Social Finance Inc. offers investors a way to earn 5% to 8% in return for helping cash-strapped students. The premise of SoFi, as it's known for short, is that successful alumni will fund the education of current students, as long as they receive reasonable returns on their investments.
In the world of social investing it's called a "double bottom line" because there is a financial reward and a social reward -- something that helps lift a community of people and solves a social problem. Social investors consider both to be equally important. Otherwise, it's just philanthropy.
"For double bottom line to work, you need to have an economic return that stands on its own," says Mike Cagney, co-founder and chief executive of San Francisco-based SoFi.
Social investing comes in a variety of forms, such as micro lending and venture philanthropy. Some social investments have a "triple bottom line," meaning positive social and economic returns as well as favorable environmental effects. And there are other companies similar to SoFi, including Collanthropy LLC.
"The reason we decided to focus on student loans is because it's a $1 trillion industry but completely broken," Cagney says.
SoFi connects students attending participating schools with potential investors. The investors have the option to engage with students if they like, perhaps by mentoring students, providing career guidance, or eventually tapping them as future hires. "We want to encourage interaction but not make it contrived," Cagney says, adding that SoFi gives investors interested in creating relationships the tools to do so.
How does SoFi work? Investors -- alumni of a particular school -- pool their money to lend to students who attend their alma mater. The investors will share in the returns when the loans are repaid.
The investment opportunity is open only to alumni, which bolsters the social aspect of SoFi. The idea is that alumni, who care about a particular school and its students, are more likely to be involved, which makes the students more likely to pay back their loans. "It yields to a better set of behavior than what you get out of an anonymous student loan program," says Cagney. "We're borrowing from micro-finance -- you don't want to default on your own community."
Transparency is key, notes Cagney. SoFi investors will always know the status of a given student loan repayment. To lessen the possibility of loan defaults, SoFi has only established loan programs at schools that have low student loan default rates.
These are schools the SoFi founders define as ones where students get "fair market" value for their education -- in other words, where the education is worth the tuition and students graduate with a debt burden that isn't so large that they end up defaulting on their loans. "This program works really well in schools where students are graduating and are able to service their debt. We think it's a signaling mechanism to the school to think about the level of debt versus the education value to the student."
Last year, when SoFi was founded, it piloted a $2 million program at Stanford University's Graduate School of Business, in which 40 alumni funded loans for 100 students. In the first half of this year, SoFi will be lending $100 million in refinance (consolidation) loans across five schools: Harvard Business School, Kellogg School of Management at Northwestern University, MIT Sloan School of Management, Stanford Graduate School of Business, and the Wharton School at the University of Pennsylvania. In the second half of the year, SoFi will broaden its refinance lending to $400 million in at least 40 schools, for a total of $500 million in loans.
Next year, SoFi is targeting lending programs at 325 schools. Right now the program is limited to accredited investors, but that restriction could be lifted in the future, according to Cagney.
SoFi has two programs for investors, who have the option of investing through a tax-deferred IRA or a 401(k):
A whole loan finance program, where investors are considered "whole participants" in the loan pool. For example, if 10 investors chip in $100,000 each, it's a $1 million pool, and each investor owns 10% of the cashflow of the loans, which spreads the risk.
A refinance program, where SoFi uses the pooled capital to refinance student loans for graduates. Refinance loans are funded by both alumni and institutional investors, but alumni investors earn a higher rate of about 8%.
For enrolled students, the loan interest rate is 6.24%, and a consolidation loan for graduates has a 5.99% interest rate. Both rates are lower than unsubsidized federal student loan rates and most private loans from lenders.
SoFi makes money on the difference between the interest rate the student pays and the investors' return, or about 1%. This year, SoFi has the potential to loan $500 million with a 1% spread, equal to about $5 million in revenue.
What do you think of the concept? Would you be willing to invest in students attending your old school?
@Sherri, I really enjoyed this post, and as an avid follower of social media, philanthropy and microfinance trends, I found the idea of the double bottom line very interesting.
BUT...I started to get a little sceptical about the concept when you said that alumni involvement would make it more likely that students will pay back their loans. "Where's the proof of that?" I asked myself.
And then I read that the track record so far is with STANFORD BUSINESS SCHOOL! Speaking as an alumna of said institution, let me assure you that that is hardly a representative sample! Stanford Business School is very small--roughly a third the size of Harvard--and the ties between alumni, students and industry are particularly deep and lasting. Stanford MBA graduates command huge starting salaries, so debt repayment is far less onorous for them than for nearly everyone else in the graduating world.
Moreover, Stanford Business School students are more likely to have come from top undergraduate schools with needs-blind admission policies, so most likely arrive at the MBA program with little or no debt from their undergraduate years. And once enrolled, all or much of their tuition expense may be underwritten by former employers who are hoping to lure the students back two years later.
This idea bears watching but I'm unconvinced that the do-gooder assumptions will be scalable.
I agree that Stanford Business School is not representative. Also, students might be less likely to pay back the money if they think that wealthy alumni can afford to lose it.
If Alumni have money to invest in their school, I think they should pool the money and set up scholarships for students.
@streetsmart: The idea is that if you know the person you owe money to and have some sort of relationship with that person, you are more likely to pay back the loan.
@Sherri, your explanation of the concept was crystal clear from your post. Maybe my point wasn't, which was that Stanford Business School isn't very representative of the "ties that bind" alumni to current students for many reasons:
1) Upscale nature of the market
2) Relative lack of debt going in
3) Ability to repay
4) Graduate school versus undergrad environment (where the real need probably lies)
4) Small, close-knit, "You'll never eat lunch in Silicon Valley again if you don't repay" alumni base.
All I'm saying is that on a spectrum from say, Stanford Business School to the University of Phoenix, Stanford's results might not translate to a broader sample. A well-known Eastern business school's either for that matter. I would expect the default rate to be a LOT higher in other populations.
@Sherri, you raise an interesting point by contrasting UNLV with Stanford Biz. I don't know UNLV, but say they have a terrific hospitality program and everyone in that program gets jobs in the casino industry. I really like the idea of alumni mentors reaching out, not only at the job level, but at the education level, too.
There's definitely something to the SoFi model. I wonder if it could be securitized at the alumni association level to offset the risk of one-to-one transactions while maintaining the "feel-good" nature of alumni helping students.
That way, an alum could pay in and be guaranteed a return without the risk of his or her particular loan defaulting.
Sherri- I wonder about the repayment terms. The government loans can not be escaped from by Bankruptcy- can these? Even with the nearly impossible to escaoe terms on federal loans, the default rate is still climbing. I wonder how these will do?
@tokyogal: These student loans are like any student loans -- they can't be discharged in bankruptcy. But from what I gather, SoFi has flexible repayment plans available. SoFi tries to head off those sorts of problems by helping students land jobs or by giving them career assistance and by establishing loan programs at schools where the default rates are low.
The trick for students is to make sure that the education you get is worth the debt that you take on.
The reason we decided to focus on student loans is because it's a $1 trillion industry but completely broken
I agree with StreetSmart that Stanford B-school isn't representative, but since the loans aren't dischargeable in bankruptcy, that mitigates the risk.
The problem with student loans, which we've discussed here before; is perspective - Too many students load up on 'whatever it takes' debt to get degrees that are closer to 'worthless' than 'priceless'.
SoFi seems to be addressing that by looking for schools where the debt loads are better matched to incomes that students can expect at graduation.
@PredictableChaos - to add to your point, I think the reason that students are loading up on debt for such worthless degrees is that there's not enough education regarding the education. I feel that there should be a highschool pre-college orientation class offered as part of a normal high school curriculum that discusses the financial pitfalls involved with just going to college for the sake of going to college.
Most High School counselors are focused on increasing the % of graduates that go on to college. This is viewed as a measure of success for their high school.
Never mind that a particular student may have a richer, better future by spending their first year in -
Semi-professional sports or
Pursuing a career in acting or music or
Traveling internationally or
Starting a small business or
Joining the military
All of these options will be discouraged by most HS counselors, who just want everyone to start at a college.
"Most High School counselors are focused on increasing the % of graduates that go on to college. This is viewed as a measure of success for their high school."
@PredictableChaos, there's the problem right there! As someone who took a very non-traditional path to a college degree, I can honestly say that this broken system is why something like SoFi is both a breath of fresh air and a sign that something is seriously wrong.
This is why I said earlier that I think high schools should teach about options in life post-high school that don't necessarily involve college. I went to college because it was the logical next step and all I have to show for my initial attempt is a waste of $5000...and that's absolutely nothing compared to what it could have been (and eventually became with attempt #2, sigh)
"Never mind that a particular student may have a richer, better future by spending their first year in -
Semi-professional sports or
Pursuing a career in acting or music or
Traveling internationally or
Starting a small business or
Joining the military"
Reading this, it makes me feel like students should be encouraged to take a year off from school and do something else for a while. It's amazing how liberating it is to realize there's no more school and that you're able to focus your attention on something that's personally rewarding. It's this approach that led to me web programming - I honestly program in my free time (for money or for fun) because I genuinely love it and not because a curriculum is forcing it down my throat.
It's a very interesting concept and I applaud those willing to do this but for me there are too many variable that are unknown. If students are in certain majors they may never be able to pay back their loans unfortunately too many still view their college education without viewing their ROI. I would need more a more stable investment that I could use to fund my own children's college education, it's a good option for the philanthropist though.
I think it is a really good concept. It's like a community microcredit program. Small communities in developing countries are encouraged to create village micro credit programs. Villagers put in a certain amount to the fund and loans are issued to villagers for various purposes even education. Defaulting is very rare since they can't face the village people if they don't pay back. And others help out in difficult times so it's a community network. I think students and past pupils in a university can also operate with this concept. Sherri what you've mentioned is very similar. So I think there is a good chance of this working where there is good networking between alumni and the student community.
"It's a very interesting concept and I applaud those willing to do this but for me there are too many variable that are unknown."
@impactnow, I agree with you re: the amount of risk involved here. It's nice to see people rising above the risk of potential loss and doing something good for others, but you also have to worry about who's going to actually get your money back and who's a financial black hole.
It's a great concept of the community supporting education but how many people would be willing to do this without some very specific terms and return?
Look at it another way: Every college harasses its graduates for donations. There's no possible return with that, except, perhaps, a tax deduction. What if alumni contributed to this fund for low-interest student loans instead of the annual alumni giving campaign? At least you know how the money will be used, and there is the possibility of a return on investment, If the investment fails, they you can write off the loss.
The program is limited to accredited investors, that is a million dollar requirement. So the investment probably won't be just $100. And from the post, 40 investors loan moeny to support 100 students. That means significant money. So I guess it's not easy to use this program to replace donation program. And not many people can actaully invest in this program. No wonder SoFi started from Stanford business school. You will find more almini there to be able to invest in this kind of program.
Still I think this is a great idea to help students in needs and may provide some ROI for lenders.
@mInvestor, you bring up some very good points about the money involved here. The funny thing is I totally glossed over where they mentioned Stanford, so you're totally right about what kind of alumnis they'd be able to tap for investing.
It's also just nice to know that there are people out there with money that are putting towards something legitimately worthwhile.
I think this whole program is a great idea, but I'm also concerned about the type of people that need this kind of help.
What I mean is that the vast majority of students do the typical thing of taking out a bunch of loans, graduating, getting a job and then going through the long and laborious process of paying the loan of for decades.
How is it that people have been able to sustain this paradigm for so long? I think the real problem isn't so much the system (which is messed up, don't get me wrong), but rather the people who are going to college for the "experience" and not for the future.
I think SoFi's approach to student debt is such a welcome change of pace. It's nice to see some recognition that the amount of debt that a student incurs is insanely high. It's also nice to a see that there's a market for such a philanthropic effort.
I agree that it's a good option for those already wanting to contribute as an alumni but I would want to understand the value and risks of my investment in much more detail. I am as philanthropic as the next person but I prefer to give to organizations that I understand the dispersion of funds and the implications.
The SoFi program is limited to accredited investors only. That means you can get more info only when you are qualified for it. Hehehe... a strange regulation from government.
"I am as philanthropic as the next person but I prefer to give to organizations that I understand the dispersion of funds and the implications."
@impactnow, I agree but I also have to say that I appreciate the weird dichotomy going on here where you have the rich people involved in a venture with a grassroots vibe to it.
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