By Enya Lu
A new online crowdsourcing platform allows students to fund their tuition and living expenses through small, non-accredited loans based on their GPA and personal stories.
Harrison Hochman ’21 and Devin Cintron ’20 launched a pilot of Sparrow Lending on May 23. Sparrow does not emphasize credit scores or income histories in assessing students’ creditworthiness, the founders said. Instead, it lets students present themselves through customized profiles.
Students’ “credit scores and tax returns can be terrible,” Hochman said. “Not because students spend lavishly and they live this exorbitant life, or they can’t hold on to a job, but because they’re young and they haven’t had time to recruit this kind of information.”
Each student’s profile includes information such as GPA, extracurricular involvement, work experience, career goals and personal story.
“A student is more than just that FICO score, more than just their GPA, more than just the internship they had at Goldman Sachs,” Hochman said. “They are a story, they are a person and they deserve to be looked at through that lens.”
Sparrow also allows students to set payment terms and interest rates. Non-accredited lenders then browse completed profiles, find matches and make loans.
“We believe the profile of a non-accredited lender could be an alumni who feels affectionate toward their next generation at their alma mater and are looking to make a social impact investment,” Hochman said.
Hochman began to develop the idea last year when he participated in Birthright Excel, a startup accelerator program based in Tel Aviv. Upon learning about another participant’s exorbitant student loan package, Hochman set out to design a better financing system for students, especially for smaller expenses.
Hochman continued working on Sparrow after the program. Cintron joined him at the beginning of spring quarter after the two were connected by Eric Lax MBA ’17, co-founder of the income-pooling startup Pando.
“The concept Devin and Harrison are working on is tackling a huge problem where small improvements can have massive ramifications on people’s lives,” Lax wrote in an email to The Daily. “I think the way we handle student debt needs to change and I am a huge believer in solutions that lean into the power of communities.”
Hochman and Cintron are currently running a pilot of Sparrow, focusing on Stanford students and alumni. After the pilot, they hope to expand to other schools as well as invite institutional lenders.
Sparrow employs a social, or peer-to-peer, lending model. The model emerged in 2005 but has faced increasing scrutiny from both investors and regulators in the last decade. The Securities and Exchange Commission briefly shut down Lending Club and Prosper, two top social lending sites, in 2008, categorizing their products as unregistered securities.
Prosper and Lending Club resumed operations after registering with the SEC, though the two encountered continuing difficulties. Lending Club, after holding its IPO in 2014, ousted its founder in 2016 over charges of fraud. Prosper paid a $3 million fine last year after the SEC found it guilty of inflating returns to investors.
Despite stumbles, the social lending market is still growing, with proponents highlighting benefits such as lower interest rates, more flexible payment terms, and more equitable loan processes.
With social lending, “Fintech had its first round at it with companies like Upstart, Prosper, LendingTree, SoFi, CommonBond, but they were exactly that,” Hochman said. “They were the first round. They were by no means a revolution, and I think that it’s time for that to get a fresh look.”
According to Nicolas Lambert, a former assistant professor of economics at the Graduate School of Business who co-authored a paper on social lending, the biggest challenge facing Sparrow may be its ability to acquire enough users.
“It’s important to understand the design of the mechanism will impact the number of people you are going to attract — especially in types of platforms where participants are relatively unsophisticated,” he said. “You have students on one side and investors on the other who are going to invest a little money for each listing, and they don’t want to spend a huge amount of time trying to figure out which are the best listings and so on, so there is a trade-off at this level.”
Lambert said that, in the beginning, 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 attract nobody even though the borrower would have been willing to pay more for getting the loan.”
However, in the long run, if Sparrow acquires enough users and borrowers, Lambert predicts that “the market will come to an equilibrium where borrowers who share similar features will have similar rates.”
“Over time, borrowers will learn what’s acceptable or not and modify their loan request accordingly,” he wrote.
Though this may lead to students changing their desired interest rates to attract lenders, Hochman said Sparrow’s design ensures that rates and terms will be in students’ interests.
“From all the conversations we’ve had with lenders, the primary driver that we’ve gleaned as to why they use Sparrow in the first place is that they want to use idle cash to empower the next generation through a social impact investment — they are not looking at these students as an asset class,” Hochman wrote. “In our experience so far, albeit limited to Stanford University, our assumptions have been true: within a reasonable range for an interest rate, lenders are far more interested in hearing about the students campus involvement or work experience than simply and strictly focusing on the interest rate they set.”
Lambert too sees value in Sparrow’s model of tapping into alumni networks.
“By putting together current and former Stanford students, it can create a home-like environment attractive on its own,” Lambert wrote. “As a Stanford alumnus myself, I certainly would feel better lending money to the students from my own university, with whom I feel connected, than investing in a neutral platform.”