When a startup known as Social Finance raised an astronomical $77.2 million last week to expand its new lending model to colleges and universities across the United States, it seemed almost too good to be true.
For the founders, social is the missing ingredient in the way that loans operate. By taking advantage of social networks, SoFi is turning wealthy alumni into lenders who pocket a check every month. Students connect with real people (not faceless banks) and default less, and SoFi can offer them a fixed interest rate of 5.9 percent. It’s far lower than a private bank loan or Federal Stafford/PLUS loan.
SoFi originated at Stanford’s Graduate School of Business (the GSB), where over 60 percent of students take out loans to fund their education
The value proposition is obvious to students and alumni, said Mike Cagney, the company’s cofounder and CEO. For us, the opportunity is to fix a broken market. Read more about the company’s recent fundraise here.
It’s the ideal testing-ground for SoFi: Many alumni are engaged, entrepreneurial, and have cash to spare. Before I jumped on the SoFi bandwagon, I had a few questions for Cagney about the challenges of launching a new lending model, and where the company plans to go from here.
Mike Cagney: We piloted the idea during my fellowship at the GSB, but I have been thinking about this problem when I was in the hedge fund world. [Cagney is the cofounder of Cabezon Investment Group, a global macro hedge fund] At Stanford, everyone was talking about the intersection between social and finance.
We raised a $2 million fund and lent out $20,000 dollars to 100 students. We were able to deliver a lower loan rate and return a piece to SoFi. After, we sat down with the students and alumni to talk about how we could connect them. On the back of that success, we expanded to a broader number of schools and expect to be in 250 in a couple months. Continue reading “SoFis CEO: The student loan market is broken. Lets fix it (interview)”