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So we're joined today by David Klein,
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CEO and co-founder of Common Bond.
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Thanks for joining us, David.
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Thanks, Encore. Thanks, Mullell. Um,
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so Common Bond, as I understand it, is
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an alumni lending or crowdfunding
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platform for student loans. Um, I know
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you recently about a little bit less
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than six months ago, uh, started lending
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for the first time. Can you tell us a
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bit about Common Bond, um, and how how
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you came to this?
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Sure. So, Common Bond, you hit it on the
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head. Common Bond is a student loan
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crowdfunding platform. Uh we source
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capital from alumni and individual
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investors and pass it on to students to
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lower the cost of students education. Um
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students can save about 20 to $25,000
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over the life of repayment and alumni
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investors and individual investors
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receive a financial return in exchange.
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But there's much more than just
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financial return. There's also social
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return. uh there's social return in the
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core competency of what we do as well as
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social return in the social promise that
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we wrap around our model.
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So I can tell you a little bit about
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what that means. Um so financial return
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we all get right the students save a
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good amount of money and the investors
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can make a competitive financial return
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relative to other investments in the
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market right now of similar risk. Right?
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The social return component from an
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alumni alumni investors perspective is
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that they have an opportunity to be part
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of a solution to a large national
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problem and that is student debt. Um
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they also have an opportunity to be part
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of a solution at a very localized level
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and that is with a student at their alma
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mater. So we think that's um that's very
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uh strong motivator for uh alumni
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investors. Beyond that though, there's
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something that we call our social
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promise. And our social promise is both
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global and local. Our global social
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promise is that for every degree fully
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funded on our platform, we will fund the
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education of a student in need abroad.
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And our local social promise is that for
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every new city we bring our loan program
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to, uh, we will fund financial literacy
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programming uh, in a local charter
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school in an underserved community. And
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how did this idea to get involved in the
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student lending market come about or
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where did the interest come from?
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Yep. The interest came from a very
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personal pain point. Um I got into
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school. I got into Wharton Business
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School and um you know I knew just like
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anywhere else you get into school
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tuition as we all read about is pretty
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high, right? I didn't realize though
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that the cost of financing my education
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was going to be high as well. Um and so
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I very much felt that personal pain. I
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looked around to see what my options
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were. I wanted to go into a fixed rate
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product. I didn't want to deal with the
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risk of variable rates. And I noticed
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that my options were twofold. One, the
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federal government, two, private banks.
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Um, and I was pretty much looking at
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something akin to 8% fixed in the in the
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traditional space. Um, and I decided
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there had to be a better way, right?
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There there had to be an option that was
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pricing risk better, and there wasn't.
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Um, and so I decided to to do something
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about it. I actually came back to
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business school on the other side of
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average age, as I like to say, with the
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express purpose of wanting to start a
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business and and run it before or upon
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graduation. And so, between my personal
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pain point uh in student lending and my
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very strong desire and commitment to
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start a company while in school, um it
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ended up being a great a great marriage
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and I ended up meeting my my two
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co-founders, Michael Tramina and Jessup
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Sheen, here at Wharton as well. and the
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social social promise element. Um, tell
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us more about the inspiration or the
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motivation behind including that as part
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of common bond as well.
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Sure. Um, so it comes from I might have
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said this before but it comes from a
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very deeply rooted personal philosophy
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in what I think and we as co-founders
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think business should be um and has a
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responsibility to be. you know, um,
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businesses and corporations wield an
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incredible amount of influence. Um, and
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a lot of that has to do with the fact
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that they yield an incredible amount of
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capital and profits in their business.
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Um, and when I think about the future of
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business, I think there is huge
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opportunity for business to play a much
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larger role in the communities, the
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local communities that they're a part of
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and also broader society that they're a
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part of. And what I'm very hopeful about
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or rather encouraged by is that there
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are a number of companies who've come
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before us who have really put the social
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mission front and center. Um Warby
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Parker of course is a great example come
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coming right out of here at Wharton. Um
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to us a major inspiration. Um they were
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part of the same startup incubator
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Wharton venture initiation program that
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we were a part of just two years later.
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Um, you know, when we had our first
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company offsite, Neil Blumenthal,
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co-founder and co-CEO, welcomed us to
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their headquarters in in New York City
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to have an all day off-site event. Um,
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he came and he spoke and it was
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incredibly inspirational, right? And so
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we were we have been inspired by the
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likes of Warie Parker, Tom Shues, and we
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decided, you know, we can bring the one
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forone model, we can be the first to
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bring the one forone model to education
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and to finance. Um, and so that's what
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that's what we decided to do.
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And so going back to the financial
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return, so how are you or how is uh
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Common Bond able to provide investors
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and students sort of better returns than
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they're currently able to get in in the
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uh public market?
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Sure. Um it's a really interesting time
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that we're in in terms of macrolevel
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interest rates, what's happening in the
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credit market. Um things are a bit out
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of whack and it's very much a cause of
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the financial crisis. We're still seeing
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the effects of that. Um, and if we
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believe what the Fed tells us with
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interest rates, we'll continue to see
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that for a few years, right? And so
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there's, and by the way, that's part of
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what makes for a broken student loan
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market. Uh, federal government had to
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take over the student loan market.
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They're charging one price to everybody.
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It's a very inefficient pricing of risk.
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Private banks are a different story.
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they're more still skittish after the
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financial crisis, charging a risk
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premium on top of student loans,
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particularly given the fact that it's
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unsecured debt and they don't want to
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take on that much of a risk. So, what
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we've done is we've come in and we've
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said, uh, you know, we don't have the
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structural problems of the federal
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government. Uh, we don't have the
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baggage of the private banks and we're a
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much leaner operation than any of our
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competitors, direct or indirect. U, we
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can come in and we can price risk what
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we consider to be much more
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appropriately, which is a 6.2 24% fixed
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rate for students and they can lower
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that all the way down to 5.99% fixed
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when they sign up for automatic debit.
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Um, and so that that's what we've done.
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We we've essentially come to the market
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and said we can we think we can price
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risk better than what traditional
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alternatives are pricing.
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Um, and so taking a step from a student
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perspective, if you're looking to
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partner with Common Bond for your loans,
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how does that process work?
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Sure. Um so you know a student might
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hear about us from either press or from
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onschool uh in school activities on
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campus activities might hear about us
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from uh you know financial aid office
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where they post all alternative private
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lenders um and then a student engages
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with us. um we would hope and what we've
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seen is that students are particularly
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compelled um because of the community
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that we bring to the table. Not just the
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lower cost, right? Not just the 20
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$25,000 savings, but also the community
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of students across schools that they're
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getting plugged into and the community
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of students and alumni within schools
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that they're getting plugged into. Um
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we're also we're also noticing that our
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social promise is resonating a lot with
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our students. Um you know the social
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promise for us was again a very personal
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thing. Um I have a very personal
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philosophy that business can and should
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be a p a force for for positive change.
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I think that business and corporations
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in general have a responsibility to give
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back to the local and broader community
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that they're a part of. And I'm hopeful
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that what we see going forward is that
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business and corporations more and more
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um kind of meet their uh social
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responsibility right in a big and real
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way. And so that that speaks to a little
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bit as to why we have a social promise.
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Um and that and that's something and
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that's something by the way um that you
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know the millennial generation which are
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the the students in school right now
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seem to to gravitate towards and that
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makes sense. We're millennials ourselves
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and we gravitate towards this. We're all
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about valuesdriven business. So th those
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are the things that I think attract
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students to to Common Bond.
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So when you deal with students for
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Common Bond, uh are students mainly
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looking for original financing or uh
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might some of them also want to
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refinance uh existing debt, student
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debt, which is more highriced.
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It's both. Um so we're originating new
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loans for students who are coming into
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school and students even at school for
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the the following semester. We're also
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very much participating in the
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consolidation market, the refinance
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market. So, we have a refinance loan
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product as well.
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And and where's the greater demand
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coming from?
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The demand is across the board. Um, and
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so what we've what we've noticed is that
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whether it's newly originated or
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refinanced, the demand is is equally
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large. If we look at how big the markets
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are right now, the refinance market um
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is much larger than the the new
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originations, which makes sense if you
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think about it. There's a backlog of
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years there in the refinance market than
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there are in the newly originated market
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which is really an annual an annual
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market.
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And and how risky are these loans and
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how do you deal with that risk?
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Yep. So the risk on these loans from an
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investor's perspective is incredibly
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low. Um and that's part of what allows
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the model to work especially now in the
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beginning as we're proving out the
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model. You know this this this industry
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is still relatively nent. Um it's about
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a year old. um plus or minus. And so one
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of the things that we have found to be
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incredibly important is that we derisk
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the model as much as we possibly can to
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give it a chance to succeed in the
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beginning and then we kind of use that
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as a platform to build off of. Um and so
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what we're when we're focusing right now
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on MBA programs, what we notice is that
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default rate is incredibly low. Payback
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payback is incredibly high. And it makes
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sense when you think about it just
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because employment rate is high and
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earnings potential is pretty high for
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students at uh at top MBA programs.
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And from an alumni perspective, so
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you've mentioned uh about the returns.
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Can you tell us more about the value
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proposition uh for any alum that you're
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looking to source to invest in common
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bond?
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Sure. The value proposition to alumni or
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individual investors or any any source
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or any cadra of investors that we use to
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kind of complement alumni capital. Um, I
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think it's three things. Uh, one is the
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financial return, and we've talked about
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that a bit. It's a pretty competitive
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financial return relative to other
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investment products of similar risk. Two
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is the social return. Uh, the fact that
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they have an opportunity to help lower
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the cost of education of a student at
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their alma mater, but they also are able
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to power the social mission of our
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company. Literally for every new alumni
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investor that comes to the table, for
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every new student borrower who comes to
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the table, they're actually helping us
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pay for uh another child at school at
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the African School for Excellence or
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fund that much more the financial
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literacy programming that we're funding
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in local communities here in the US and
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every new city we bring our program to.
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Um and so their participation powers our
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social mission, right? And that's very
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that's very powerful. The third thing
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I'd say is that the alumni and other
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individual investors who participate are
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able to plug in to a network, a
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community of top tier, top talent. Um,
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and we think that matters.
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Um, and so in thinking about this
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community, what's what sort of events or
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activities do you actually offer to
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alumni and to recipients of the loans?
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Yep. So, good question. You know, when
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we think about community, what does that
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mean? Um, a lot of people pay lip
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service to community. In fact, what I
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would argue is that any player that
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comes into this space or really any
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space as it pertains to finance or
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pretty much any other industry today,
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you have to build community, right? That
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to us is table stakes. That's not what's
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meaningful. What's meaningful is who can
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build a community that people want to
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belong to. And that's what we think
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we're building. uh you know when I think
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about the types of community events that
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we're putting on and by the way when I
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say community events and community I'm
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not just talking about building an
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online platform right we have a lot of
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online platforms and what you see over
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time with online platforms is as they
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grow as they become a bit more
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ubiquitous the value actually decreases
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right and so what we say is real
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connection meaningful community is done
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in the real world humanto human in
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person and so what we've done is we've
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spent a lot of time creating environment
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ments for students, investors,
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forward-inking professionals to come
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together under one roof, meet and
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connect. And what we found so far, you
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know, we have a number of examples of
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students who are within what we call our
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common bond family who because they are
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part of the family, because they are
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interacting with members of the
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community, they've been able to propel
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their professional success. Um, you
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know, we have one student who met uh the
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head of corporate acquisitions at
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American Express at one of our events,
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and American Express is her dream
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company. Um, and he was able to set up a
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number of interviews for her, and it
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looks like she might be getting a
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full-time job there uh when she
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graduates. Um, you know, I think about
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another MBA student who uh has a startup
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and she met a reporter at Business Week
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at one of our events in business week
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covered her company about two months
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after meeting and she wrote excitingly
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to us over email, you know, thank you so
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much. This was all because of of Common
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Bond. So, we think of ourselves much
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more than just a student lending
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company. We consider ourselves a company
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that reflects um that reflects kind of
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the future of finance. You've got to be
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more than just what you can argue is a
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commoditized lending product, right?
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You've got to do more than just lower
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the personal expense line of the
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student, which we do, but you've also
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got to help students maximize their
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topline, and that's what we feel like
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we're doing with our with our community.
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Great. And so, as you approach alumni, I
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have to imagine alumni affairs offices
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at different institutions uh may or may
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not be worried. How do you partner with
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or approach or or work with alumni
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affairs um departments through the
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universities that you're working with?
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Yeah. What what we say is it's best to
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um talk with everybody, right? And so
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while we're talking directly to
00:14:50
students, um we don't want to lose sight
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of the fact that there are a number of
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different constituents out there. Uh
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admissions offices, financial aid
00:14:58
offices, alumni affairs offices, not to
00:15:01
be officially affiliated in any way, um
00:15:04
but to build positive relationships with
00:15:07
them. We think that matters. Um as it
00:15:10
pertains to the alumni offices, frankly
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the reaction to this model is a bit
00:15:14
mixed, right? Um there are kind of two
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camps that you can fall into. Um one is
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kind of a camp territorial camp where
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there's a zero sum game. There's a
00:15:24
finite size to the pie and there's
00:15:26
another camp that you can fall into,
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right? And that's kind of the camp of
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abundance. Um where there's a growing
00:15:30
pie. We happen to fit or consider
00:15:34
ourselves to be in the the uh the camp
00:15:36
of abundance, right? We actually believe
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that our model can engage an entire
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swath of alumni who currently are not
00:15:44
participating or otherwise engaged in
00:15:46
university affairs. Um and and in a
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sense our model can bring those folks
00:15:51
into the fold because there's a
00:15:53
financial return component to it. And
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from there um I actually think our model
00:15:58
can complement the efforts of alumni
00:16:00
offices pretty well. Um some alumni
00:16:03
offices see that others don't. Um, and
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that's fine by us. We think that over
00:16:09
time what we'll be able to show, you
00:16:10
know, as we get more and more data,
00:16:12
we'll be able to prove that we actually
00:16:13
live in a world of abundance as it
00:16:15
pertains to alumni investor
00:16:16
participants.
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So, is the concern of some those alumni
00:16:20
offices that you might cannibalize some
00:16:22
of the alumni giving that might
00:16:24
otherwise go to fund scholarships for
00:16:26
those students?
00:16:26
That's that's the concern. And what what
00:16:28
we
00:16:28
how have you addressed that uh with uh
00:16:31
uh you know the more territorial alumni
00:16:34
offices,
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right? So what we say is two things. Um
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one the scholarship uh is a different
00:16:41
kind of investment or or giving from
00:16:45
alumni right or put another way we fall
00:16:48
into the conservative slice of any
00:16:50
investor's portfolio right um alumni
00:16:53
giving alumni scholarships falls into
00:16:55
another slice of somebody's personal
00:16:57
portfolio that falls into the
00:16:59
philanthropic slice as opposed to the
00:17:01
conservative investment slice. And so we
00:17:03
see them actually as quite different
00:17:05
kinds of investments. And so even among
00:17:07
the alumni who currently participate uh
00:17:10
you can see a world in which they can
00:17:12
participate in both because they're
00:17:14
still able to diversify their portfolio.
00:17:17
The second thing we tell them and we
00:17:18
talked about it a little bit before and
00:17:20
that is hey we actually think this is
00:17:23
going to engage a large group of alumni
00:17:26
who are currently not engaged with the
00:17:28
university.
00:17:30
you you say that u the industry um is
00:17:34
about a year old. Uh who's your
00:17:36
competition and how have you positioned
00:17:40
Common Bond uniquely uh in this space?
00:17:42
Yeah, our competition really falls into
00:17:45
three different categories. Um you have
00:17:48
traditional players, the federal
00:17:49
government and the private banks. The
00:17:50
federal government represents about 93%
00:17:53
of u of student loans and private banks
00:17:56
represents about 7%.
00:17:59
The the second is this um it's the
00:18:03
social lending space that's a bit more
00:18:05
mature, right? Um and so you have
00:18:08
players like a lending club or a
00:18:09
prosper.com who have been in
00:18:11
peer-to-peer lending since 2006 and 2007
00:18:15
respectively, right? Um they're not in
00:18:17
student loans right now. Could they be?
00:18:19
They could. Um and then the third piece
00:18:21
is what I would call social lending as
00:18:23
it relates specifically to student
00:18:25
loans. That's the market that's about a
00:18:28
year old. Um and and that's and that's
00:18:32
where the problem is particularly acute
00:18:35
and particularly large. And so we feel
00:18:38
pretty excited to come in and solve
00:18:41
that. Um you know there are a couple of
00:18:43
different things that make us different
00:18:45
than any of our competitors across the
00:18:47
board regardless of what segment they
00:18:49
fall into. Um we talked about we've
00:18:52
touched on a few of them. Um the first
00:18:55
what we're noticing and getting feedback
00:18:57
from students again the millennial
00:18:58
generation is that our social promise
00:19:01
makes us pretty distinct. Um that's
00:19:03
something that doesn't exist across the
00:19:05
board. Again we feel proud of the fact
00:19:08
that we're the first in education or
00:19:10
finance to bring the one for one model
00:19:13
to to both education and and finance. Um
00:19:16
and I can speak as to why that's
00:19:17
important if you'd like me to. Um the
00:19:20
second is the community piece that we've
00:19:22
been talking about. Um, some folks are
00:19:25
building community. Um, some are doing
00:19:27
it better than others. For us, again, we
00:19:30
think that's table stakes. We think
00:19:31
that's an absolute requirement. But what
00:19:34
makes what's going to make a player in
00:19:36
this industry different is creating a
00:19:38
community that students and alumni
00:19:40
investors want to belong to and that's
00:19:41
what we think we're doing in a very real
00:19:44
way. Um, you know, the third piece is
00:19:48
risk management. Um I think our approach
00:19:51
to risk management is different than any
00:19:53
other player in the space. Uh when I
00:19:56
think about you know who we're going
00:19:58
after at first to ensure that this model
00:20:01
works and when I think about what those
00:20:04
default rates look like not after 6
00:20:06
months of origination but after 3 years
00:20:08
of origination what do those default
00:20:10
rates look like? We think that the
00:20:12
approach that we're taking is is a bit
00:20:15
thoughtful and appropriately methodical
00:20:17
to allow for our model to succeed early
00:20:20
and therefore for the long term. The
00:20:22
other thing I would say on risk
00:20:23
management is that and this is one of
00:20:25
the benefits of coming from a place like
00:20:27
Wharton. Um you know we have been
00:20:30
working with a professor in the
00:20:32
statistics department who's helping us
00:20:34
build a proprietary model that helps us
00:20:38
better predict future repayment. So a
00:20:41
lot of proprietary underwriting today
00:20:43
and we have proprietary underwriting
00:20:45
scorecard but it's what I would call
00:20:47
traditional the power is when we go
00:20:49
forward being able to find those
00:20:50
attributes that better predict future
00:20:52
repayment as opposed to any
00:20:53
backward-looking tool like a FICO based
00:20:55
tool.
00:20:56
Could I wonder if I could just ask you
00:20:58
one last question?
00:20:59
Sure.
00:21:00
Uh five years from now where would you
00:21:02
like common bond to be?
00:21:04
Good question. I don't get that a lot.
00:21:07
We think about it a lot. We see it in
00:21:08
our model, but I don't get the question.
00:21:11
We would like to be a premier lender,
00:21:16
period. Uh we're starting with student
00:21:19
loans. It makes sense to for two
00:21:21
reasons. One, the problem is large. Uh
00:21:24
and it uh is derived from a personal
00:21:27
paypoint uh of myself and my co-founder,
00:21:30
Mike Terramina, uh who I met at Wharton
00:21:32
Business School. Um and so that's why it
00:21:34
makes sense to start with student loans
00:21:36
for us in particular. But if you think
00:21:38
about going forward and you think about
00:21:40
finance and the future of finance more
00:21:42
broadly um and you think about what the
00:21:46
financial crisis did in destroying trust
00:21:49
between banks and people and people and
00:21:51
banks
00:21:53
what you realize is that that trust
00:21:55
needs to find itself somewhere and it
00:21:57
does exist. It exists in trusted
00:22:00
networks. exists uh among affinity
00:22:03
groups and schools happen to be a
00:22:05
natural fit for affinity and trusted
00:22:07
networks, right? Which is why this model
00:22:09
works so well. Another reason why we're
00:22:11
we're starting with schools. But if you
00:22:13
broaden out what trusted networks mean
00:22:15
and you broaden out the definition of
00:22:17
affinity groups, you can envision a
00:22:19
world in which not only are student
00:22:21
loans being better priced, better
00:22:24
administered, and better serviced with
00:22:26
this model, but all different kinds of
00:22:28
lending products as well.
00:22:31
Thanks so much for joining us today.
00:22:33
Thank you. Thanks for having me.
00:22:37
[Music]
