Pandit-Backed CommonBond to Provide Loans for College Students

  • Company to offer financing for current undergraduate students
  • New product to attract younger customers but comes with risks

CommonBond Inc., the student-loan venture backed by former Citigroup Inc. head Vikram Pandit, will begin lending to current college students as it seeks to grab a slice of a growing market.

The New York-based company, which has raised roughly $80 million in equity, announced that it’s launching a program to help graduate and undergraduate students pay for school. The new product differs from CommonBond’s existing offering, which sees it focused on lending to current MBA students or refinancing old student loans at lower rates.

The expansion puts CommonBond in competition with more traditional banks that have been providing private loans for increasingly pricey college educations, as well as dozens of startups trying to make borrowing more efficient through the use of new technology. The move also comes after total U.S. student debt hit a record $1.31 trillion in 2016, with growth in outstanding loans for higher education far outstripping increases in every other type of household debt since 2009.

“This allows us to go to virtually every college and university for in-school financing,” CommonBond co-founder and Chief Executive Officer David Klein said in an interview. “With the price of higher education increasing every year, it’s really important that students, and their parents, get the resources that they need to make informed financial choices.”

New Hazards

The new student loans, which exclude for-profit colleges and online-only universities, will have variable rates that start at 2.87 percent and fixed rates starting at 5.50 percent, CommonBond said. They will also come with repayment options that include deferment, fixed monthly payment, interest-only payment and full monthly payment.

Providing loans to undergraduate students should help the company establish relationships with customers earlier than the firm would have otherwise, but there are also hazards in lending to younger borrowers. 

Risks include shorter credit histories, more uncertainty regarding future income and the chance that students don’t graduate at all. The U.S. Department of Education, for instance, estimates that students who borrow for college but never graduate are three times more likely to default.

“The team has been very thoughtful about thinking through the risks associated with going into the in-school market and making sure that the product, pricing and marketing approach has been done in a way to minimize that risk,” Brian Hirsch, a CommonBond investor and co-founder of Tribeca Venture Partners, said in an interview. “Having parents co-sign is an example of a safeguard in this space,” he added.

Since his ousting as Citi CEO back in 2012, Pandit has been helping seed new businesses looking to challenge traditional banks. In 2013, he was among investors including venture capital fund Social + Capital that plowed more than $100 million into CommonBond.

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