Sept. 4 (Bloomberg) -- CommonBond Inc., an online provider of student loans, raised more than $100 million from investors including former Citigroup Inc. Chief Executive Officer Vikram Pandit to help more graduates reduce their debt loads.
Tribeca Venture Partners and Social+Capital Partnership led the financing, which consists of equity and debt, CommonBond CEO David Klein said in an interview. The startup is going after students and graduates from 20 business schools by offering lower-cost loans than those from private lenders or the government.
“Financial institutions, which are supposed to appropriately price risk, are charging outlandishly high rates to credit-worthy borrowers,” said Klein, 33, who co-founded the New York-based company in 2011.
CommonBond and Social Finance Inc., or SoFi, are among a growing crop of startups trying to displace banks and traditional loan providers by providing cheaper rates for borrowers and letting individuals serve as lenders and investors. LendingClub Corp. and Prosper Marketplace Inc. pioneered the model -- known as peer-to-peer lending -- with a focus on consolidating high-priced credit-card debt into cheaper three-year and five-year loans available online.
With the financing, CommonBond’s 10-person team will be able to issue loans to 1,500 borrowers over the next six months to a year, Klein said. He declined to comment on the company’s valuation. CommonBond is smaller than San Francisco-based SoFi, which may originate as much as $1 billion in loans this year to graduates from about 100 schools.
Both companies raise funds from alumni of each university they work with, turning the individual lenders into investors. Klein says investors can expect annual returns of 4 percent to 6 percent, a rate that exceeds yields on 10-year Treasuries, savings accounts or certificates of deposit.
CommonBond promotes annualized percentage rates for borrowers on its site for 10-year loans of 6.4 percent, compared with 6.89 percent for federal PLUS loans.
President Barack Obama signed legislation last month linking student-loan interest rates to financial markets, setting rates for Stafford loans for graduate students at 5.41 percent for the 2013-2014 academic year and PLUS loans at 6.41 percent.
Enactment of the new law, designed to provide certainty to students who rely on government loans, ends two straight years of political skirmishing in Congress over the rate for subsidized Stafford loans.
Even with the more competitive government rates, Klein said his business isn’t threatened because those loans are only available for existing students and not graduates. That means the change doesn’t address 90 percent of student debt outstanding, he said.
“It’s that part of the market where we have the opportunity to provide a superior product,” he said.
CommonBond’s financing also included participation from former Thomson Reuters Corp. CEO Thomas Glocer and ex-Barclays Plc executive Tom Kalaris. In November, the company raised $3.5 million, with $1 million from a private investor and the rest from alumni.
CommonBond makes money by taking an origination and servicing fee on every loan. While Klein declined to disclose the size of the fee, LendingClub generates revenue of about 5 percent on its loans.
Peer-to-peer lending “opens up whole areas of finance that were no-go areas before,” said Glocer, who is also an investor in LendingClub. “For the number of people with capital that are getting nothing in traditional savings or time deposits, it’s created a really interesting asset class.”
The schools CommonBond serves include Klein’s alma mater of the University of Pennsylvania’s Wharton School, as well as Harvard Business School, Stanford Graduate School of Business and the University of California at Berkeley’s Haas School of Business.
The maximum loan available for graduate refinancing is $220,000, and for current students it’s the cost of attendance.
To contact the reporter on this story: Ari Levy in San Francisco at firstname.lastname@example.org
To contact the editor responsible for this story: Pui-Wing Tam at email@example.com