N.Y.-based CommonBond has a simple goal: To reduce the headaches and fees associated with refinancing student loans.
Today, the three-year-old company announced that it raised $35 million in a Series B funding round led by August Capital, with investment from Nyca Partners. Existing investors TriBeCa Venture Partners, Social Capital, and Tom Glocer also chipped in. CommonBond didn't disclose its current valuation or its total amount of funding. Previously, in 2013, the company raised $100 million in equity and debt, as part of a Series A round, which was led by Tribeca Venture Partners and included former Citigroup CEO Vikram S. Pandit as an investor.
CommonBond wants to make loans more affordable to a larger (if more elite) slice of the market. Starting at a less than two percent annual percentage rate (APR), with fixed rates peaking at around 6 percent, young professionals in heaps of student debt can refinance up to $220,000 worth of loans -- provided they make a salient -- often triple figure -- salary, and have an approved credit score. An average borrower at CommonBond has a FICO rating of 770. CommonBond estimates that borrowers save more than $14,000 by using the service.
David Klein, CommonBond's 35-year-old founder and CEO, sees a broader theme taking place in the market. "Whether you want to call it fintech or marketplace lending, it's really moving from the margins to the mainstream," he says.
Certainly, the company is attempting to solve an important problem: Student debt in the U.S. currently weighs in at $1.3 trillion.
With the most recent financing, Klein plans to roughly double his current team of 35 employees, which more than doubled since the beginning of 2015, when there were only 15 employees. The company will also continue to build out its data-intensive algorithm for determining client risk.
"In just two years at national scale and with a lean team, CommonBond has established itself as a leader in marketplace lending," said Tripp Jones, a partner at August Capital, in the press release announcing the funding. "CommonBond's growth has been impressive, and we look forward to supporting the company as it continues to scale."
At large, the financial technology sector, which encompasses student lending, payments processing, and investment services (also called "robo-advisers"), is poised to disrupt the way traditional financial institutions do business. Upstarts like CommonBond operate exclusively online, and claim to be more data savvy than private banks. An algorithm built out from scratch allows CommonBond to evaluate, and thus approve, more clients at lower interest rates.
"What gets customers to walk through the door has to do with tech, insofar as tech enables the simplicity and speed of the [refinancing] process," Klein says.
In return, CommonBond takes a small fee, as well as premiums from select investors on the platform. Significantly, Klein notes that the technology allows CommonBond to consider risk on factors beyond your credit score: Things like employment history and savings are also taken into account.
To date, CommonBond has refinanced over $100 million worth of student loans, and projects surpassing $1 billion by the ended of 2016. For reference, San Francisco based SoFi (also called Social Finance Inc.,) a competing lending firm, has refinanced more than $3 billion in student loans to date.
Klein himself is no stranger to student debt. He got the idea to start the company when he was unable to secure loans at payable interest rates from traditional banks, in order to attend graduate school at the University of Pennsylvania (Wharton), where his firm's pilot program would ultimately launch. At the time, Klein was already in his thirties, making a sizable salary as the Director at American Express.
Since CommonBond's founding in 2012, it has expanded to serve graduates of more than 200 graduate schools. By the end of this year, it projects serving every graduate program in the country -- that's more than 2,000 schools.
Still, analysts believe that companies like CommonBond will ultimately have to expand to a larger and less wealthy client base. "The strategy of cherry picking high credit quality borrowers is a good one but a short term one," notes Craig Focardi, a principal with the financial research firm CEB TowerGroup. "Any startup or traditional bank or credit union can do the same thing, and these borrowers tend to be more savvy and need the least help."
At present, CommonBond is not cash flow positive, but Klein expects that it will turn profitable within the next two years. And thus far, no borrower has ever defaulted on a loan.
"We've proven that this is a platform where underwriting upfront is incredibly strong. We've earned the right to expand further. We'll continue to methodically grow, making underwriting and modeling more sophisticated, so we can provide our service to more people without sacrificing credit quality," Klein says.