Student loans – previously a phrase that signified opportunity and excitement, but now an image of crushing debt. So much so that the New York Times labeled today’s students “a generation hobbled by the soaring cost of college.”
Enter CommonBond, a company that’s trying to make it easier for students by tailoring loans that better fit their situations.
David Klein had the idea when looking for loans to pay for his MBA from Wharton Business School. “The rates from the federal government and private bank were really high, and the process was pretty bad,” he told Opportunity Lives. “I thought there had to be a better way.”
When Klein (unexpectedly) met co-founders Mike Taormina and Jessup Shean, they began the company in November 2011.
The key component of CommonBond’s loan strategy is targeting low-risk applicants so that they can guarantee a higher level of repayments and offer lower rates. For example, the company first offered loans only to MBA students from major business schools, recognizing that they were more likely to have future high earnings and pay back their balances on time.
Soon CommonBond expanded to offer loans to students from other specific law, medical, and engineering programs. The greater probability of high earnings from graduates of these programs allows CommonBond to outcompete other loan providers – often saving students thousands of dollars in the process.
“We realized that ‘one size fits all’ interest rates just don’t make sense, especially for creditworthy borrowers who are more likely to repay their loans,” said Klein. CommonBond serves over 1,000 borrowers at the moment and is looking to grow.
One of the hardest times for the business was the initial startup period. To secure financing, Klein and the other co-founders had to talk to everybody they knew. Their goal was to convince investors to put in $100 million that they could subsequently lend out to students, a difficult task with “relatively little data, a pilot, and just a year or so of operations,” said Klein.
Somehow it worked. Investors bought into the idea, giving CommonBond a chance to start lending money and prove its effectiveness. In the first full year, Klein says the company has loaned out that $100 million, and they expect to hit $500 million in loans next year.
It won’t stop there either. There is a greater vision that goes beyond low-rate student loans. Klein says the next five years could give CommonBond the chance to develop long-term relationships with borrowers and offer more financial products and services.
Additionally, the company discusses a “Social Promise” on their website – “For every degree fully funded on the CommonBond platform, the company funds the education of a student in need abroad for a full year.”
Klein also views the company as a source of inspiration for other entrepreneurs. “CommonBond, for example, was nothing three years ago – it didn’t exist – and this year will be the year that we fund $100M of loans, saving our borrowers about $10M in aggregate student loan interest payments, over the life of their loan,” he said.
He told a story about his grandpa, an immigrant to the United States after World War II who worked hard and went from having nothing to owning a chain of local shoe stores. That opportunity is still here, Klein said. “If you’re methodical and driven, and if you’re ready to make your venture your focus, there’s certainly opportunity here to create something from nothing.”