CommonBond, has recently announced that it will disburse $2.5 million in student loans at Wharton, benefiting as many as 50 students. What makes this significant is that the loans are funded by Wharton alumni itself. CommonBond is a startup founded by Wharton Alumni. They oversee the disbursal process. At the heart of CommonBond's effort is a philanthropic quest - a positive social change. A case in point is that for every fully-funded degree, the company will sponsor a child's education, for a year in partnership with the African School for Excellence.
The news is a boost to the nascent alumni-sourced loan industry, which seeks to ease the difficulties faced by MBA students looking for loans. Students do not have to put up with the intense scrutiny and paperwork, which they must go through otherwise. And even more significantly, the interest rates are just 6.24%, lower than the lowest Federal loan rate of 6.8%. Private loan rates go even higher, averaging around 12%. Alumni who contribute to the loan pools get returns of above 4.25% - profits with a cause attached. What's more, the risk factors are very low. The 10-year cumulative loss rate estimated for the Wharton loan pool is around 0.70%.
Students have a grace period of 6 months after graduation before they need to start repayments. There also is an economic hardship forbearance period, when students can postpone making payments due to financial hardship. The only additional charge is a 2% origination fee which is added to the loan balance, and compares favorably to the Federal Direct PLUS loan's 4%. The repayment period is 10.5 years after graduation, in 120 installments. The loan amount can be the entire cost of attendance, which at Wharton was $87,764 for the class of 2013 and $93,000 for the class of 2014. Repayment can start earlier if the students choose so, and there is no prepayment penalty.
CommonBond's growth so far has been exponential. The company was founded in November 2011, and a year later, $3.5 million has been raised, including $1 million in seed money. It also reflects the high potential for this industry. Market leader SoFi has made $130 million in loans in 2012, while UK's Prodigy Finance, has disbursed $28 million. CommonBond plans to hit $50 to $100 million in loans in 2013, at 20 schools. They will mostly be at selective, top tier schools like Harvard, Stanford, Booth, Haas, and Stern.
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