The Biden administration’s recent decision to forgive many existing borrowers up to $20,000 on student loans came with a significant caveat for student debt holders: Private loans are excluded from the relief plan.
Private loans make up a relatively small portion of the nation’s student debt, but during the 2020-21 academic year, student borrowers still borrowed nearly $12.5 billion in non-government loans, according to the College Board’s latest report, Trends in College Pricing and Student Aid . That total has grown 34 percent, adjusted for inflation, over the past decade, even though the total amount of new Bunds has fallen by the same rate. Private loans are notoriously inflexible and often carry high interest rates, which tends to make them the most onerous option for students looking to finance their studies.
It’s those kinds of statistics that motivated Harrison Hochman, a 23-year-old Stanford grad, to create Sparrow, a finance search engine that allows potential borrowers to search for and compare alternative loans — or refinance existing federal and non-federal loans an application. Hochman launched the site with friends and co-founders Griffin Morris and Daniel Kahn in 2020 during the Covid-19 pandemic.
“When all of our friends were sent home, we saw firsthand and very clearly the problem of personal student loans and the type of burden it places on young adults as they graduate from college,” Hochman said. “And we felt compelled to do something.”
Sparrow users submit a short application and Sparrow returns a list of lenders the user is eligible for and personalized rates. Hochman calls it the Expedia for student loans.
“Similar to Expedia where you go to a central hub and submit a quick form for flights with your desired destination and dates, you provide us with information that would help us pre-approve you with lenders on our platform. he said. “And then when you find the right loan offer — or the right plane ticket on Expedia — you click through to the lender and upload your paperwork to get verified.”
The fledgling company recently raised $5.83 million in a seed investment round led by Sozo Ventures. To date, the company has raised $6.7 million. Sparrow works with 17 lenders, including Sallie Mae, SoFi, Ascent, and College Ave, and Hochman is working to bring smaller lenders to the platform.
“We’re trying to expand to lenders that are typically ‘offline,'” Hochman said. “These are credit unions and government nonprofits. These are lenders that have amazing loan programs for borrowers – they’re tax-deferred, and they usually take that tax saving and pass it on to the underlying borrower. But they are built on a monolithic infrastructure and difficult to integrate.”
The app is free for students and colleges. Sparrow makes its money from lenders who enter into loan agreements through the site. Whenever a Sparrow user takes out a loan from one of the partner lenders, Sparrow receives a percentage of the loan amount as a sort of referral fee. Typically, the company’s cut is between 1% and 2.5%.
Today, Sparrow covers more than 8,000 colleges and schools at thousands of higher education institutions across the United States.
Similar apps already exist. Credible offers a comparison service that shows users personalized rates from eight partner lenders. However, many student loan shopping sites are linked to a specific lender or just allow students to compare options before learning what they are eligible for.
Dependent undergraduate students can borrow a maximum of $5,500 in their freshman year and slightly larger amounts in subsequent years from the federal government, for a total direct loan limit of $31,000. (Financially independent students can borrow a total of $57,500.) With many private college sticker rates starting at $50,000 per year, many students are looking for additional credit to fund their graduation.
And most students cannot contact their school’s tax office for help with this decision. According to Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, many colleges and universities don’t maintain lists of preferred private lenders — or even encourage students to obtain personal loans — because it’s highly regulated.
Grant officers at Pitzer College in California take a “hands-off” approach to alternative lending to avoid the additional administrative burden, says Kara Moore, director of Pitzer’s grant office. Pitzer is now one of 17 colleges that refer students looking for a private loan to Sparrow. The company is linked on the college’s financial aid website, and Sparrow provides a customized link for Pitzer students. The college doesn’t pay for the link and Sparrow doesn’t pay for the promotion.
Sparrow was attractive to Pitzer because it allows students to compare personalized rates with an application, Moore said.
“A student who used Google to find five different lenders would have to apply to each of them before telling them if they were eligible or not,” Moore said. “The benefit we’ve seen for Sparrow is that students can get a list of potential lenders without having to apply to each individual lender and then make multiple loan requests.”
Lewis-Clark State College, La Sierra University, Allegheny College, Otis College, Trinity College, College of Wooster, University of San Diego, Rollins College, Mercer University, Northpoint Bible College and the Pacific University are among the colleges that are directly affiliated with Sparrow.
Hochman has big plans to grow Sparrow for the next few years. He and his co-founders plan to bring on more lenders and more universities, and hopefully add additional features like the ability to take out federal loans through the platform.
“We want students to be able to borrow on the platform and actually make that process easier,” he said. “Right now, 17 universities have signed up to the platform, where we are their de facto integrated central lending platform, and we’re looking to extend this to universities so that we can make this solution and technology available to as many students as possible.”