SoFi Tapping Alumni to Help With Student Loans

A start-up that had a test-run at Stanford University’s business school last year aims to tap alumni as a source of funding for student loans at colleges across the country.

SoFi — short for Social Finance Inc. — is branching out and expects to begin taking applications for consolidation loans in April from recent graduates of five business schools, using funds raised from alumni of those schools (Harvard, M.I.T., Northwestern and the University of Pennsylvania, in addition to Stanford).

SoFi also aims to begin taking applications in June for new student loans for undergraduates and graduate students at about three dozen schools for the 2012-13 academic year.

SoFi is raising funds and expects to originate $150 million in loans this year, although the amount available at each school will vary. Students can register their interest in applying for both types of loans on SoFi’s Web site.

SoFi marks a sort of evolution of “peer to peer” lending programs, like GreenNote, that aimed to help students tap their own social networks to help fund their education, although Mike Cagney, SoFi’s chairman and chief executive, describes SoFi’s model as more of a “group to group” approach.

The idea, Mr. Cagney said in an interview, is that by linking students with alumni, who had an interest in seeing the school’s graduates, and their own investments, do well, students would be more successful and less likely to default on their loans. “We believe that the stronger the social fabric, the lower the defaults and the higher the alumni realized returns,” SoFi explained in a letter to potential Stanford investors. (It also said, though, that because the company didn’t have much of a track record, that theory was as yet unproven).

The loan pools at each college are being coordinated by alumni working with SoFi, rather than through the schools themselves. However, loans to current students will be distributed through school financial aid offices. Alumni aren’t involved in choosing which students get loans, but they will be kept informed about student repayment performance, Mr. Cagney said. It’s also hoped that they will act as mentors to the students, interacting with them online to advise and encourage them in their education and in their careers.

Consolidation loans of up to $200,000 for recent graduates will be offered at a fixed rate of 5.99 percent, which is below the federal consolidation rate for most borrowers, SoFi says.

New loans from $5,000 to $100,000, for current undergraduates and graduate students, carry a fixed rate of 6.24 percent, which can be reduced to 5.99 percent if students make automated payments. (That rate is lower than the current 6.8 percent rate on unsubsidized federal loans, like Stafford loans. In July, the rate on subsidized Stafford loans is set to rise to 6.8 percent as well.).

Alumni, meanwhile, are making a private investment in a school-specific loan pool with an anticipated annual rate of return of at least 5 percent after fees, SoFi says. That rate of return assumes no loan losses, however, so the investors’ actual returns could be lower if some students default. Alumni have the option of investing directly or through a tax-favored option like an I.R.A. The alumni also get a “social return,” Mr. Cagney said, in that they are helping to further the reputation of their school and help its graduates succeed.

Mr. Cagney and four fellow graduate students at Stanford’s business school created SoFi last summer. The company registered as a lender in California and raised $2 million from 40 Stanford business school alumni who gave an average of $50,000 each, Mr. Cagney said. The money was loaned to 100 graduate business students, who borrowed roughly $20,000 each. The students are graduating this spring so haven’t begun repaying their loans. “We have a very strong pool,” Mr. Cagney said.

Mr. Cagney said there were some caveats borrowers needed to consider. For instance, he noted, federal student loans offer certain forbearance and loan-forgiveness options that aren’t available with SoFi loans.

Mark Kantrowitz, founder of the Web site finaid.org, said in an e-mail that he saw challenges for SoFi. For starters, he questioned whether making student loans at below 6 percent is “economically feasible.” He also said it might be difficult for SoFi to raise all the funds it needs from alumni, which meant it might need to open its doors to outside investors at a difficult time for capital markets. And he’s skeptical that the social connection with alumni will seriously reduce the risk of defaults, although “cherry picking” by focusing heavily on graduate students, and business students, may help. (SoFi says it is focusing initially on schools with low default rates and high graduation rates).

In a follow up e-mail, a SoFi spokeswoman said 100 percent of the funds for undergraduate loans would come from alumni, while consolidation loans would include funds from alumni and institutional investors, like banks. The goal is to have at least 50 alumni contributing to each school’s loan pool.

SoFi put Bucks in touch with Ben Kessler, an M.B.A. student at Stanford who borrowed through SoFi.  He said he was attracted by the low interest rate for a fixed-rate loan; he planned to go into business for himself after graduation, he said, and liked the idea of having a predictable monthly payment.

What do you think of SoFi’s approach, as either a borrower or an investor?