SoFi is Connecting Student and Graduate Borrowers with Alumni Investors

The rising cost of tuition, combined with decreasing earnings, is a big reason why people are concerned about student loans. And it should be. With student debt levels and delinquencies at all time highs, it has become essential for prospective and current college students to determine whether their degrees are worth the cost of tuition and amount of debt they will need incur.

College Tuition vs Earnings for College Graduates

College Tuition vs Earnings for College Graduates

This visualization of trends in tuition and wage growth is certainly troubling, and it is clear this is not sustainable. But how did we get into this position and what can we do to make it better?

The Problem

The federal loan programs were developed with an important mission – to ensure students could afford a college education regardless of the cost. While these programs have successfully enabled many students to achieve their goals for higher education, the unintended consequences of the policies are largely responsible for the student loan crisis and rising cost of tuition.

By allowing students to borrow up to the cost of attending school, the government perpetuates tuition inflation. Without a cap on tuition, universities have less incentive to keep costs down and avoid expensive capital projects. Schools are compelled to spend on state of the art fitness facilities and all-you-can-eat sushi bars to attract the best students and the government is tuition-price-blind when lending money for college.

Keeping tuition costs down is also a challenge because universities are not held accountable for producing successful graduates. Tuition prices are rising as a result of university costs increasing – not because the value of the education is improving. The price of a degree is not necessarily connected to the outcomes it produces – graduation rates, jobs, future earnings. In the current system, schools are not at risk of losing money if students don’t get well-paying jobs – that falls on the government and the taxpayer.

A Private Sector Solution

The private sector is perfectly positioned to enter the student loan space and correct some of the problems of this inefficient marketplace. Private lenders could solve the incentive problem of universities and hold schools accountable for the success of their graduates.

SoFi’s model is one example – a community-based lending model in which alumni invest in a loan fund for current students and recent graduates. Successful graduates willing to invest in their alma mater is a clear indicator that tuition is priced appropriately and that education is a good investment for borrowers and lenders.

A focus on financial education is also an essential component for reigning in runaway tuition costs. All constituents must be involved in this process – from financial aid offices to parents, from private lenders to the government – students should have the information to decide for themselves whether a degree -and the loans they’d take out to fund it – are worth it to them. SoFi has created a Know Before You Owe Calculator to help students understand how their choice of school, major, and city of residence impact their ability to repay their loans.

If the cost of tuition continues to rise as wages decrease, many students will pay more for school than they can ever expect to recoup – a reality that will have significant consequence for individuals and taxpayers as a whole. The private sector must take on more of the student loan market to fix the inefficiencies or the U.S. economy will continue to suffer.

This blog was provided by Dan Macklin, Co-Founder & VP Alumni Relationships at SoFi. Dan Macklin was a guest on College Smart Radio “Tackling the Runaway Costs of College” on March 30th, 2013.  Listen to this broadcast on YouTube here.

Photo Credit: Business Insider

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