Disrupting The MBA Loan Market

VALIDATING A SOCIAL THESIS

Alums who contributed the cash were given a 5% annual return on their money and could invest through a 401(k) or an Individual Retirement Account. Lenders had access to an online roster of borrowers. Each group could put their Facebook or LinkedIn profiles in the system, and lenders could see in real time whether borrowers were making their payments on time.

“It validated our social thesis,” says Cagney. “People wanted to know who was on the other side of the table.” Cagney says that when students called alums from a directory of more than 17,000 it was like cold calling people out of a phone book. But when students began borrowing from alums to help finance their education an instant connection was made.

“We created lenders who are engaged with their borrowers,” says Cagney. “It helps that MBAs tend to have strong, passionate alumni communities.” Some lenders became mentors to students, helping them manage their debt and land jobs after graduation. Students took on greater responsibility for their debt, knowing that if they default, they would be doing so in their own alumni network. “People don’t want to default in their own community,” adds Cagney.

SOFI LOANS NOW AVAILABLE TO STUDENTS AT MORE THAN 30 TOP BUSINESS SCHOOLS

With the pilot a success, SoFi began writing loans to MBA students at Harvard, MIT, Kellogg, and Wharton in May. Currently, graduates from at least 27 major MBA programs, ranging from Babson College and Boston College to Wake Forest University and Yale University, can refinance their existing loans at SoFi’s better rates. MBA grads who have refinanced with SoFi loans have saved an average $9,600 of the cost of their debt.

SoFi’s offices, in the headquarters building of the Presidio, a former Army post on the edge of San Francisco, are bursting at the seams. Young professionals, sitting side by side at long conference tables, are hunched over computer screens everywhere. SoFi has about 50 employees but is in aggressive hiring mode and looking for more space.

WHY B-SCHOOLS ARE NOT HELPING SOFI CONNECT WITH ALUMS

Cagney, who rides his bike to and from work, has been able to rapidly expand the business despite having little to no help from business schools. Even during the Stanford pilot, for example, he had to match alumni with students using LinkedIn and his own network of contacts. As Cagney puts it, “The first challenge is that the development office can consider this cannibalization of their efforts,” says Cagney. “But it’s really an investment on the part of alumni and not a donation. A lot of alums participate through IRAs so we have a very different value proposition.

“The second challenge is that the financial aid office is wary of things that are beyond their control. A few years ago, some schools got in trouble for pushing bad private loans on students so they are not allowed to promote a particular vendor. It’s always perceived to be safer to push federal loans. The feedback from Standard was that they see one of these every year and they all fade away. I guess we’re the one that hasn’t faded away,” says Cagney.

LOANS TO INTERNATIONAL STUDENTS A POSSIBILITY IN THE FUTURE

So far, the loans are being made to domestic students and those on H1B visas. Cagney hopes to introduce a loan product for international MBA students who often have greater difficulty borrowing money, particularly without a co-signer. One idea he has is to match MBA alumni from a couple of different countries, such as China and India, with MBA students from those nations. “We would love to do an international product, but we haven’t gotten any takers yet from the schools,” he says.

Cagney says he will soon roll out an entrepreneurial loan program for MBA students who don’t want to opt to take the startup route at graduation. The company would waive the current requirement to prove income and cash flow, give borrowers a 12-month deferral before the monthly payments kick in, and introduce borrowers with alumni who would be interested in investing in startups.

A FORTHCOMING FACEBOOK APP WILL HELP STUDENTS MAKE MORE INFORMED DECISIONS

SoFi also is building a Facebook application that would inform students which professions are most likely to allow them to service the debt they take on during college. To Cagney, the biggest problem with student debt is financial illiteracy. Most students have no idea what kind of income they will need to service their student debt.  “It’s not only egregious,” says Cagney. “It’s criminal for schools to put some kids in deep debt and allow them to study a subject, like psychology, when that degree may make them less employable.”

Tapping investors to fund an aggressive growth plan, Cagney expects to arrange loans of $500 million this year and to spread the program to a larger number of business schools. This month So Fi expanded to 45 schools and is now making new loans to cover costs for the 2012-13 academic school year for undergraduate students and graduate business school students.

Asked how big SoFi can get, Cagney says he believes the firm could eventually capture $15 billion of the original student loan market and another $60 billion to $90 billion in student loan refinancing.

DON’T MISS: GRADUATING WITH AN MBA AND TONS OF DEBT or MBA DEBT: THE BURDEN GROWS HEAVIER AND GETS SCARIER

About the Author...

John A. Byrne

John A. Byrne is the founder and editor-in-chief of C-Change Media, publishers of Poets&Quants and four other higher education websites. He has authored or co-authored more than ten books, including two New York Times bestsellers. John is the former executive editor of Businessweek, editor-in-chief of Businessweek. com, editor-in-chief of Fast Company, and the creator of the first regularly published rankings of business schools. As the co-founder of CentreCourt MBA Festivals, he hopes to meet you at the next MBA event in-person or online.