Pioneering new opportunities in the online student lending industry.
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According to a report on millennials issued by the White House, total student outstanding loan debt surpassed $1 trillion by the end of the second quarter of 2014, making it the second largest category of household debt, and the average amount carried by each borrower is inexcess of $35,000. The rate of student debt has quadrupled over the last 12 years and, at $1.3 trillion, now exceeds every other form of consumer debt aside from mortgages.
Today’s students and graduates have huge liabilities as they start their careers, which we must remember is a burden that previous generations barely had. Market leader SoFi, which has so far funded more than $4 billion in loans and said at the end of September 2015 that it expects to fund $6 billion in loans by the end of 2015.
CommonBond as “second SoFi”
In November 2015, the three-year-old company announced that it raised $35 million in a Series B funding round led by August Capital, with investment from Nyca Partners. Existing investors TriBeCa Venture Partners, Social Capital, and Tom Glocer also chipped in. CommonBond didn’t disclose its current valuation or its total amount of funding. Previously, in 2013, the company raised $100 million in equity and debt, as part of a Series A round, which was led by Tribeca Venture Partners and included former Citigroup CEO Vikram S. Pandit as an investor.
CommonBond wants to make loans more affordable to a larger (if more elite) slice of the market. Starting at a less than two percent annual percentage rate (APR), with fixed rates peaking at around 6 percent, young professionals in heaps of student debt can refinance up to $220,000 worth of loans – provided they make a salient – often triple figure – salary, and have an approved credit score. An average borrower at CommonBond has a FICO rating of 770. CommonBond estimates that borrowers save more than $14,000 by using the service.
David Klein, CommonBond’s 35-year-old founder and CEO, sees a broader theme taking place in the market. With the most recent financing, Klein plans to roughly double his current team of 35 employees, which more than doubled since the beginning of 2015, when there were only 15 employees. The company will also continue to build out its data-intensive algorithm for determining client risk.
So far, CommonBond has refinanced over $100 million worth of student loans, and projects surpassing $1 billion by the ended of 2016. For reference, San Francisco based SoFi (also called Social Finance Inc.,) a competing lending firm, has refinanced more than $3 billion in student loans to date. At present, CommonBond is not cash flow positive, but Klein expects that it will turn profitable within the next two years. And thus far, no borrower has ever defaulted on a loan.
“We’ve proven that this is a platform where underwriting upfront is incredibly strong. We’ve earned the right to expand further. We’ll continue to methodically grow, making underwriting and modeling more sophisticated, so we can provide our service to more people without sacrificing credit quality,” Klein says.
Since CommonBond’s founding in 2012, it has expanded to serve graduates of more than 200 graduate schools. By the end of this year, it projects serving every graduate program in the country — that’s more than 2,000 schools.
Still, analysts believe that companies like CommonBond will ultimately have to expand to a larger and less wealthy client base.CommonBond borrowers are able to refinance their student loans to a lower interest rate than the federal government or private banks can offer, saving the borrower on average about $14,000 over the life of the loan.
But what is really setting CommonBond apart is their technology, which simplifies and speeds up the process of getting a student loan, and a business model that puts customer service front and center. Borrowers become part of the “CommonBond Family,” which offers networking opportunities, panels and events, career support, hosted dinners, and much more. The success that Klein has found is in no small part due to his company’s focus on the customer first.
“We decided to take a customer-first view, and be maniacal about that. We wanted to get the product and price right, of course, but then build technology to truly simplify and speed up the process. We decided to offer customer service in a way that nobody else in finance was doing, and frankly nobody else in finance is still doing.
“One of the things that we’ve been methodical about in our growth is people. We have a team of 35 right now, while others at our stage might be 75 or 100. We heavily leverage technology and we take hiring very seriously. Hiring the right people and being really thoughtful about who you put in place early is critical. These early hires are the bedrock of our company and will be critical to us scaling our business while maintaining, if not improving, the borrower experience as we grow. Zappos is a prime example.”
In December 2015 CommonBond, a New York-based financial tech company, announced it will be offering assistance with student loan repayment. CommonBond’s cofounder and CEO David Klein told Fast Company that with about half of the staff currently paying back loans, the decision to help reduce their payments was met with excitement.
“In fact, 100% of them with student debt have already enrolled in the benefit,” Klein says. “Offering this benefit relates to a broader theme taking shape in the workplace, which is the growing emphasis companies are placing on financial wellness,” Klein explains.
Indeed, CommonBond is joining a small (about 3% of private sector businesses, according to the Society for Human Resource Management) but growing number of companies that are starting to implement this benefit. Klein chalks its up to employers staying ahead of a shift in preferences among millennials, who now make up one-third of the U.S. workforce and are carrying a load of debt.
No wonder a survey of 1,000 workers with student loans from student loan management company iontuition found that nearly 80% with debt said they wanted to work for a company that offered repayment assistance. Among the individuals surveyed, nearly half (49%) said they would prefer their employer contribute to reducing their debt rather than a 401(k) plan.
Klein cites another benefits preference study that found among 400 college-educated millennial participants, 85% would accept a job offer when student loan repayment is included.
“Many overwhelmingly prefer debt repayment to other perks, such as 401(k) and health insurance contributions, free food, and gym memberships,” he points out.
CommonBond’s Klein notes that its benefit is $100 per month provided to all employees with student debt, until the loan is fully paid off, so long as they are employed at the company. “Typically, companies that offer this benefit will cap it, either by time or lifetime amount or role,” he says, “At CommonBond, there are no such caps.”
CommonBond’s Klein admits that $100 per month might sound small. “But over 10 years—a typical term for a student loan—that’s $12,000,” he observes. “Additionally, based on our research across the industry, this is the richest student loan benefit that exists, in terms of benefit to the employee,” he contends.
Student Loan Hero fighting for financial literacy of young adults
In America, there are 40 million borrowers that collectively own more than $1.2 trillion. Out of all the borrowers in the country, some 8 million default on their debt. So, what really happens to the graduates who defaulted on their student loan?
Andrew Josuweit is the CEO of the Student Loan Hero, a website that helps people save on their student loans. When he graduated in 2009, he had a total of $104,000 of college debt from 16 various student loan services.
Because of this humongous amount of debt, his relationship with his parents suffered. He had to take multiple undignified jobs. He had to live in Southeast Asia, where the cost of living is cheaper, and he couldn’t even get approval for an apartment when his girlfriend moved in with him. He found out that after 270 days of not paying, the college loan will go into default and the creditor will transfer the debtor’s information to a collection agency.
So what he did was sign up for an income-based repayment plan to pay for his federal loans. Then he enrolled in a rehabilitation program to erase the default on his credit history after making nine consecutive monthly payments.
He makes sure he pays his highest-interest-rate loans first and the other loans that have the smallest principle balance. He refinanced the rest of his loans, which helped lower his interest rate by 1.5 percent. This helped improved his credit score. Also, thankfully, his online business made $68,000 in 2014 and is getting better.
There are serious consequences when defaulting on a student loan. For those who defaulted on their federal loan, the government can get your tax refunds, garnish your salary without going to court; they can even get money from your Social Security checks.
Although there are repayment assistance programs available, some borrowers are not aware of them or don’t know how to gain access. That’s where Andrew Josuweit comes in.
So far, Student Loan Hero has 20,000 users and helped borrowers refinance more than $130 million in loans last year. He says he was inspired to educate other borrowers about their options and empower them to get out of student loan debt once and for all.
“Every day we get phone calls from people who have had such a bad experience working with other student loan servicers, and who are calling us as a last resort. I wish this weren’t the case, but most of those people tell us that by providing free and unbiased advice, we’re providing a service that no one else they’ve gone to for help has been able to do,” says Josuweit.
Student Loan Hero provides an array of resources, including debt calculators and advice on repayment options. Josuweit says he is not that surprised by students’ lack of knowledge when it comes to student loans due to what he says is a “broken and complicated system.”
“Paying off debt is a marathon, not a sprint. You won’t eliminate your student loans overnight, but you don’t have to live a miserable, penny-pinching lifestyle until they’re gone, either. Making smart financial choices, like budgeting, finding creative ways to boost your income, and sticking to a structured repayment plan can go a long way.“
Affirm: the latest entrant into space
One more online lender begin offering student loans. The latest entrant into this space is Affirm, the financial technology startup that PayPal founder Max Levchin launched back in 2014. Starting July 2015, students at General Assembly, Bloc, Kaplan’s Dev Bootcamp, and Metis will be able to secure loans that last 12, 15, or 18 months, with interest rates ranging from 6 to 20 percent. In most cases, students won’t be required to pay back the loan during the first six months they’re enrolled in the program.
With this new product, Affirm joins companies like Earnest and Upstart, which have also begun offering student loans for this same demographic. Levchin says he expects this field will only grow with time, as more students pursue this type of education. Levchin argues that there are differences in quality with any education system. “In four-year programs, there’s a real difference between Stanford and a state school computer science degree,” he says. “In that sense undoubtedly there’s a pecking order.”
That’s why he says Affirm is being purposely selective, and only working with bootcamps that place a high percentage of their graduates in high-paying jobs. That’s not just for branding. It’s for financial reasons too. The students who stand the best chance of paying Affirm back on time will be the ones who are able to secure those jobs after graduating.
Levchin’s ultimate goal is to apply these indicators to more industries to create a suite of online credit and loan products, all under the Affirm umbrella.
“Our goal is not about being a point-of-sale lender or education lender. It’s fundamentally about helping people improve their quality of life through responsible use of debt.”
Meanwhile, Affirm is moving fast to piggyback on the success of Earnest, one of the first financial services companies to target bootcamp students and the current market leader. Earnest’s bootcamp loan volume for the first half of this year was double its volume for the second half of last year, the company says. (Earnest administers its bootcamp loans in a manner similar to its personal loans, as Affirm plans to do. These are private loans that happen to be for students, not to be confused with federal student loans.)
For Affirm, which raised $275 million, the bootcamp loans represent a first foray into a more specific need category. When students are accepted to one of Affirm’s partner schools, like Dev BootCamp or GA, their congratulatory email will include a link to a school-specific landing page with information about financing through Affirm.
Levchin disputed the idea that loans for coding bootcamp loans might fuel an already rapidly growing student lending bubble. “It’s a little bit outside of what we’re doing, but it’s something I’m trying to wrap my head around,” Levchin said. “If you look at the default rates for some of these schools, they’re unbelievably high. Then of course, these loans are essentially guaranteed by the government. It’s a giant vortex of cash into the ground.”
Examples of new players: Ernest, WeFinance and Credible
In November 2015 Earnest, one of the new online lenders using smart algorithms to serve millennials who may have short credit histories, announced $275 million in new funding. Seventy-five million dollars of that is a series B round led by venture capital firm Battery Ventures, and an additional $200 million comes in the form of lending capital from New York Life and other insurance companies.
The San Francisco-based company, launched in May 2014, started out making personal loans, but its most popular product is student loan refinancing. Rolled out in late January, when the company received a $17 million series A round of financing, that offering has helped fuel rapid growth, bringing this year’s total loan volume to about $400 million dollars, 50 times greater than the $8 million Forbes reported it lent last year.
The company has also added staff at a quick pace. Now at 160 employees, up from 30 a year ago, it plans to add another 200 new workers — primarily in engineering, such as data engineering, data science, product design and product management. The goal is to expand into new products, and eventually, to become the Amazon of financial services.
Many of the companies in this category use alma mater, major, employment and credit score to underwrite the loans and determine the interest rate. Earnest, on the other hand, eschews the credit score and instead adds in checking, credit and savings (including retirement) data, noting not only whether the applicant made a credit card payment on time but also whether she paid the minimum or full balance, and spotting financially responsible borrowers due to their savings behaviors.
That, in turn, allows the company to offer some of the least expensive loans on the market, saving its borrowers an average of $18,000; the average loan amount is $70,000.
The company also uses the 80,000-100,000 data points it gathers on each user to offer a precision pricing feature, in which borrowers can switch between variable and fixed rates, drop from a 15-year to a five-year loan (particularly appealing to those, such as medical residents, who see their incomes rise), customize their loan payments down to the penny, or pay biweekly to better match with their paychecks.
All these tweaks can save borrowers even more on their loans. More than 95% of its clients take advantage of precision pricing, which Beryl says accounts for a large portion of the $18,000 that the company saves its borrowers on average.
Beryl credits these features for the company’s high net promoter score (a number from -100 to 100 that expresses a consumer’s willingness to recommend a company to others). At 81, he says it is higher than any in financial services. (In March, NPS co-creator Satmetrix announced that Costco had the highest overall score at 79.)
So far, Earnest’s big data algorithm has enabled it to target a financially responsible crowd. Although it’s too soon to determine the company’s default rate — typically, defaults peak in the second year of the loan — the company so far has a default rate of 0% and none of its student loan refinancing borrowers have ever missed a payment.
“Really high-quality, high-potential young people are just being dramatically overcharged and mispriced by the credit system,” Beryl says. “You’ve heard all of these things—you need to go get a J.Crew card, and pay it off—that’s crazy! All the workarounds—the system isn’t built right.” Earnest is an attempt to correct those flaws, and in the process save young borrowers thousands of dollars.
Earnest is on track to hit a lending run rate of $1 billion by the end of the year. According to the company, the average customer paying off a bachelor’s degree will save $11,143 with Earnest; savings are even higher for graduate-level degree-holders like MBAs ($14,740) and lawyers ($30,715).
WeFinance, launched in April 2015, is the new startup to use a combination of technology and crowdfunding in order to offer borrowers lower interest rates on loans, while reducing lenders’ risk. The new peer-to-peer lending platform operates something like a Kickstarter for personal loans – largely those in the range of $10,000 to $20,000, and many of which are being used to help borrowers fund their educational expenses, including tuitions, bootcamps, financial support during unpaid internships, and more.
Founded in early 2014, the idea for the site comes from co-founder and CEO Eric Mayefsky, who previously spent three-and-a-half years at Facebook as a product manager focused on ads optimization, infrastructure and stability. He explains that, while at the company, he began to loan his friends money directly on good terms, in order to save them from the otherwise “exorbitant rates” they would have to pay on that debt.
The problem, in many cases, was that the things that made them low risk didn’t reflect on their credit scores, he explains. “They had very little credit history,” Mayefsky says. “They had good jobs in their past or they had good jobs lined up. In my perspective, they were very low risk.”
On WeFinance, which is also co-founded by Willy Chu, previously of Credit Karma and Kiva.org, borrowers write a brief loan application, and link to their Facebook account to verify their identity. They’re also encouraged to link to their LinkedIn too, so lenders can view their educational background and work history. The site then vets their application, offering them feedback on what to change, and if approved, it goes live. Dwolla, meanwhile, is used for the payments and WeFinance covers the fees associated with that.
In addition, the idea with WeFinance is that the borrowers aren’t meant to immediately rely on an anonymous crowd of lenders to support them, but rather they first rally support from their own network of family and friends instead. “Traditional credit metrics don’t work that well for people at that stage in their life,” notes Mayefsky. But he adds the site has also helped those who are out of school, too, and undergoing a transition – like switching careers, or taking time off to have a child, for example.
Student loan marketplace Credible is trying to connect students to the best deal available. In February 2015, the San Francisco-based company announced it has closed the final $1.5 million tranche of its $2.7 million seed financing, the total raised thus far for the two-year-old company. “In ten seconds, a recent graduate can use Credible’s comparison tool to find out if they are overpaying on their student loans,” founder and CEO Stephen Dash told.
In five minutes, he added, a student borrower can complete a Profile that enables lenders to offer personalized quotes with exact rates for private loans. In a Dashboard, users can compare such factors as APR, monthly payment, fixed or variable interest rate, total repayments, and estimated savings. There’s no charge for borrowers to use the platform, as lenders for completed loans pay a fee to Credible. The company said it does not sell leads or user data.
More than 15,000 profiles have been created on Credible since it launched in March 2014. The site focuses on helping borrowers in the refinancing of existing loans — as opposed to their initial college loans — because “this is where borrowers can save the most money by comparing lenders’ offers,” Dash said.
“A graduate is typically a much more attractive lending proposition than a student,” he said, because they have a longer credit history, usually have a job, and have a university degree. Most other online facilitators of loan refinancing are lenders themselves, Dash said, including Citizens Bank, CuStudentLoans, Earnest, CordiaGrad, Success Loans, iHelp, and others. By contrast, he said, Credible is a nonlending matchmaker between borrowers and lender — “a Kayak for student loans,” the company says.
Photos: getty, Company profiles.
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