Student debt is poised to top $1 trillion for the first time, default rates on some programs are hovering around 10 percent, college tuition continues to rise at twice the rate of inflation, and the job market for recent graduates is dismal.
What is wrong with this picture? Plenty, of course. But Silicon Valley entrepreneur Mike Cagney says the whole system is broken.
“You have the government, the student and the school. You have a set of disinterested parties,” Cagney said in an interview.
Cagney says the government—the primary originator of student loans—knows it will ultimately be repaid, since student loans cannot be discharged in bankruptcy. The student has little choice but to borrow in order to meet rising tuition costs, and the school has very little accountability for high tuition prices or default rates.
Cagney’s solution: get alumni involved.
The former hedge fund manager, an alumnus of the Stanford Graduate School of Business, is the co-founder of SoFi, a startup that ultimately aims to make college alumni the primary source of student credit, instead of the federal government.
The company is courting alumni of 40 colleges and universities to fund loans for their students. The alumni invest in funds made up of student loan-backed securities, which Cagney says will pay a competitive and reliable return. Students, meanwhile, get a ready source of credit. Interest rates, currently 6.24 percent for student loans and 5.99 percent for refinancing existing loans, are comparable with unsubsidized federal loans as well as some private loans. But Cagney says the big difference is that SoFi creates a new level of accountability in the system.
“The students are accountable to the alumni, not only because of the transparency but because that’s their community," he said. "The alumni have an interest to help the students, and an economic interest to see them succeed, and that’s a big differentiating factor between the alumni and the government in that context. And the schools now have an implicit level of accountability. Should students default, it impacts their alumni community, which indirectly impacts their giving, but it also impacts their reputation.”
Like other student loans, the SoFi loans cannot be discharged in bankruptcy, but Cagney says they offer deferment programs that mirror federal and private loans, as well as income-based repayment programs similar to federal loans.