Peer to peer student loans are becoming an increasingly popular way to pay for college as funding from traditional loan sources becomes more difficult to acquire.
With banks facing new financial regulation and pressure from regulators to increase their capital levels, the amount of available consumer credit, especially for student loans, is drying up. Student borrowers often represent a higher-risk to banks because they often do not have an established credit history. As a result, student lending is generally one of the first types of loans that become more difficult to acquire when banks restrict their lending activities.
Almost all families will be able to get some amount of federally guaranteed student loans via the Federal Stafford Loan Program and the Federal PLUS Loan Program. Some will also qualify for Pell grants, scholarships and other forms of financial aid, but often the amount of financial aid that a student receives isn’t nearly enough to cover the cost of tuition, room and board, and other fees that universities charge students.
Fortunately, students have now have several options to borrow money directly from other people through a number of peer-to-peer lending marketplaces that offer peer-to-peer student loans. The two largest peer-to-peer lending companies, Lending Club and Prosper Marketplace, both allow borrowers to take out personal loans to pay for college expenses. Prosper and Lending Club loans generally aren’t marketed specifically to students, but students can get education loans if they meet the companies’ 660 credit score requirement.
Unsecured loans that are offered by Lending Club and Prosper Marketplace will come with an interest rate between 7 and 20% depending upon the borrower’s credit score. Unlike federal student loans, the payments are not deferred until after college and amortize over 36 equal payments.
There are two other peer-to-peer lending companies that target student borrowers specifically—People Capital and Fynanz.
People Capital has not officially launched their service as of the publish date of this article (2/20/2010), but have recently announced a “beta launch” of their service, but are allowing students to apply for loans. People Capital is waiving the application fee for borrowers during their beta period. People Capital rates borrowers based on a number of different factors, including the student’s GPA, major and the university they are attending rather than the student’s credit score.
Fynanz also allows students to borrow money via their “EdAccess Private Student Loan” product. The peer-to-peer student loans being offered by Fynanz are marketed through its “CuStudentLoan” subsidiary. To qualify for Fynanz’s student loans, borrowers must also be a member of one of the company’s participating credit unions.
Although the peer-to-peer lending industry’s foray into the student lending business is in its infancy, there are many opportunities for students to borrow that may have been otherwise been turned down by their local bank. Getting a peer-to-peer student loan to help pay for college expenses may not be the best option for all students, but are certainly worth looking into for students that do not have their tuition expenses fully covered.