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Social Finance (SoFi) is a startup with a simple solution to the student debt crisis. The company taps college alumni as a funding source for students loans.
The strategy seems to be working.
Today, the startup announced that it is covering 100 schools, including pricey Liberal Arts colleges and most of the Ivy League. The idea is that by linking students with alumni, who have an interest in seeing graduates (their investments) succeed, students are far less likely to default on their loans.
SoFi has experienced rapid expansion in a little over a year, primarily by word of mouth. It originally targeted just 40 colleges and universities, with a focus on postgraduates. SoFi now caters to almost 3000 undergraduates and graduates.
The company is experimenting with all sorts of new ways to help student borrowers ascend the career ladder, and pay back loans.
“Now that we’ve reached this critical mass of borrowers, we can do so much with the community that we couldn’t do last year,” said chief executive Mike Cagney.
SoFi now offers support for budding entrepreneurs, networking opportunities, even job placement. In recent months, a handful of students couldn’t find a job after graduation, so SoFi’s alumni network stepped in. These students have subsequently secured employment, and are paying back their loans on time.
SoFi also organizes dinners and speaking events in cities around the country, so alumni and student borrowers can meet and mingle. Many of the alumni are prominent investors, and are eager to connect with developers and tech entrepreneurs.
Cagney saw an opportunity to help these young entrepreneurs, especially those who are crippled with student debt.
After six months of pilot tests, SoFi is also ready to roll out a special program for founders. The idea was inspired by feedback from graduating students. Many said they would like to start a business, but felt they needed a stable job or they wouldn’t be able to pay back their loans.
[Related: For more on SoFi’s solution to the student debt crisis, read our recent Q&A with SoFi CEO Mike Cagney here.]
Through the program, SoFi will provide six months of loan forbearance to would-be entrepreneurs, as well as access to accredited investors and mentors through the alumni network.
SoFi is now accepting applications for its September 2013 program, and the deadline closes in August. It’s bound to be a competitive process; SoFi will vet the business ideas, and run them by the seed investors in their network.
To be eligible, entrepreneurs will need to be a degree-holder from one of SoFi’s 100 participating schools, and must be a loan borrower.
In the long-run, the company may even offer a seed fund of sorts. But first, Cagney said they will likely raise a “modest capital base” to cover basic living expenses for entrepreneurs in the program. SoFi may even provide office space to founders, so they can get to the point where they can present a viable business plan.
“Through the program, we’d like to see about 10 entrepreneurs get their startups up and running, even securing a first round of capital,” said Cagney.
He added that he is particularly partial to startups in the financial services sector. The San Francisco-based team can offer guidance and connect fin-tech founders with potential investors.
Similarly to other startups in the “peer to peer” lending space, SoFi acts as a mediator of sorts. The company raises a pool of capital from alumni at each school, and doles it out in chunks to students. It takes a .75 percent management fee and .5 percent service fee.
SoFi was a revenue-generating business on day one, according to Cagney.
SoFi has also raised ample venture funding to help it scale out the model to universities around it country. It secured $77 million in September 2012, and $41 million this spring.
The company originally began as a pilot at the Stanford Graduate School of Business, where many students are struggling to afford sky-high tuition costs. About 60 percent take out loans to finance the two-year education, making it an ideal testing ground.
The pilot went a long way to validate the model — 100 percent of students paid back the loan at a fixed interest rate (now as low as 5.74 percent APR, which is more affordable than a private bank or federal loan. More on SoFi’s loan rates.)
Are you a college student or parent? Would you use a service like SoFi? Let us know in the comment section below.