Student Loans: For a Great Deal, Borrow from Alumni

An alumni network at 40 universities looks to make student loans more affordable while cutting the default rate and providing lenders with a decent return.

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With student loans approaching $1 trillion and some folks arguing that college is no longer worth the expense, it’s clear that we need solutions. College shouldn’t be just for the well off and those who qualify for grants and scholarships.

Now an innovative program called SoFi—short for social finance—is enlisting university alumni as benevolent lenders in a program that aims to keep student loan rates down. Alums contribute to a fund at their alma mater, which taps the fund to extend loans it wouldn’t otherwise offer—at rates below what is available in the commercial market. Participating alumni also serve as online mentors to students doing the borrowing, and the alums get paid back—plus interest.

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This program is the brainchild of four former graduate students at the Stanford Business School: Mike Cagney, Ian Brady, Dan Macklin and Jim Finnigan. Stanford ran a pilot SoFi program in 2011, seeded with $2 million from 40 alumni and disbursed to 85 students in the graduate school of business. Now the founders are taking the program national. Some 40 universities including the likes of Duke, Indiana, Wisconsin and UCLA will offer SoFi loans next year, providing an estimated $150 million in student financing. These are for future, current and recent graduate and undergraduate students. Loans to consolidate education debt are part of the program.

The going rate for 2012-2013 is fixed at 6.24%, which falls to 5.99% once repayment begins and the borrower agrees to an automatic payment program. That is 3 to 4 percentage points lower than many private loans—an average discount that SoFi says will be a steady feature no matter where interest rates trend. That rate is also below the federal unsubsidized Stafford loan rate of 6.8% and the federal Plus loan rate of 7.9%. Loans are available up to $200,000.

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SoFi believes that by paring the loan with a network of alumni mentors, who can help graduates with their job search, the default rate on these loans will be much lower than the nearly 9% default rate on federal student loans. Alumni lenders can invest IRA or 401(k) assets and SoFi projects annual returns of 3.5% to 8%.

No co-signer is needed and SoFi says that all students get the same rate. Credit history is considered but the program’s assessment model values highly that a student is studying at the institution that is the source of the loan. For the list of colleges that are participating and instructions on how to get a SoFi loan, go to Applications for the fall semester open this week.