Niche crowdfunding platforms are using increasingly popular peer-to-peer lending to refinance student debt, and pair people who want income with graduates looking for credit.
US-based Social Finance, a marketplace lender, announced this month that it had closed a $151 million securitization of refinanced student loans for graduate borrowers.
Social Finance (SoFi) mainly lends to business school students, as well as students from law and medical schools.
Their most popular business schools are elite US institutions including Harvard, NYU Stern and the Kellogg School of Management. The average US MBA leaves business school with around $40,000 of debt, according to a report from the New America Foundation with data from the U.S Department of Education. However at elite schools debt rates are much higher – Harvard’s 2013 MBA class averaged nearly $74,000.
Average debt is up at many of the top-ranked American business schools. Others do not disclosure average debt figures.
But with high average Harvard MBA salaries of about $176,000, the graduates have high FICO credit scores, averaging 776.
Access to debt refinancing may be limited to a select group of MBAs. SoFi and hedge fund Eaglewood Capital are the only two US companies which package these kinds of loans into bonds.
The big ratings agencies have steered clear of the bonds, further limiting their reach, but there are signs that they are warming to the idea.
Standard & Poor’s rated the senior notes "A", the first such rating for a marketplace lender, while Canadian firm DBRS has an investment-grade rating on bonds which SoFi put together last year.
Analysts expect this to increase the amount of student debt bonds available to investors.
For business school students, it provides a way to pay for increasingly costly tuition fees, which are higher in the US because of longer courses.
Six of the top-ten ranked business schools are hiking tuition fees for the class of 2016, building on a 37% rise in the degree’s sticker price over the past six years, according to Bloomberg data. The average increase announced this year was 4%.
Nearly 14% of this year’s business school applicants intend to take out a student loan to fund their degrees, according to a recent survey by QS, while only 4% intend to use family savings.
In June, SoFi funded over $100 million in student loan refinancing – a monthly record, but it is a smaller slice of the $730 million it has dished out in total loans, including mortgages, to its 8,000 borrowers. However this is increasing.
SoFi has been issuing more bonds for more money each year. Its first securitization in the category with $151 million in senior notes was backed by $168 million in collateral. The $251 million July 2014 transaction is backed by $278 million in collateral, with over 30 top-tier institutional investors participating, the company said.
“This securitization allows us to significantly lower the cost of borrowing for our members,” said Nino Fanlo, SoFi’s chief financial officer. “Because the rating was based on the calibre of SoFi’s customers and approach to consumer underwriting, it allows us to expand our school footprint.”
However the company is expected to strengthen its personal loans and mortgages, rather than seek out non-elite schools whose MBA students may have more difficulty paying off tuition fees.