A new online crowdsourcing platform allows students to finance their tuition and living expenses through small, non-accredited loans based on their GPA and personal histories.
Harrison Hochman ’21 and Devin Cintron ’20 launched a pilot of Sparrow loan May 23. Sparrow does not focus on credit scores or income history in assessing student creditworthiness, the founders said. Instead, it allows students to introduce themselves through personalized profiles.
“Student credit scores and tax returns can be terrible,” Hochman said. “Not because the students spend lavishly and they live this exorbitant life, or that they cannot keep a job, but because they are young and they did not have time to recruit this kind of information. “
Each student’s profile includes information such as GPA, extracurricular participation, work experience, career goals, and personal history.
“A student is more than that FICO score, more than his cumulative average, more than the internship he has completed at Goldman Sachs,” Hochman said. “They are a story, they are a person and they deserve to be looked at through this lens.”
Sparrow also allows students to set payment terms and interest rates. Unaccredited lenders then scan completed profiles, find matches, and make loans.
“We think the profile of an unaccredited lender could be one of alumni who feel affectionate towards their next generation in their alma mater and are looking to make a social impact investment,” Hochman said.
Hochman started developing the idea last year when he participated in Birthright Excel, a Tel Aviv-based startup accelerator program. After learning about another participant’s exorbitant student loan program, Hochman set out to design a better funding system for students, especially for small expenses.
Hochman continued to work on Sparrow after the program. Cintron joined him at the start of the spring term after the two were connected by Eric Lax MBA ’17, co-founder of the revenue pooling startup. Pando.
“The concept Devin and Harrison are working on tackles a huge problem where small improvements can have massive ramifications for people’s lives,” Lax wrote in an email to The Daily. “I think the way we manage student debt needs to change and I am a strong supporter of solutions that build on the power of communities.
Hochman and Cintron are currently running a sparrow pilot, focusing on Stanford students and alumni. After the pilot, they hope to expand to other schools and invite institutional lenders.
Sparrow uses a social or peer-to-peer lending model. The model appeared in 2005 but has come under increasing scrutiny from investors and regulators over the past decade. The Securities and Exchange Commission briefly shut down Lending Club and Prosper, two of the leading social lending sites, in 2008, classifying their products as unregistered titles.
Prosper and Lending Club have resumed operations after registering with the SEC, although both have encountered persistent difficulties. Lending Club, after having completed its IPO in 2014, ousted its founder in 2016 for fraud charges. Prosper paid fined $ 3 million last year after the SEC found him guilty of inflating investor returns.
Despite the stumbles, the social loan market continues to grow, with proponents pointing to benefits such as lower interest rates, more flexible payment terms, and fairer lending processes.
With social lending, “Fintech had its first round with companies like Upstart, Prosper, LendingTree, SoFi, CommonBond, but that was exactly it,” Hochman said. “They were in the first round. They were by no means a revolution, and I think it’s time for a facelift for that.
According to Nicolas Lambert, former assistant professor of economics at the Graduate School of Business and co-author of a paper on social loans, perhaps the biggest challenge facing Sparrow is its ability to acquire enough users.
“It is important to understand that the design of the mechanism will have an impact on the number of people you are going to attract, especially in the types of platforms where the participants are relatively unsophisticated,” he said. “You have students on one side and investors on the other who are going to invest a little bit of money for each ad, and they don’t want to spend a lot of time trying to figure out which are the best ads and so on. , there is therefore a compromise at this level.
Lambert said that initially when borrowers have few users setting their rates, “some listings will attract too many lenders who would have been willing to lend at a lower rate, and some listings will not attract anyone even though the borrower would have been willing to pay more to get the loan.
However, in the long run, if Sparrow acquires enough users and borrowers, Lambert predicts that “the market will reach an equilibrium where borrowers who share similar characteristics will have similar rates.”
“Over time, borrowers will learn what is and is not acceptable and change their loan application accordingly,” he wrote.
While this may cause students to change their desired interest rates to attract lenders, Hochman said Sparrow’s design ensures that the rates and terms will be in the best interests of the students.
“From all the conversations we’ve had with lenders, the main factor we’ve gleaned as to why they’re using Sparrow in the first place is that they want to use unused money to empower the next generation through a social impact investment – they don’t see these students as an asset class, ”Hochman wrote. “In our experience so far, although limited to Stanford University, our assumptions have been true: within a reasonable range for an interest rate, lenders are much more interested in hearing about the involvement of campus students or work experience than simply and strictly focusing on the interest rate they set.
Lambert also sees value in Sparrow’s model of tapping into alumni networks.
“By bringing together current and former Stanford students, he can create an attractive home-like environment on his own,” Lambert wrote. “As a former Stanford student, I would definitely feel better lending money to students at my own university, which I feel connected with, than investing in a neutral platform.”