SoFi Reinvents College Loans With Alumni Funding

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As the cost of a college education continues to rise, a startup called SoFi is offering a way for alumni to offer students financial assistance and more.

Co-founder and CEO Mike Cagney describes the current student loan system as a “classic market failure,” resulting in students who are stuck with high interest rates and heavy debt that they struggle to pay off. He says that if you can remove government from the equation (specifically government loans) and replace it with alumni, then “you create a very virtuous cycle.”

So that’s what SoFi tries to do. The company is creating university-specific funds for alumni to invest in, and those are used to make loans to students. SoFi says it’s offering to cover the full cost of attendance for participants, with loans ranging from $5,000 to $200,000. The loans are 6.24 percent fixed rate, and they can drop to 5.99 percent, lower than federal Stafford and PLUS loans and many private loans. So students get relatively low interest rates, while alumni get a significant financial return.

The benefits aren’t purely monetary. Through its website, SoFi tries to connect the participating alumni and students, for example if someone is looking for mentorship or help with their job search. Cagney notes that the loans create a financial incentive for alumni to pitch in — after all, they want students to do well so they can pay off the loans. On the flip side, he says that some alumni don’t care about making money from the investments at all, and want to use the interest payments to a nonprofit organization that will help the students (something that SoFi is investigating).

Of course, alumni donations are already an important source of funding for university programs. Cagney says these loans can be made from tax-deferred accounts like a 401k, so they shouldn’t divert money from traditional alumni giving.

Cagney and his co-founders ran a pilot program at Stanford (where they attended the Graduate School of Business) last fall, raising a $2 million fund from 40 alumni. This fall, SoFi is expanding to 40 locations and hopes to lend out $150 million.

As for its own funding, the company has raised $4 million from Eric Schmidt’s Innovation Endeavors, and board members Joe Chen (founder and CEO of RenRen) and Steve Anderson (founder of Baseline Ventures).