Social Finance Comes From China To Assist US College Students?
Social media has continued to evolve over the course of the last decade. From social networking to social gaming to social commerce, the common belief is that social will continue to bleed into other categories. Social Finance is SM's latest iteration and there are a number of exciting start-ups trying to attack the trillion-dollar student debt problem in the U.S.
Currently debated in the presidential campaigns, both Democrats and Republican differ markedly over solutions. Mitt Romney's position based on scaling back the size of the government has been criticized sharply by both the right and the left. Obama has run campaign ads calling him out for lecturing students that should "borrow money from your parents" to attend school.
Obama favors a student loan reform measure called "Pay As You Earn" which would cap monthly federal student loan repayments at 10 percent of monthly discretionary income in addition to adjusting benefits based on geographical regions of the country.
However while the election is still months away, with changes that would not take effect until 2013 or later. And with a loan debt problem escalating to over a trillion dollars, students are searching for other creative channels to obtain funding. Ironically those resources are coming from a very unlikely source. . . namely China.
In 2011, a group of Stanford business school grads decided to start "Social Finance" (aka "SoFi") with the goal of transforming the student loan industry. Others such networks such as LoanLook, SimpleTuition, Tuition.io have followed, but none as aggressively social as SoFi.
Then in September, Renren Inc. which operates the leading real name social networking platform in China decided to invest $49 million in this San Francisco-based private enterprise.
"The investment in SoFi represents our continued efforts in leveraging our social and demographic expertise. As a pioneering company building social infrastructure over the Internet, we have closely observed and participated in the transformation of other online vertical businesses that leverage social to produce, market, distribute and scale," said Joseph Chen, Chairman and Chief Executive Officer of Renren.
"With gaming and e-commerce socialized, as exemplified by social gaming and social commerce, we expect the next wave will be finance and education; SoFi lies at the nexus of that revolution. As the largest real-name social network platform in China, we constantly explore for synergies of how social can successfully transform industries and help push beyond traditional boundaries."
SoFi's new approach to the student loan lending paradigm is to switch the lending institutions from banks and the government to previous alumnus of a particular school. With over 78 colleges currently involved in the program, to date the company has generated more than $60 million in loan applications and is on track to commit more than $200 million in 2012.
Called "Double Bottom Line Investing," alumni have a unique opportunity to participate in a SoFi Community that is custom built around your alma mater. Alumni invest in a pool of loans for students (or recent alumni) from each school. Alumni provide immediate value for borrowers by giving a lower fixed loan rate, while at the same time receiving a return on their investment. In addition, alumni have the option to invest through a tax-deferred IRA or 401K account. SoFi calls this opportunity a "double bottom line" return, in that Alumni gain both a social and financial benefit.
According to a TechCrunch post, "this is where the interest from Renren (not your average lending investor) enters the picture." Chen notes that the company will closely participate in SoFi's new product offerings.
Interesting value proposition for both companies, but one might ask why Renren? How did China's leading social network come to this opportunity before one of the US's homegrown networks, such as Facebook. Granted, the US has reached out to China many times over to help finance a multitude of projects, but with SoFi based in the Silicon Valley, might it not chosen a neighbor instead of a foreign enterprise?
In this financial transaction, Renren stands to earn a substantial return on its investment which could only help improve its financial status and its stock share price that is currently only trading around $3. With Facebook in dire straits regarding its dismal IPO debut, perhaps Zuckerberg might take the lead from its Chinese competition and join in SoFi's next round of funding. This is just the type of investment that might appease Facebook's investors who are thinking twice about continuing to hold on to a stock that's lost 50% of its value in just a matter of months. Your thoughts readers?