Disrupting The MBA Loan Market

The idea was hatched in Mike Cagney’s “Evaluating Entrepreneurial Opportunities” class at Stanford University’s Graduate School of Business. At the time in 2010, Cagney was a Sloan Fellow, taking a year off from an often frenzied 15-year career in finance to develop a business.

At Stanford, Cagney found himself surrounded by students who had heavily borrowed money to finance their degree. Roughly 65% of the MBAs at Stanford take out student loans, with the average debt burden of $77,600 at graduation. At some business schools, including Wharton and Columbia, the average debt is now in six figures.

MBA students, moreover, had agreed to pay interest rates that were essentially the same as those charged to students at any other school, even though GSB borrowers had a miniscule default rate of just 0.58% over the past 15 years.  Cagney says the national default rate on student loans is about 8.8%, with an average of 15.5% for students at for-profit schools. At the University of Phoenix, for example, the default rate runs something closer to 18%.

Yet, regardless of who takes out a loan, the interest rate on a federal Stafford loan is 6.8%, while the interest on the federal Direct PLUS loans are 7.9%. Cagney saw an opportunity.


“The student loan market is a trillion dollar industry that is classically broken,” says Cagney, the 41-year-old co-founder and managing partner of Cabezon Investment Group, a San Francisco-based hedge fund. “It’s a market that definitely needed disruption.”

Cagney, who had traded derivatives for Well Fargo in the 1990s and started and sold a wealth management software company called Finaplex in the 2000s, dreamed up a disruptive alternative: SoFi (short for Social Finance) that not only took advantage of the fact that interest rates on student debt were not commensurate with risk, but of linking business school alumni who have money to invest with students and recent graduates who need to borrow money.

“Social means three things to people,” he says. “It means social impact, social communities, like Facebook, and social media, like Twitter. What they have in common is that they are transparent, local and interactive. The banking system is inherently anti-social.” The idea: to build a student loan company “where social meets finance.”

Cagney graduated from Stanford’s Sloan program in June of 2011 and founded SoFi in September, starting a pilot at Stanford that connected MBA alums with students. He convinced 40 Stanford alums to toss in $50,000 each and then lent $20,000 each to 100 students. The fixed loan rate was 6.24%, falling to 5.99% after graduation, if they agree to have payments automatically deducted from their accounts. There are no origination fees

That compared with a 1% origination fee on 6.8% Stafford loans and an origination fee of up to 4% on the 7.9% federal Direct PLUS loans. An MBA borrowing $100,000 and repaying the loan back over a 15-year period would save nearly $23,000 in origination fees and interest charges by using SoFi over existing government loan programs.

  • Pushkin

    Having just been through the loan application process, all I can say is this – SoFi LOOKS like a good idea, but the reality is that they have not staffed to the volume they are getting. I’d sent them the same exact documents (gov’t issued id – from the US Gov’t) 3x over 4wks. It’s now the 2nd week of classes and I still haven’t had the funds released. I just went to financial aid and transferred my loans to a different lender. The idea is great. The execution is exceedingly poor.

  • Guest

    Please read the article. It’s available at many schools, so I’m guessing he has had buy in at many schools. You also discredit him by saying that “ROI isn’t attractive” enough for others to pursue, yet they can criticize his business as unoriginal. I can tell you this, not many MBAs, elite schools and all, would be able to pull this off. 

  • UDumb

    You are an idiot. Not everyone finds SoFi’s or Prodigy Finance’s ROI attractive enough to do it themselves. Plus it takes alumni of each school to do this.

  • Guest

    Seriously. If it was such a simple idea that was already being done in Europe, how come none of you sh*theads didn’t do it before SoFi? God, people are idiots.

  •   It was humbling and exciting to be working with an entire team passionate about social change….


  • Guest

    This is how I am planning to fund my MBA. Just sent in my Application for my loan. I love how it implements an honor system to paying back your loans as well to some regard. The money is coming from MBA communities and alumni, so there’s a sentimental connection to paying back the loan (one would hope!). Plus, their staff is just great and very easy to work worth. Sallie Mae has been nothing but headaches for me.

    SoFI, keep up the awesome work!

  • Dan

    Shouldn’t your initial reaction be to recognize INSEAD and Prodigy Finance rather than criticize SoFi and the article? Posters are unnecessarily combative.

  • Likenoother

    Tell me how this is different from INSEAD grads’ Prodigy Finance. Wow John. There is something about your articles and your fantasizing HBS or Stanford.

  • anonymous

    Hardly original. Prodigy Finance has been doing this in Europe for more than 3 years or so, very successfully.