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CommonBond has raised over $100 million to rescue students from the crushing burden of student debt.
The startup powers a platform that connects student borrowers with lenders who can help pay for their education. CommonBond raises money from alumni, individual, and institutional investors and pools this money together to fund loans at interest rates lower than most federal and private lenders.
It is similar to LendingClub (which has funded $2.363 billion in loans to date), but specifically for higher education.
“The financial crisis was one of the best things that could have happened to the financial industry,” CEO and founder David Klein said in an interview with VentureBeat. “As painful and horrible as it was, it shook us out of traditional thinking that banks too big too fail were the only option. Things are now happening and evolving — people have opened up their minds to alternative forms of financing.”
Student debt is a heavy and dark omen hanging over America today. Student loan debt has surpassed $1 trillion in the U.S. and is continuing to rise. The average debt per student is over $27,000 — it outstrips car loans and credit card as the largest sources of personal debt. The Pew Research Center estimates that nearly one in five households is paying off student loan debt, and it haunts many people for decades, so they can’t afford to retire.
Alas, the burden is only getting heavier.
Tuition in the U.S. is expected to double in the next ten years. A recent report from Goldman Sachs, based on Department of Labor Statistics, found that unemployment rates of college graduates has surpassed those of workers without a high school education. An expensive college degree no longer guarantees a lucrative career and a quick climb out of debt.
CommonBond’s goal is to reduce the amount of student debt by providing more affordable loans and refinancing options.
“We came together to create a company that could lower the cost of education,” Klein said. “This market is so broken, and we are displacing traditional forms of financing. Our goal is to shift the culture of borrowing to one that is about community and customer service.”
Klein cofounded Commonbond with Michael Taormina and Jessup Shean. The three met as MBA students at the elite Wharton School of the University of Pennsylvania. They thought that the existing financing options were “nuts” and set out to a build a better one.
Commonbond first launched for MBA students at Wharton in 2012.
At first, loans were funded through alumni investors but the platform has opened up to institutional investors as well, such as community banks, family offices, hedge funds, insurance companies, and pension funds.
Current students can finance their loans at a rate of 6.24% and graduates pay a fixed rate of 5.99%. Klein said that MBA graduates can save over $17,000 as compared to federal government loan rates.
This funding round is a combination of equity and debt financing — $100 million of it will go directly towards funding and refinancing student loans.
By the end of 2013, Commonbond will expand to 20 MBA schools. In 2014 the company will expand into law, medical, and engineering graduate programs, as well as undergraduate programs.
CommonBond is also adopting a one-to-one model called Social Promise. Along the lines of Warby Parker or TOM’s shoes, for every degree that is fully funded on the platform, they will finance the education of a student abroad.
Both the education and financial services industries are undergoing significant transformation right now. Internet companies are fueling this change by bringing greater efficiency and transparency to sectors that have traditionally been bureaucratic and opaque.
In personal finance, there is LendingClub and Prosper, and for student loans a whole slew of startups including Instagrad, Tuition.io, StudentLoanHero, Vittana and others are taking innovative approaches to funding for education.
With $100 million going towards student loans in the next six to twelve months, Commonbond gains a significant boost in this area. The equity financing was led by New York’s Tribeca Venture Partners and the Social + Capital Partnership. Other investors include former Citigroup CEO Vikram Pandit, former Thomson Reuters CEO Thomas Glocer, and former Barclays senior executive Tom Kalaris.
CommonBond is based in New York City. It closed a $1 million seed round last year to get the platform off the ground.