Disrupting The MBA Loan Market | Poets and Quants

SoFi Founder Mike Cagney in his Presidio office

The idea was hatched in Mike Cagney?s ?Evaluating Entrepreneurial Opportunities? class at Stanford University?s Graduate School of Business. At the time in 2010, Cagney was a Sloan Fellow, taking a year off from an often frenzied 15-year career in finance to develop a business.

At Stanford, Cagney found himself surrounded by students who had heavily borrowed money to finance their degree. Roughly 65% of the MBAs at Stanford take out student loans, with the average debt burden of $77,600 at graduation. At some business schools, including Wharton and Columbia, the average debt is now in six figures.

MBA students, moreover, had agreed to pay interest rates that were essentially the same as those charged to students at any other school, even though GSB borrowers had a miniscule default rate of just 0.58% over the past 15 years. ?Cagney says the national default rate on student loans is about 8.8%, with an average of 15.5% for students at for-profit schools. At the University of Phoenix, for example, the default rate runs something closer to 18%.

Yet, regardless of who takes out a loan, the interest rate on a federal Stafford loan is 6.8%, while the interest on the federal Direct PLUS loans are 7.9%. Cagney saw an opportunity.

A BROKEN MARKET AND A DISRUPTIVE IDEA

?The student loan market is a trillion dollar industry that is classically broken,? says Cagney, the 41-year-old co-founder and managing partner of Cabezon Investment Group, a San Francisco-based hedge fund. ?It?s a market that definitely needed disruption.?

Cagney, who had traded derivatives for Well Fargo in the 1990s and started and sold a wealth management software company called Finaplex in the 2000s, dreamed up a disruptive alternative: SoFi (short for Social Finance) that not only took advantage of the fact that interest rates on student debt were not commensurate with risk, but of linking business school alumni who have money to invest with students and recent graduates who need to borrow money.

?Social means three things to people,? he says. ?It means social impact, social communities, like Facebook, and social media, like Twitter. What they have in common is that they are transparent, local and interactive. The banking system is inherently anti-social.? The idea: to build a student loan company ?where social meets finance.?

Cagney graduated from Stanford?s Sloan program in June of 2011 and founded SoFi in September, starting a pilot at Stanford that connected MBA alums with students. He convinced 40 Stanford alums to toss in $50,000 each and then lent $20,000 each to 100 students. The fixed loan rate was 6.24%, falling to 5.99% after graduation, if they agree to have payments automatically deducted from their accounts. There are no origination fees

That compared with a 1% origination fee on 6.8% Stafford loans and an origination fee of up to 4% on the 7.9% federal Direct PLUS loans. An MBA borrowing $100,000 and repaying the loan back over a 15-year period would save nearly $23,000 in origination fees and interest charges by using SoFi over existing government loan programs.

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Source: http://poetsandquants.com/2012/07/31/disrupting-the-mba-loan-market/

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