Are Alumni the Answer to Student Debt Woes?

Alexa Pugh
Posted

Alum student loansAllegiance to your alma mater could mean more than remembering the words to the fight song—with the help of two new companies, some alums are footing the bill for new grads struggling to pay student loans.

By fund-raising through older graduates, the companies, SoFi and CommonBond, are offering high-performing students at top-tier graduate programs who face rising interest rates on student loans the opportunity to refinance.

With underemployment common among recent grads, it’s easy to develop a bad credit history that prevents students from finding a favorable interest rate on private loans. While government loans usually offer lower interest rates, the figure for subsidized Stafford loans just doubled to 6.8%.

How the Loans Work

Under these programs, alums funnel money into a fund for younger students, and receive returns in the form of student loan payments. The fund is supplemented with capital from banks and hedge funds, which allows SoFi and CommonBond to offer below-market interest rates to students.

The two companies also provide networking and mentoring services through their programs. By seeking out the best and the brightest, the companies are able to guarantee returns to investors.

SoFi, which started in 2011, predicts that it will refinance $500 million in student loans from more than 7,000 borrowers this year.

CommonBond, founded last year, is forecasting a $100 million payout of more than 1,500 student loans for 2013. The company, which currently offers its services only to students pursuing MBAs, will expand its coverage to those seeking other graduate degrees and to undergraduates next year.

Both companies have reported that no students have defaulted on their loans … so far.

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