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New Student Loan Method Asks Alumni to Lend to Students

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With over $1 trillion in student debt, Stanford graduates are looking to create a new lending option for student borrowers.

CREDIT: istockphoto

Social Finance Inc. (SoFi), a new innovative student loan model, may expand to schools across the country after a successful first year at Stanford University.

As an attempt to solve the predatory student lending problem that has saddled student borrowers with more than $1 trillion dollars in collective debt, SoFi aims to recast the role of the “lender” to a more invested stakeholder: the alumni.

Mike Cagney, SoFi’s chairman and chief executive, told the New York Times that “by linking students with alumni, who had an interest in seeing the school’s graduates, and their own investments, do well, students would be more successful and less likely to default on their loans.”

Loans for 2012-2013 through SoFi are fixed at 6.24 percent and will drop to 5.99 percent once the borrower agrees to an automatic payment program—3 to 4 percent lower than many private loans.

The loans are coordinated through the school’s financial aid office and donors are not included in the decision of who receives the money.  However, SoFi does envision donors being “mentors to the students, interacting with them online to advise and encourage them in their education and in their careers.”

SoFi says it’s initially focusing on schools with low default rates and high graduation rates in order to keep the program stable while it looks for positive results during its first few years.

While SoFi loans offer fewer protections for students who are unable to pay federal loans, SoFi offers a financial incentive to universities to keep a lookout for ballooning student debt at their school.

“If they’re graduating students with untenable debt burdens,” Cagney told Marketplace Radio, “it’s going to negatively impact their alumni community directly through the financial return.”

Leor Reef is a journalism intern with Campus Progress.

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