Monday, September 23, 2013

CommonBond - another example of higher education profiteering

CommonBond is about as different from a typical Sallie Mae private college loan as Indiana Tech Law School is from any other bottom tier diploma mill.  Identical, in other words, despite CommonBond's assertions (and shITLS's assertions) that they are something new and revolutionary, they are just the same old problems wrapped up in a new website.

The basic story at CommonBond is that some finance types saw an opportunity to invest in private student loans.  After all, why should Sallie Mae have all the profit?  So the prestigious folks at CommonBond went to their prestigious alumni at their prestigious schools and said, "Hey guys, you want in on this racket?  Lend money to students at top business schools at rates that are only a fraction better than the government, but with none of the perks of government loans, and you can profit from this rock steady investment."

CommonBond lends money (right now) only to MBA students at the top business schools, and it's not a bad idea.  Those students are most likely to get the top jobs and repay their loans.  Forget all the idiots at the diploma mill MBA schools - they can stick with their government loans.  (Although I think that CommonBond has missed the true core of profiting from student loans, which is making it as easy as possible to allow student defaults, generating fees, penalties, and all manner of other increases to loan balances.  Sallie Mae has got this down to a fine art.)

The idea is sold on prestige.  The web site oozes prestige, basically telling students, "Hey, you're better than relying on a government program, which sounds a bit like food stamps or some other welfare.  We offer a super exclusive, super prestigious opportunity to show everyone how prestigious you are by borrowing from us, a prestigious and exclusive lender that only lends to the most prestigious students ever.  So what'll it be?  Food stamps, or filet mignon?"

Yet looking under the cover, the loans from CommonBond are a bad dead.

First clue: first page of the borrower section.  Here's their graphic:

 
Looks good, right?  From that graphic, you might assume that CommonBond's rates are what, about forty percent of the government rates?  How deceptive!  Here's the chart as it should be shown (lots of scrolling required, and I had to reduce the scale to make it fit):
 


Yes, by showing only the tip top of the chart, CommonBond is telling a massive lie right off the bat.  Their rates are only slightly lower - a fraction, in fact.  Not the sixty percent discount that its graphic implies.

So how do they get their rates low?  Well, you give some stuff up over the regular government loans, like access to Income Based Repayment and Public Service Loan Forgiveness.  Aren't sure that you'll graduate into that high dollar job with McKinsey, and you might be working for you local supermarket chain?  With CommonBond's loan, you'll be paying it back in full, rather than being able to use the IBR program offered by the feds to protect those with high debt and low incomes.  Want to work for your local government or in a federal job?  Again, with CommonBond's loan, you're out of luck when it comes to public service forgiveness.  In essence, with CommonBond, you're taking a gamble - you're betting that for a miniscule interest rate benefit, that you'll be sure to have a high-paying job that lasts at least a decade or longer, however long it takes to pay the loans off.  Need extended repayment plans?  Out of luck with CommonBond, which makes you pay it all off in ten years.

Sound familiar?  Law schools being so expensive, and countless students trapped when the jobs of their dreams didn't appear and they were saddled with massive debt?  But of course, that would never happen to those prestigious MBA students at such prestigious schools, right?

Not content with the vomit-inducing borrower profiles (like Grace, who was president of the Wharton Food Club, or Andrew, who was Captain of the Cross Country Club, or Dan, whose post-MBA life is merely "New York City!"), few of whom actually stand out as anything particularly successful or interesting, CommonBond tries additional tricks to get borrowers through the door.  Their "Social Promise" section states that for each fully-funded MBA degree, they'll donate a year of schooling to a kid in Africa.  Sounds good, but it's a gimmick.  A year of said schooling through the African School for Excellence (which is the institution CommonBond supports) costs a mere $600.

How much is $600 compared to the interest CommonBond will be reaping from its borrowers?  Let's take a look.  A year of tuition and fees and incidental living expenses at a top business school is around $80K per year as a conservative estimate.  So a $160K loan from CommonBond over two years.  According to CommonBond's own calculator, the total repayments will be $241K, over $80K more than was borrowed.

So CommonBond's "social promise" is to return a mere 0.75% of its interest income to social issues.  Wow.  How generous.  (Of course, it's better than nothing, and I'm all for supporting programs like ASE, but it's clear that CommonBond is not interested in supporting social issues - they are interested in using social issues as a means to show what a harmless, helpful, benevolent PRIVATE STUDENT LENDER they are.  Rather like President Assad of Syria comparing himself to Saddam Hussein and saying, "Look how nice I am!")

CommonBond, if you want to make a difference, then make a BETTER private student loan, not just ANOTHER private student loan.  Invest in your borrowers by allowing your loans to be discharged in bankruptcy if the student fails after five years.  I'm sure many would happily pay a higher interest rate for the privilege.  Invest in struggling students here in the US, the ignored millions who go to elementary school hungry each day, and invest more than $600.  Stop commoditizing borrowers, stop profiting from the higher education system (which is rotting away because it's now seen as a business, not a social good.)

CommonBond is a private student lender.  It suffers from the same issues all private student lenders do, no matter how hard it tries to differentiate itself from the predatory debt traps like Sallie Mae and Access Group.  It's just another way for private individuals to make a buck, wrapped up in as many misconceptions and half-truths as it's allowed to get away with in order to hide what it's really all about.  Just like law schools are now exposed as being.  And just like MBA programs are.  Cost of attendance at $80K or more per year?  That screams "scam".

Here's the most informative quote from CommonBond, tucked away on its website: "CommonBond affords access to an entirely new asset class that is historically low risk."  There you have it, students and borrowers.  That's how you're seen by student loan lenders.  An "asset class", not individuals.  An investment opportunity, not a human being trying to get a foothold on the middle class.

Regardless of CommonBond's glossy new product, the same old truths apply:

1.  Borrow as little as possible.
2.  Borrow it from the government if you have to, and never from private lenders.

Note that 1 and 2 can be very easily accomplished by just not attending law school or an MBA program in the first place.

17 comments:

  1. This is a very good and very interesting commentary on our times. However, I think the biggest issue isn't who you borrow from, but how much you borrow. The JD factories are scams because they're overpriced by 400% or more.

    Restrain your borrowing, even if IBR sounds tempting. If that means no "prestigious" degree for you, then find another career path, or even just a job for now. If higher education ever stops being a scam, I can foresee many new opportunities for everyone.

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    1. True, but we can't harp on about "law school costs too much" in every single post. It gets tedious, and we already know it.

      I like the trend towards widening the scope of this blog once in a while. Just because there is a post that doesn't have "law school it too expensive" or "there are too many law schools" as its core message, it doesn't mean it's not pertinent to our cause.

      We need to stop preaching to the choir. We need to start preaching on street corners and showing everyone what a scam graduate school is in general. Then we might collectively be heard.

      Because a JD grad is getting no sympathy from anyone. "Oh look ha ha ha ha ha an unemployed greedy lawyer." An unemployed MBA might get some more sympathy (although not much).

      But then again maybe not. We have countless unemployed science grads, engineering grads and other useful grads, and the general feeling in the US is "they were stupid for going to college, should have been an electrician or a bus driver like me." We are anti-intellectual in this country. We place no value on education - if we did, our standards would be higher (and not giving out undergrad degrees that are literally high school level compared to many other countries), we would value teachers, we would stop colleges being sports teams, we would stop throwing money at online education from for-profit schools, etc. The problems we have are immense, and it all boils down to our attitude that education really isn't valuable at all.

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    2. 12:46 here...

      Most Americans care about education and want to see more of it. The tax burden for primary and secondary education is huge, and there is now over one thousand thousand thousand thousand in government-guaranteed student debt. The big issue is that education is paid for in massive amounts, but not produced in massive quantities. This is caused by gross distortion in prices.So your statements about "our attitude" can be dismissed as absurd.



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    3. The overwhelming drive is still to push every high school graduate into college, and also if you find yourself unemployed later in life you'll find yourself under pressure to "go back to school". Although its not so much what you learn that's so valued but the mere credential, which you are right 6.07 is definitely not healthy.

      Some people do push for more skilled blue-collar workers, but this is a reaction to this overemphasis on college and is still a minority position.

      'We have countless unemployed science grads, engineering grads and other useful grads, and the general feeling in the US is "they were stupid for going to college, should have been an electrician or a bus driver like me."'

      Generally what I see online is people saying that all those liberal arts graduates (including lawyers) should have taken STEM degrees instead. Generally people believe there's no such thing as an underemployed science or engineering grad - just as people used to believe there's no such thing as an unemployed law school graduate (of course there are quite a few science or engineering grads now who can't find work in their fields).

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  2. Apparently I don't know enough about the finanacial world, but I've wondered why the market isn't rushing into the student loan business as CommonBond has tried to do. With grad school rates at 6.8% from the Feds, for example, you would think you could offer something like 5% or 4.5% and sweep up some market share.

    The risk/return must not be that lucrative (no collateral, I guess), otherwise the discount wouldn't be a measly 25 basis points. Or they just don't make enough damn money off the backs of students at 4%, even with all the extraordinary protections afforded student loan lenders, so why not go 6.25%?

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    1. Greed? Why take only 5% when you can take 6%? The model might work at 5% too, but it would work better at 6%. (And by work, I mean put money into the pockets of investors, which is what CommonBond is.)

      The government is the collateral, I think. The borrower's tax refunds, social security, and income for the rest of their lives is the collateral.

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    2. 5 percent is not a large amount considering all the expenses that go along with it such as salaries, advertising, obamacare taxes, income taxes and stuff. I know private equity investors whose funds have averaged over 20% a year for more than a decade. who would really be interested in a cap of 5 or 6% gross profit?

      I don't know what the origination fees is, but it cant change the basic math for the investors that much.

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  3. I say this as an MBA, but this sounds like a parody of something that an MBA would conceive. So focused on enriching the founders that the business doesn't bother to offer anything that customers would want.

    Also, I see quite a few veterans among the profiled borrowers. Are they more susceptible to being scammed than students who work in the business world before doing an MBA program?

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    1. Vets? Yes, they are scammed hard with higher education.

      Remember the stories of recruiters from online colleges getting onto bases and signing up countless soldiers for their online degree programs, including many with head injuries and who could clearly not even participate?

      I work with a number of vets. I have the utmost respect for anyone who goes out there and suffers through that difficult and dangerous life for a few years on our behalf. I do thank them for their service.

      But they aren't exactly rocket scientists in general. The enlisted guys enlisted because they couldn't do anything else. Most only go to college online because it's free money to do so, not because they are actually interested in getting a degree or learning about anything. They would not go if they had to pay for it themselves, because to them it has less value.

      Many have an attitude of "I served, you went to college, I'm better than you." They look down upon college, education, and hard-earned qualifications. But at the same time, they need degrees to "check the box" on application forms. They don't care what they study or where they get their degrees from.

      Which is a round about way of showing why vets are often scammed. They have free money for school, but they don't care about what school they go to. So they go to the easiest for-profit schools, get junk degrees that they never have to repay (although the taxpayers are footing the bill), and the for-profit schools thrive because of vets.

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    2. 6:33, 7:19, this is a great point. I've wondered about the data regarding veterans and how they may be getting scammed by higher-ed, regardless of whether or not good-faith efforts are at play. I remember an article about a non-trad vet who went to law school and was having a hard time of it, so I can only imagine what the larger picture is.


      http://dupednontraditional.blogspot.com/2012/05/too-old-too-young-too-qualified-too-non.html

      Sounds like a subject for a separate post, with somone who knows about the topic.

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  4. Somebody smart enough to attend a top MBA school should be smart enough to recognize the miniscule difference in interest rates and to look in to which type of loans to take before doing so. MBA seekers are no different than law students in being snowflakes, but I would guess most of them have a little more financial savvy.

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    1. It *is* interesting; I'd aim this at people going to bottom-tier MBA programs.

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    2. I showed this to a friend with a HS diploma, and he immediately spotted the fraud in the graph.

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  5. very timely that you've posted this. several years ago i've considered the pros and cons of attending the non M7 top MBA programs (e.g. Cornell/Johnson, Dartmouth/Tuck, etc), and it really boiled down to 2 points

    - The most effective way to build a network is not to get an MBA, but to be successful. That way you will have all the MBA friends you could ever want.

    - Business is fundamentally about two things: innovating and selling, which most MBA programs teach neither.

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  6. It's unreasonable to rely on a bar graph, or anything for that matter.

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  7. Commonbond is currently offering 5.99% fixed vs. 6.55% federal. I don't need IBR or any of the other "help" programs designed to screw the student out of the tens of thousands of dollars extra in interest over the life of the loan. The interest rate at Commonbond still isn't fantastic, but it is slightly better than federal graduate loans. For most borrowers, Commonbond will beat SoFi's fixed rates. Darien Rowayton has the best fixed rates I've seen, but their underwriting is insanely strict. In fact, they require borrowers to have such a low DTI that anyone who meets their criteria is probably able to pay at least 3 or 4 times the minimum on their student loans each month. (For example, the current minimum on my federal loans is about 6.5% of my gross monthly income, and I do not meet DRB's underwriting standards because my three-figure income is not high enough.) Commonbond's qualification seems much more straightforward and much less picky.

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  8. Article overly whiny. If you went to a good school and got an MBA instead of a degree with less chance to get a good job and repay your loans, you're probably a better risk. They think they can make more money by offering a lower rate to people who will actually pay them back, no conspiracies involved.

    I fully support feeding kids and other nonprofit activities, but it's probably not a viable for profit business model. If that is the kind of "why don't they just give everyone all thier money, the greedy bastards" arguing they teach where you go to school, I am not surprised you are worried about your loans. It's not terribly logical or compelling, you're a pretty long way from Huey Long.

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