Student loans rates are a problem, a big problem. Student loans rates are such a big problem that many young people now weigh the question of whether or not a college education, (not to mention an advanced degree), is even worth the upfront cost and the years spent paying it off. As millennials enroll in these institutions of higher learning they are faced with two equally unappealing loan options: fixed government rates with high interest, or private bank options that aren’t much better.
One new site CommonBond is working to expand those options by creating a student loan crowd-funding platform that gives graduate students more affordable loan options. The three founders are loan-saddled students themselves, who seem to understand that the options out there today, quite frankly, suck. From their own loan experiences these Wharton students created CommonBond, a platform that seeks to alleviate some of that omnipresent financial anxiety that plagues our generation.
CommonBond is currently funding its first year of students – 100 of them all at Wharton. I spoke with CommonBond co-founder and CEO David Klein about what inspired the business, the millennial struggle, and the company social promise that sets them apart.
For those of you looking to finance your education, the CommonBond site is now officially launched and accepting applications.
Elena Sheppard (ES): How did the CommonBond journey begin?
David Klein (DK): CommonBond’s journey began when I got into business school. I knew tuition would be expensive, but didn’t realize the cost of financing a student loan would be so expensive. My federal government rate was over 8% fixed (APR). Private bank options weren’t much better, and in some cases worse. I thought traditional rates were unnecessarily high.
No alternatives existed, so I set out to do something about it, in concert with my co-founders Michael Taormina and Jessup Shean. We came together in November 2011 and haven’t looked back since. We’ve built our operational backend, secured our legal infrastructure, generated strong student demand, and raised $3.5M from investors. We launch at our first school this month (Wharton Business School), and expand further from there.
ES: Why did you decide to start with MBA students? How do MBA loans stack up against loans for MFA's, JD's, or other advanced degrees?
DK: We are focusing on MBA students first, and then plan to expand across other degree programs, including undergraduates. Our initial focus on MBAs has everything to do with our desire to have as broad an impact as possible.
Our model – bringing the power of community to finance through crowdfunding – is disruptive of a large and regulated industry. Disruption leaves little margin for error. We must get it right, so we’re removing as much risk from our model as possible in the beginning, to give our model the best chance at broad scale impact in the long run. We believe that starting with MBAs does just that.
In a way, we’re taking a page out of the Facebook playbook: launch at one school. Get it right. Expand to a limited set of schools from there. Get it even more right. And then expand further. We believe that a thoughtful and methodical growth plan is the most responsible thing to do. Our economy could have used a lot more of that before the financial crisis in order to prevent it.
ES: I think a lot of students understand that loans are a problem, but don't fully understand what sorts of numbers we're talking about. For a Wharton MBA student, what type of money would they be saving through CommonBond, and how does that break down?
DK: Let’s say you go to Wharton Business School to get your MBA – well, you’re looking at a cost of attendance of about $90,000 per year. If you have to take out loans for both years to pay for it – like we did – and you went through CommonBond vs. the federal government, you could save over $20,000 in repayment.
ES: Using crowdfunding as a way to facilitate these loans is an interesting approach. How exactly does it work and, for lack of a better way to put it, why are alumni interested in being involved?
DK: Students apply for a low fixed-rate loan through our website. As we continue to raise money from alumni and individual investors, we continue to fund student borrowers. Student demand has been very high, and alumni continue to be interested in participating because they can receive a competitive financial return, while having an impact on students’ lives at the same time.
ES: I read that this will be the first year Wharton students are receiving loans through CommonBond, how is it going so far? How many students are you funding?
DK: Yes, we’ll be funding as many as 100 students at Wharton this semester. We plan to grow quickly across other schools in 2013 as well, lowering the cost of education for as many students as we can. We’re receiving a lot of positive feedback from students across the country.
ES: Tell us a little about the Social Promise aspect. What is the process and how did you choose the charity? Why is this an important component of CommonBond?
DK: We believe business can and should be a positive force for change. Period.
We believe that companies have a responsibility to make the world a better place. That's what we expect from each other as individuals. Why not think about companies in the same way? They have a tremendous amount of influence and capital that can drive a tremendous amount of social good.
Just look at Warby Parker and TOMS Shoes, two of CommonBond’s greatest inspirations. They have built brilliant business models that gear the for-profit motive toward social good.
As co-founders, firmly rooted in the above philosophy and inspiration, we developed what we call our Social Promise.
Our global social promise is that for every degree fully funded on our platform, we will fund the education of a student in need abroad for a full year. We have partnered with the African School for Excellence to make this a reality. And we are proud to be the first company to ever bring the “one-for-one” model to education.
Our local social promise is to fund financial literacy programming for students and families in under-served neighborhoods in each geography we expand our loan program to. We plan to pilot the program at KIPP Charter Schools in West Philadelphia to coincide with our launch at Wharton Business School. Financial literacy has proven to be one of the most effective ways to break the cycle of poverty in America. We are uniquely positioned to play a role in improving people’s lives through financial education.
The process we used to identify our nonprofit partners has everything to do with serendipity ... and the “common bonds” we, as co-founders, share with each organization. This answer is already getting long, so you can read more about it here.
ES: On a more general level, how do you think student loans have affected college and grad school grads in this country? How did the situation get so bad?
DK: Students face poor loan options in a system left broken by the financial crisis.
When the financial crisis hit, the secondary market for student loans dried up. As with mortgages (and car companies), the government stepped into student loans to provide financing when the markets froze. But unlike the mortgage market (and auto industry) – which ultimately got back on their feet, albeit a little doozy and with some lingering side effects – the student loan market is still, to this day, primarily financed by the federal government, accounting for approximately 93% of newly originated student loans.
In a sense, the student loan market is still being “bailed out.”
The federal government charges the same, high fixed interest rate to all students, regardless of past credit history or future likelihood to repay the loan. Grad school students pay 6.8% fixed for the first $20,500 borrowed and 7.9% fixed for money borrowed thereafter. In addition, borrowers must pay an origination fee of 1%-4%. Those numbers are simply too high. For many qualified students, this is a significant mis-pricing of credit risk.
Private bank lenders, the typical bastion for market-based pricing, aren’t offering a much better deal for fixed rate student loans. Still shell-shocked from the financial crisis, many banks are “gun shy” when it comes to extending student loans and have either stopped lending or raised rates considerably, making it even more difficult for students.
It is a broken system, and it’s unclear how the traditional players plan to fix it, or if they even can.
ES: Ultimately, what is the hope for CommonBond? What do you think would be the best possible outcome?
DK: We believe CommonBond will become the leader in transforming student finance, not just because students can save over $20,000 in loan repayment but because they are part of the CommonBond Family, a powerful network of top students, professionals, and alumni with a vested interest in our student borrowers’ success.