CommonBond, a new kind of student loan
Student loan debt is in a need of makeover. CommonBond brings technology to the student loan market to offer lower rates.
$1.3 Trillion
That burden is the nation’s total student loan debt, much of which comes from federal government, and it’s becoming a big problem. National student loan debt has risen 325% since 2004. While there are many reasons for this staggering number and many potential solutions to addressing it, CommonBond is one company trying to reform student loans in the US. CommonBond originates and refinances loans at lower interest rates than the federal government or private banks can offer, and save the borrower $14,000 on average. By the end of 2015, CommonBond will have originated $500 million in loans, and plans to originate $1.5 billion by the end of 2016.
The primary goal of CommonBond is to bring lower rates to creditworthy borrowers than traditional institutions have provided, and make the whole process of getting a lone much more efficient. It is a marketplace lender, a non-banking financial institution that serves a two-side marketing of borrowers and investors. To generate revenue, CommonBond sells the loans it originates to investors at a premium. This company is a “winner” because its operational model allows the company to successfully disrupt the landscape of traditional financial institutions and lower the cost of education for many borrowers.
Technology
Traditional finance institutions haven’t been able to close the gap on customer service and low rate offerings, and technology is one reason. CommonBond’s online platform significantly simplifies and speeds up the process of getting a student loan, making payments. The process is much more straight-forward and transparent than on other private lending sites, and being an online-only business allows the company to keep costs low and pass that savings on to their borrowers.
Customer Service
As someone who’s spent countless hours on hold with various customer service departments, the ability to chat real-time with someone knowledgeable about my loan is invaluable. CommonBond’s Net Promoter Score, a measure of customer satisfaction and loyalty, has been much higher than traditional financial institutions, and is one of the primary ways it seeks to differentiate itself from the rest of the market. Also, CommonBond recently expanded from offering loans to just MBAs to undergraduates as well, and plans to further extend their business model into areas like home mortgages. They understand that a commitment to excellent customer service – founder David Klein describes being “maniacal” about customer service – creates a positive relationship with the borrower that will keep them as a long-term customer.
Smarter Lending
The federal government does not consider credit history when handing out loans, which is one reason why every borrower gets the same rate. By contrast, CommonBond uses an algorithm to evaluate and approve more clients at lower rates. Some analysts are concerned that CommonBond will eventually have to expand to offering loans to less credit-worthy borrowers to continue their staggering growth, but if they can better spread risk across borrowers, the overall impact to student loan debt should be positive.
Social Promise
The company was founded with a social promise. For every loan it originates, the company funds the education of a student in a developing country through a partnership with Pencils of Promise. Annual educational costs are just $100 in Guatemala, Ghana, and Laos (the countries Pencils of Promise most works with), but the support makes a huge difference in the lives of those students.
Henry, Zoe. “CommonBond Gets $35 Million Funding, Wants to Cut Woes Behind Student Loan Refinancing.” Inc. September 8, 2105. http://www.inc.com/zoe-henry/lending-startup-commonbond-raises-35-million-from-august-ventures.html
McCann, David. “A New Kind of Enterprise Lures Banker to CFO Post.” CFO.com. July 29, 2015. http://ww2.cfo.com/people/2015/07/a-new-kind-of-enterprise-lures-investment-banker-to-cfo-post-commonbond/
Newlands, Murray. “Why CommonBond Will Make You Forget Everything You Thought You Knew About Student Loans.” Forbes. November 4, 2015. http://www.forbes.com/sites/mnewlands/2015/11/04/why-commonbond-will-make-you-forget-everything-you-thought-you-knew-about-student-loans/
Great company choice, Heidi! As a holder of several student loans, I’m well aware of the pain points of this industry, particularly pertaining to federal-funded loans. It appears that CommonBond has brought together some clear benefits from the traditional loan financing industry and applied them in a user-friendly and cost-effective method to student lending. I wonder if their success will be hindered by other entrants to this market. It almost seems like low-hanging fruit as federal student loan rates (especially for graduate students) are significantly higher than market lending rates. I’m also curious about the share breakdown of the value they’re creating. Their social mission/core leads me wanting to believe they provide the most value to their student clients, but as financial services grow it’s easy for profits to swing mostly toward their pockets in the end. It will be interesting to watch them evolve.
This is a great example of what happens when traditional product offerings are unbundled. When you look at CommondBond and their competitors, robo-advisers (e.g., Betterment), Ally Bank (just savings, checking, CDs), RobinHood (zero fee brokerage), Stripe (payment processing), they’re exposing large banks as poorly cobbled together financial services. Using any one of these services from a conventional bank tends to be paperwork-intensive with poor customer service. Each of the new unbundled offerings is able to focus on making one product amazing to use, whereas each product at a large bank has to fit into the context of a larger business and operating model and therefore is much more likely to be misaligned.
I wonder if there’s an opportunity for CommonBond to seek a different kind of “investor” of this two-sided market – scholarship donors. Those who want to create a scholarship (perhaps in their name) can fund part or all of a student’s education through CommonBond. The students will probably have to answer a couple of extra questions, which may be useful data for the company. In addition, having access to exclusive scholarships should give students extra incentive to get their loans through the service. If a student can graduate without significant debt, then she can consider giving back later too. This creates good karma in general, but also generates good word of mouth. Thanks for sharing, Heidi!
Interesting post! I wonder if CommonBond adjusts its rates based on student performance. Intuitively, high GPAs and SAT scores as well as strong internships and extracurricular activities are all correlated with future economic success, which would reduce default risk for CommonBond. While there may be questionable applications of such a policy as well (i.e. linking interest rates to choice of major, and thereby incentivizing students to pick high income majors like business and engineering), it would certainly reward students who excel in the classroom.