Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 14, 2012

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The student loan industry is in for a shakeup. While the federal government still provides the vast majority of financing for young students that does not mean that the private sector is anything to scoff at. Private lenders still account for billions in revenue (and profit) the now $1 trillion student loan industry.

The alumni of many colleges and universities, perhaps remembering their own struggles with the rising cost of college, have decided to join together in order to lend money to students in lieu of government and private loan companies. These new alumni-sourced student loan companies are fast becoming a dynamic online presence where they not only help students obtain financing for an education, but also make a decent profit for their alumni investors.

New Lenders in an Old Market

One such company is CommonBond. Previously known as FundMyMBA, CommonBond grew from a blog to a full-fledged online lender and changed its name in June of this year. In November, it secured seed funding and investment totaling $3 million. While the company is currently only providing student loans to attendees of the Wharton Business School at the University of Pennsylvania, it intends to expand to other schools.

CommonBond believes it can overtake other lenders in the industry because of “the CommonBond Family,” which is the networked body of students, professionals, and alumni that have rallied to the crowd-sourced lender since its creation in 2011.

The financing offered by CommonBond features low-cost, fixed-rate student loans. These loans are not exclusively funded by alumni. Rather, individual investors are also welcome to participate making CommonBond a form of crowdfunding.

Adding a philanthropic aspect to their operations is the stated practice of CommonBond to fund the education of one student in the developing world through the African School for Excellence for a full year for every degree they fully fund.

According to its blog, CommonBond’s two founders, David Klein and Michael Taormina, have 20 years of experience in consumer finance and capital markets between them, giving their startup a competitive edge in the world of finance.

Despite offering student loans for one of the world’s premier business schools, CommonBond isn’t alone in the emerging alumni-sourced lending business.

Competition Heats Up

Another company, SoFi, has processed $130 million worth of student loans and lent to borrowers from a whopping 79 schools. Not to be outdone by CommonBond, SoFi services first-time undergrad and MBA students. Additionally, it offers refinancing for undergrad, MBA, and law students. Surprisingly, SoFi claims to have 100 percent repayment among its active borrowers, no small feat when compared to the ongoing tales of delinquent and defaulting borrowers across the country.

Just as CommonBond rose from prestigious beginnings, SoFi was started at Stanford University’s Graduate School of Business in the Fall of 2011 where it raised and lent nearly $2 million.

SoFi’s formation began long before 2011 though.

“I began to look at lots of new business ideas in finance—but I didn’t find anything I felt had defensibility to the big banks. I was fortunate to find a team that understood social. Social unlocked our model. It allowed us to take the old community banking model-something that worked for hundreds of years before being supplanted by the mega-banks—and reintroduce it. Only rather than community being defined by geography, we defined it through social. While we’re rolling out to 40 schools this year, we want to take SoFi to every school as fast as we can,” said founder Mike Cagney on the SoFi company blog.

Alumni-sourced lending companies like SoFi and CommonBond are far from being an exclusively American innovation. Across the Atlantic Ocean in the UK, Prodigy Finance has operated as an alumni-sourced lender since 2007.

A Competitor Across the Pond

Formed by three graduates of INSEAD, one of the world’s leading business schools, Prodigy has lent over $30 million in student loans to MBA students. According to the company’s website, Prodigy has had zero defaults since its launch.

Aside from its co-founders, Prodigy’s Board is comprised of some of very experienced leaders in the world of business and finance including corporate chairmen and entrepreneurs. This may explain why Prodigy, unlike CommonBond and SoFi, lends to students on a global scale who attend learning institutions from Europe to Russia. Prodigy prides itself on its ability to fund a diverse range of students from around the world. According to the company’s website, there are 80 nationalities represented in its current portfolio.

Alumni-sourced lending is the product of an interconnected world shaped by internet communication. Alumni, experienced and successful compared to the young students at their alma maters, have innovated a new way to combine assistance and financing that benefits a new generation. While borrowers no doubt benefit off student loans with generous interest rates, perhaps the world will benefit off an increasing number of educated young scholars that are not burdened with life-long debt.