Student loan refinancing juggernaut SoFi announced Wednesday it has raised a whopping $1 billion in its latest round of fundraising.
It’s a milestone for the San Francisco startup that nearly triples its haul from three previous funding rounds which altogether netted $365 million. CEO Mike Cagney says the influx of capital will help the company keep pace with its rapid rate of growth. Founded in 2011 by a group of Stanford Business School alumni, SoFi has funded more than $4 billion in loans and aims to top $6 billion by year end. Cagney says the company plans to grow its 400-member staff to 500.
In just a few years SoFi has led a wave of new startups looking to fill a void in the lending market for younger borrowers looking to refinance high-interest student loan debt. Their success is proof positive that consumers are hungry for alternatives. As it stands, federal student loan borrowers can consolidate their loans but can’t refinance to lower interest rates available today as one would with a mortgage. Meanwhile, companies like SoFi, CommonBond, LendKey and Earnest, and Darien Rowayton Bank, have stepped in and flourished by targeting a specific group of student loan borrowers: young, affluent workers with great credit who graduated from schools with low loan default rates.
For borrowers with graduate school loans, both SoFi and CommonBond (which is on track to originate $500 million in student loans by year’s end) work with borrowers who have earned a degree in a specific field like medicine, accounting, law, engineering, or finance. And that degree must be from a school on a list the companies have preselected. Compared to traditional lenders, these newer companies offer lower rates (fixed-rate loans at SoFi, CommonBond and DRB start as low as 3.5% compared to 6% charged by some credit unions).
These lenders have thrived on a customer base eager for refinancing alternatives. And with increased competition (there are well over a dozen companies, including banks and credit unions, in the space now), consumers can expect to see a shift in types of products being offered. SoFi began peddling consumer loans and mortgages last year, and predicts these loans will outpace its student loan business by December. In addition to student loan refinancing, LendKey offers home improvement loans and Earnest offers consumer loans. It’s likely Commonbond will soon be in the mortgage and consumer loan space as well.
By Mandi Woodruff