By Ariel Schwartz
$57,070. That's the yearly tuition for 2012-2013 at the small liberal arts college where I went to school. That kind of cost can lead to crushing debt for students, who are facing climbing tuition costs and lower salaries post-graduation than the generations that came before. The system is, simply put, a mess: this past March, the Consumer Financial Protection Bureau reported that student debt has passed $1 trillion. There needs to be a better way.
Social Finance Inc. (SoFi) is one of a handful of startups aiming to change the way student loan debt is handled. Founded by a group of Stanford Graduate School of Business alumni who graduated in 2011, SoFi offers relatively inexpensive student loans via school alumni, who also serve as a network of contacts post-graduation.
"We came up with a way to reduce the cost of education. We get alumni of a school to invest in a fund, and use the fund to give loans to students at lower rate than they would otherwise get," explains Daniel Macklin, co-founder and VP of business development at SoFi. "They also get the benefit of that community that's backing them. We think it's a more sustainable model than banks where generally they're only too happy to give you money, but paying it back--if you don't have a job, they can't help you."
On average, borrowers save approximately $10,000 compared to a bank loan. They also gain connections to alumni with a vested interest in their success. At Stanford, where SoFi piloted its program last year with 40 alumni and 100 students, one lender indirectly hired a borrower. Another alum put a borrower in touch with 10 contacts in his network.
The young company, which recently raised $77 million in a Series B round, launched this year in 79 schools, from the small (Swarthmore and Bryn Mawr) to the large (Penn State and University of Michigan). Since July 2012, it has made $110 million in loans. SoFi has experienced a rapid ascent, most likely fueled by the fact that some schools are only too happy to experiment with new models as they observe the looming threat of free online education programs.
SoFi has some big plans for coming year, including an expansion to 200 schools, the creation of an online network (a kind of LinkedIn for lenders and borrowers) and an entrepreneurship program. "If you're a borrower and you want to be an entrepreneur but you have $50,000 in loans, you'll have the ability to find alumni that like what you're doing. If they're supportive, they may assist in some way to help through early months," says Macklin.
The startup is just one of many trying to make the bloated higher education experience more affordable (see a Fast Company roundup here). Others include CommonBond, a just-launched startup with a model similar to SoFi; and Upstart, a startup that lets funders invest in individual students.
Right now, SoFi is focused on graduate programs. But one of its biggest challenges may come from schools with less engaged alumni--especially compared to schools with well-known alumni networks like Stanford. According to Macklin, however, all that's needed is a critical mass.
Copyright 2012 by Fast Company. Reprinted with permission.