Alumni-Sourced Lending Startup Plans Launch at 20 Schools

Seeing an opportunity in the explosion of student lending, startups have been emerging to facilitate lower-interest loans to students and graduates. The young financing companies aim to disrupt traditional lending and are targeting elite schools that have lower student default rates historically.

One of those companies is CommonBond LLC. CommonBond crowdsources funds from alumni members and interested investors to establish a loan pool. Then the New York startup, which partners with a bank and a loan servicer, disburses capital to MBA students and graduates.

To date, the company has distributed $2.5 million to borrowers at the University of Pennsylvania's Wharton School, whose MBA students have the largest debt in the country, and also where the co-founders attended university. "We wanted to prove our model, prove the demand is strong among creditworthy borrowers and prove alumni would participate," David Klein, co-founder and chief executive, tells BTN.

The startup didn't disclose how many people received loans or how many investors contributed to the loan pool. Alumni investors can expect a return within the 4% to 6% range, while borrowers pay a fixed rate as low as 5.99%. Interested borrowers can apply for loans online.

Klein says CommonBond can provide lower interest rates to borrowers because it views the credit quality of the underlying asset as very high.

"We look at a combination of publicly available federal data and proprietary data sources," says Klein. "The default rate at our 2013 schools has historically been less than 1%, and we expect that to continue based on the forward-indicating data of employment rate and earnings potential."

By year-end, CommonBond plans to offer loans at 19 more universities nationwide, distributing up to $100 million in student loans. Kellogg, Columbia, Harvard, Yale and Stanford are among the universities on its target list.

CommonBond faces existing competition. Social Finance Inc. (SoFi) operates in the alumni-sourced lending space. The San Francisco nonbank startup originated about $100 million worth of loans last year. Meanwhile, alternative lending providers continue to emerge. Pave, for example, launched in December a crowdsourcing platform targeting young people.

One factor distinguishing CommonBond from other financing companies is how its business model comes with a social-good promise: for every degree fully funded on its platform, the startup says it will fund a year's tuition for a student in need abroad, in a partnership with the African School for Excellence. The idea borrows from existing social good companies like TOMs Shoes or Warby Parker, which sells vintage-inspired eyewear.

"You don't have to sacrifice a financial return for social good," says Klein. "In fact, we're finding that profit drives social good, and social good drives profit."

Looking further ahead, Klein expects to offer its financing services to more than just MBA borrowers and include individuals coming from the engineering and medical fields, for example.

"The problem is so big and the market is so large," says Klein.