Ask anyone with a student loan about their experience, and it’s likely that their explanation will include a few expletives. America has roughly $1.4 trillion in student loan debt, and 11.2% of those loans are 90+ days delinquent or in default. This has created a cascading effect across the economy, as exemplified by the sluggish housing market among millennials (71% say their debt delays homeownership). The combination of burdensome debt with stagnant wages (from 1973 to 2015, productivity rose 73.4% while hourly compensation only went up by 11.1%) has produced a generation wracked with stress over this financial anvil hanging around its neck.
CommonBond is a relatively new company, but they have already made inroads in this space by simply pledging to be different than the monoliths holding dominion over our checkbooks. When the idea first came to market, it caught the attention of outlets like Forbes and Bloomberg, and it has steadily built itself into a more established player in this space. On Tuesday, they announced that they are expanding their offerings, and their CEO, David Klein, spoke with Paste about their new venture, how their focus on customer service gives them a competitive advantage, and his vision for the future.
This interview has been edited for clarity and length.
So what is CommonBond?
David Klein: More than 70% of millennials have student debt, over 43 million people in this country have student debt, and obviously going to get that college degree remains one of the elusive early life milestones, and that comes with a hefty price tag from colleges and universities. What we exist for is to reduce that cost—reduce that burden—as much as we can. Our approach to reducing that cost of receiving that education is reducing the financing cost of it. We got our start three and a half years ago, we’ve since done a billion in loans funded. The way we got our start is very personal to me.
I went back to business school and I needed to pay my way 100% with student loans, and I realized that the student loan market—particularly for those needing to finance their education while in school—was particularly broken. Rates were high. The process was complex. Service was really bad. And that really hasn’t changed much in student loans. And so we set out to change that.
We first got our start with the refinance product, that is to say, if you graduated from school with student loans, we’d be able to refinance those into a lower rate by better leveraging technology. We’re going out to market and now launching a broad in-school product—very similar to my own experience, to the students currently in school—giving them an opportunity to get into a student loan that was well-priced from a company that has modern technology that could speed up and simplify the process, and ultimately provide much better customer service than any other incumbents in the space. And so that’s what this announcement is all about, being the first financial technology company to enter into school student loans.
Can you expand a bit on what you mean by better customer service?
Klein: A little background as to why the company has customer service at its core, when I graduated college I ended up working at McKinsey (a management consulting company) for a while and I wound up advising financial services clients around the idea of “this notion of customer service, don’t just think of it as a cost center. You can think about this as a customer loyalty generator.” And the companies with very strong customer loyalty are the ones that are the strongest companies over time. And so I spent a lot of time working with financial services clients who generally are pretty reticent to invest in customer service. I remember thinking at that time, when it’s my turn to start my own company—because I always knew I was going to start one, I come from a family of entrepreneurs, it was just a matter of time—I realized that customer service is critically important. And the big guys are just missing that. They just completely miss it.
But the data is there to support that the great and lasting companies do great customer service. And so that was something I took with me, and when it was time to start my own company, we decided to have it at its very core. Of our ten company values, our very first one is all about our customer. As I think about delivering on the mission, I think about the Stevie Awards, which are a relatively strong award system where they award companies for doing a bang-up job on various things in the industry, and so CommonBond was named in 2016 to be the people’s choice for customer service. You don’t typically get that from a student loan company, let alone a finance company more broadly, but it’s something we invest heavily in.
Another thing I can talk about is our CommonBridge program. This is a program where if customers find themselves in economic hardship, we are there to help them. So we will postpone their payments for three months at a time for as many as 12 consecutive months if they’ve lost their job until they get back on their feet. And we go the extra mile to help them get back on their feet, so we will actually get on the phone with our borrower, we will have a conversation with them, we will understand their background, we will understand where they want to go—what industry, what companies—and we will tap either our company network or our borrower network to connect them to their next job or their next interview opportunity. Our team has done a really nice job of managing people out of this period and helping them land jobs on average within three months. We just do things that are a bit different or a lot different from what you’d expect from a finance company.
As far as how you’re able to finance these loans, are you a middleman negotiating them down between the loan originator and the borrower, or how does that work?
Klein: We’re actually the loan originator. So what we do is we secure capital across the capital markets and investor set, and then we underwrite using hundreds and hundreds of different data variables to be able to score and price and approve those who apply with us. Our rates are generally lower than what you can get elsewhere. That’s in part because of how we underwrite and the data we use. That’s in part because of the capital that we’re securing, and that’s in part because we heavily leverage technology as a business to reduce our operating costs relative to traditional incumbents so we can pass those savings on to the customer.
That’s interesting because it’s such a monolithic space. I’m lucky enough to not have any student loans, but just based off what I know from conversations with my friends who do have them, it’s strange thinking that there’s more than just a handful of loan originators out there.
Klein: Yeah, I mean it’s one of those things where there are a few really big loan originators, but having had personal experience myself with them when I went back to business school and just knowing the space well, there’s just so much room for improvement across rates, across products, across technology, across customer service that we thought we had a real opportunity to come in here and provide a product that a lot of people wanted. And one of the things that gave us that confidence was that when we first launched three and a half years ago, we ended up launching at 20 MBA programs and in-school programs. So while we were basically in every college and university on the refinance side of our business, on the in-school side of our business we’ve been in a very select number of programs—just anywhere from 20 to 30 over our time.
But what we found was that at Yale Business School, we became the number one private lender. Above Sallie Mae. Above Wells Fargo. Above Citizens. At Tuck Business School—same thing. At Columbia Business School—same thing. At Chicago and Wharton—very high penetration. So we thought “you know what, we’re relatively small next to the big guys, but we’re the number one private lender at a lot of these schools. This notion of a better product, that’s better priced, that has better leverage and technology and provides great service, that’s real. And people in market want it. So let’s bring it to more people, so we decided to broaden out our impact with the in-school product to virtually every college and university across the country, not just 20 to 30 MBA programs.”
What’s your sense for how big this could get?
Klein: Here’s what we know: we know that every year, more than one hundred billion dollars in student loans comes on the market. If you just consider for a second that we’re a fintech company; we provide better products at a generally better price; we better leverage technology and we actually provide customer service in a way that nobody else does, is it reasonable to believe that we can get one percent of the market? Two percent of the market? Three percent of the market?
We certainly think so—over time no doubt. And so you’re talking about multiple billions of dollars of a market that’s quite large.
Is there anything else that I may have missed in my questions?
Klein: I don’t think so, the only thing I would just add that I think might be interesting to your readers and is certainly unique to our model as the first in finance to have this, and why I think in part we were able to become the number one private lender on some of these campuses, is that for every degree we fund, or for every person we lend to, we actually fund the education of a student in need. So we actually brought the one-to-one model pioneered by Toms Shoes, made famous by Warby Parker, we have brought that to finance.
We’ve had it from day one. We’ve partnered with Pencils of Promise, which is an education non-profit based here in New York with a chain of three hundred schools globally, and funded a significant amount of education at Pencils of Promise schools. But it’s one of these cool concepts where students who need to pay for their education not only get to get this great loan from us, but they get to pay it forward. So there’s this fun, impact-driven twist to the model that I think has resonated with a number of folks, particularly on the in-school side. Harvard Business School called us the “Warby Parker of student loans.”
Yeah I bet that facet of the business would resonate with some of our readership. if there’s one thing I learned from the popularity of our article on the Consumer Financial Protection Bureau suing Navient, it’s that there is a whole lot of anger at student loan originators, so simply doing something like that one-for-one deal can give you a bunch of good press compared to some of your competitors.
Klein: Yeah we did it at the start because it’s something we believe was the right thing to do. I’m personally very much an advocate of business being a source for good and so what we realized along the way is not only would it be the right thing to do, but to your point, it can do well to spread awareness for who you are. So we feel fortunate to be able to have a social promise, we actually want more people, more companies to have a social promise—especially in finance. While you would probably expect me to say that it’s good that we’re the only company in finance to do this, I’ll be honest, I wish many more companies in finance had a one-for-one model. I think we’d be in a lot better shape, but alas, here we are.
Jacob Weindling is Paste’s business and media editor, as well as a staff writer for politics. Follow him on Twitter at @Jakeweindling.