wharton.

They put together a business plan and applied to the Wharton Venture Initiation Program for free office space and advice. “When you are selected, there is instant credibility because the venture committee is very much part of the startup scene on campus,” adds Klein. “About 300 apply every year but only about 30 make it through. We were one of them.” Last summer, the group got a $2,500 grant from the school.

RAISED $3.5 MILLION FROM INVESTORS TO CREATE A $2.5 MILLION POOL TO LEND

Ultimately, Klein and Taormina deferred their second year at Wharton to pursue the business full-time. “As co-founders,” says Klein, “we put our money where our mouths were and capitalized the company to bridge us to funding. We dipped into our savings to get it off the ground, and in the summer and early fall we pounded the pavement pretty hard and raised $3.5 million from investors.” Some $2.5 million of that sum is being put aside for lending.

CommonBond, the name they chose for the company, began lending money to MBA students at Wharton in late November. The firm plans to soon enter additional top-ranked schools including Harvard, Stanford, Chicago, Wharton, Kellogg, Columbia, and New York. By yearend, CommonBond expects to expand lending to all the top 20 business schools.

The firm has fixed interest rates of between 5.99% for a MBA refinance loan and 6.44% for a new MBA student loan. Those rates, figures Klein, allow for savings of more than $20,000 over a more conventional loan during a ten-year term or more than $10,000 in savings for MBA graduates who refinance. CommonBond will lend up to the full cost of attendance—tuition, fees, and living expenses–which is $93,000 at Wharton this year.

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  • MBAreapplicant84

    Nice alternative to traditional loans!

  • http://www.facebook.com/rose.lee.90834776 Rose Lee

    Good post.more informative stuff about Financing Your MBA to be shared

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