Student debt is a very serious problem that can no longer be ignored. Recently, student debt in the U.S. topped $1 trillion, eclipsing both national credit card and car loan debt. Naturally, a debt crisis of this proportion didn’t grow over night; it’s been coming for years. So, in 2011, a group of Stanford business school grads decided to start Social Finance, with the goal of transforming the student loan industry.
Many companies are addressing this problem, with varying degrees of success. But today, the young San Francisco-based company got a big vote of confidence from investors, as the company announced that it has raised $77.2 million in Series B funding. The round was led by Baseline Ventures, with participation from DCM and Renren, one of China’s largest social networking sites.
This is a huge round for such a young company, but there’s obviously a lot of confidence in SoFi’s leadership, which isn’t your average 20-something co-founding team fresh out of business school. The startup’s leadership is made up of veterans of the financial and software industries, including Nino Fanlo, the former executive vice president and treasurer of Wells Fargo, and Ian Brady, the former director of innovation for Fidelity Investments.
Like others in the space, SoFi is developing a lending solution that attempts to give students access to lower loan rates than the federal standards. However, SoFi believes that it can beat those offered by Federal Direct and PLUS loans while still offering quality borrower protections by creating significant social and economic connections with alumni investors. The interest rate on a federal Stafford loan will be 6.8 percent next year (assuming Congress doesn’t intervene) and Direct PLUS is around 7.9 percent, with private loan tools going as high as 16 percent. SoFi, in comparison, looks attractive with rates fixed at 6.49 percent, which can drop to 5.99 percent upon graduation, according to The Wall Street Journal.
Naturally, the startup will use its new infusion of capital to help finance its lending, build on this network base, and ramp up its outreach to student and graduate borrowers, as “it expands beyond 78 schools this fall.” This roster of schools includes Stanford, University of Michigan, Smith, and Swarthmore to name a few.
SoFi CEO Mike Cagney admits that the debt crisis is going to get worse before it improves, but he believes SoFi’s approach can work, because it creates a new market in which students can both finance their education and actually strengthen their connections to their schools’ alumni.
Beyond its “dedicated lending fund,” which aims to offer lower rates, the startup has created a social platform that combines online and offline connections to help educate students on financial literacy while offering career mentoring and “in-school project assistance,” according to the CEO. To date, the company says that it has generated more than $60 million in loan applications and is on track to commit more than $200 million in 2012.
SoFi’s approach aims to create value both for students and alumni. Students benefit from receiving advice on career decisions and, importantly, savings on loans, whereas alumni get to feel like they’re giving back by helping to finance those loans, while seeing better returns and adding value to their school’s community through the startup’s lending engagement model.
That’s SoFi’s value prop — or how it’s selling itself anyway. That it’s doing good for the school community, on top of helping students ease the pain on their wallets, all by leveraging social tech. This is where the interest from Renren (not your average lending investor) enters the picture. Renren CEO Joe Chen said in a statement that the company “closely observes and participates in other online businesses that are leveraging social to create, market, and distribute products at scale” and that SoFi brings the same factors to play on the intersection of finance and education.
What does that look like? One example SoFi has implemented is a “$100/$100 promotion,” wherein each completed refinance application that’s referred by a user means that both they and the person referred get a $100 check. A tried-and-true basic financial incentive. If the startup doesn’t work with a student’s school in particular, they can ask that the institution be added to SoFi’s network.
When the company started out, its inaugural loan program was a $2 million pilot at the Stanford graduate school of business. Thereafter, the startup has worked at becoming a national lender via state registration and has since created a broker dealer and added in-school and consolidation loans. The team hopes to begin offering a loan option for international students as well in the near future.
For more on the specifics, rates and details, check out SoFi’s FAQ here.