A new private loan company is set to lend more to UT students and alumni than the total amount of private loans the University’s financial aid office certified last academic year if the company is successful in obtaining alumni investment.

SoFi Student Loans claims it brings an innovative solution to financing education, but a national financial aid expert is critical of the company’s sustainability. At the end of last month, the company filed paperwork with the U.S. Securities and Exchange Commission to create a UT-specific fund.

Since April 2012, the company has expanded and lent more than $90 million to students at 79 universities with zero defaults. The company is currently focusing on re-financing student loans of business students at a 5.99 percent interest rate but also extends credit to undergraduate alumni who have secured high-paying jobs, company spokeswoman Arden Grady said. The company cannot make new loans because it has run out of money, Grady said.

“All loans are on waitlist status,” Grady said.  “We expected there to be a high demand, but we’ve had to turn those loans off temporarily while we raise more capital to fund those loans.”

Grady said the company hopes to start lending again in March, after a fundraising campaign. SoFi has lent $1.3 million to 14 UT students and alumni so far, Grady said. Another 96 students were on a list to borrow more than $7.2 million as of Feb. 19, she said. 

If SoFi were to loan to everyone on the waitlist, the amount borrowed from the company by those affiliated with UT would surpass the amount of private loans the University certified last year. From summer 2011 to spring 2012, the UT financial aid office certified $7.8 million in private loans to 623 students, said Tom Melecki, director of Student Financial Services. Of those borrowing, 80 students were graduate students, who borrowed more than $1.6 million.

SoFi Loans was founded in 2011 by graduates of the Stanford Graduate School of Business. The company’s goal was to make loans to 100 graduate business students at Stanford with an interest rate lower than federal loans. In addition to seed capital, the company raised funds by offering long-term investment opportunities to alumni.

“The founders saw that students around them were burdened with a lot of debt, and not a lot of great options to pay them off,” Grady said. “Typically with business school debt you’re looking at $100,000 and in most cases the federal government is going to charge you 7.9 percent interest on most of that.”

UT MBA student Michael Sciortino said he would welcome an alternative to the federal loan program.

“Right now the federal interest rates aren’t great,” Sciortino said. “I’d be totally open to something that had lower rates.”

UT alumnus Zac Zeitlin is now a venture capitalist and decided to invest in SoFi more than a year ago, and in the UT-specific SoFi fund in the past two months. 

“I think it’s a great way to support students at any school, but in this case where I went to school,” Zeitlin said. “I think it’s a very creative form of impact investing allowing those who want to help others get an education and give back. This way of doing it makes good sense from an investor’s perspective by investing in great students with a great credit profile.”

Grady said investors can expect a return comparable to those seen from other long-term investments.

Mark Kantrowitz, financial aid expert and founder of fastweb.com, isn’t convinced the company is sustainable for a long period of time because interest rates will rise higher than federal rates. 

“I would expect that their loan terms on new loans will evolve each year as the interest rate changes,” Kantrowitz said. “So you might take advantage of them this year, but next year the loan won’t be so good. In a few years from now the deal will clearly be worse than the federal loans.”

Kantrowitz also questions SoFi’s marketing strategy for alumni investors.

When SoFi announced it had raised $77 million in September 2012, it stated in a press release that Chinese social network company Renren, capital firm Baseline Ventures and venture capital firm DCM were lead investors. Grady said SoFi cannot release details of how many alumni investors the company has or how much venture capital the company has raised. 

“My concerns are more for the sustainability of the organization than for the students,” Kantrowitz said.“The reality is not the same as the marketing. I mean, they do have some alumni investors, but it looks like the bulk of their funding is coming from outside capital. Having some sort of social network involved probably has some sort of minimal benefit for decreasing default rates.”

Kantrowitz said his concerns about the company should not keep students from taking a loan with a better interest rate. 

“I don’t see any reason a student who qualifies for their loans shouldn’t take advantage of it if it means they can get a lower interest rate,” Kantrowitz said. “The main reason for caution is if a student is going into public service and expect to qualify for public service loan forgiveness then they should stick with the federal loans.”

UT spokeswoman Tara Doolittle said in a statement that the university is unfamiliar with SoFi, but does not anticipate that the company’s fundraising will interfere with UT’s fundraising.

“We continue to be grateful for the generosity of our donors and alumni as they support this institution and our students,” Doolittle said. “Business opportunities and charitable giving often work hand in hand, so at first glance we don’t see any reason why a private business enterprise such as this would conflict with our charitable fundraising efforts.”

Grady said the program shouldn’t take away from money that would go to scholarships or endowments.

“It’s a different way of giving back to the school,” Grady said. “This is something beyond if you were to donate to an endowment. You can still do that. This is a way to invest money you were already planning on investing while having a direct, positive impact on students at the University.”

Published on February 22, 2013 as "Loan company offers new way to borrow".