CRAINSNEWYORK: What if there were a $1 trillion-plus market so riven with inefficiencies and overburdened with regulation that even the most powerful companies inside it had grown eager to partner with the startups seeking to disrupt it? Welcome to the world of student loans.
Since 2011, startup CommonBond, based in Manhattan’s Chinatown, has grown from a pilot idea hatched by three Wharton School students to an operation funding $100 million in student loans nationwide. Now it is partnering with Nebraska-based financial-services company Nelnet to expand its offerings sevenfold.
In exchange for an unspecified equity investment, Nelnet will finance at least $150 million of CommonBond’s annual loan volume. Nelnet holds almost $30 billion in student-loan debt.
CommonBond’s online platform helps create connections between investors, like alumni of certain graduate programs, with students and recent graduates looking to find better rates or refinance existing loans. Those pools of investors funnel cash into loan instruments that CommonBond extends to carefully selected students who are poised to succeed postgraduation—like Wharton M.B.A. candidates—but would otherwise be paying the same rates as struggling M.F.A. candidates.
“A lot of creditworthy borrowers are looking to refinance their grad-school loans,” said CommonBond co-founder and CEO David Klein. “The student-loan market is pretty broken, but its inefficiencies allow us to offer a better rate.”
Students borrowing from CommonBond save an average of $10,000 over the life of their loan, and investors are almost guaranteed a return in the neighborhood of 5%. In 2013, former Citigroup CEO Vikram Pandit was part of a group that invested $100 million in equity into CommonBond, making it a very real disruptor on the student-loan scene.
The deal with Nelnet proves the disrupted are now taking notice.
“There are very few players in this industry, and this partnership is bringing together a 40-year-old company with a new player,” said a Nelnet spokesman. “CommonBond’s approach to financial services is simple: delivering great customer service and leveraging technology to make this process easier. That fits with Nelnet.”
For Mr. Klein, partnering with an industry titan means that he and his colleagues have become legitimate players in an industry they have been trying to fix for quite some time. “We’ve built something that we wanted to see when we were in school,” he said. “We asked, ‘Do we want the financing of education to be more market-driven or publicly funded?’ I think we are seeing an answer.”