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Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College

Jun 18, 2014 Jennifer Williamson, Distance Columnist | 0 Comments

Peer-to-peer lending has many names. It may be called microlending, microfinance, or social lending, and it generally involves one person giving a loan to another—without the interference of a bank. Traditionally, the term “microloan” meant small loans given out to people in developing countries, sometimes as little as $10 or $15, in order to start businesses or make other small investments.

However, the concept has enlarged to include larger loans made by individuals to students to cover education. Usually, “peer-to-peer” lending involves larger loans, although it may mean numerous small contributions from a number of people. Here are a few ways peer-to-peer lending manifests in the student loan world.

Loans from friends and family

In some cases, you might get a loan for your education from a family member or friend who can afford to lend to you. The terms of these loans are up to you and  your family member, and most of the time there is zero regulation on these types of loans—unless you call a lawyer and draw up a contract between the two of you. Lending between family members and friends has special pitfalls, and a contract can be a really good idea to make sure the terms of the loan are honored on both sides.

Peer-to-peer loan websites

The two largest peer-to-peer lending sites in the US are currently Prosper and, although there are also lending sites that focus specifically on education loans, such as SoFi and GreenNote.

The models for these lending platforms vary depending on the company. On LendingClub, individuals and large groups of lenders “bid” on loan requests. The downside of this website is that you need a stellar credit rating; approximately 10% of those who request a loan actually get funded. For students, this means getting a parent to co-sign on the loan in most cases. Fynanz, a peer-to-peer website that lets you get loans from both strangers and friends, operates on a similar bidding model. 

Some peer-to-peer loan companies help you capitalize on friend and family relationships you already have to get loans. Virgin Money, for example, specializes in lending between friends and family. It’s mainly there to facilitate the process, and your credit history doesn’t matter as long as you have a friend or relative willing to give you a loan. GreenNote operates in a similar way, but helps students organize a “pledge drive” to drum up possible investors among their existing friends and family. Once they have enough pledges to meet the loan amount, the company helps you handle the legalities.

SoFi’s loans are financed by alumni. The company will halt your student loan payments if you face unemployment, and even offer employment connections between recent graduates and alumni.

Other models include the Human Capital Contract, which allows investors to loan money to students at rates based not on their credit history, but on their potential future earnings based on their field of study and other factors. Under this agreement, the student borrower offers to pay back a certain percentage of earnings over a fixed period of time. 

Peer-to-peer lending is at present not the next big thing in funding for traditional and accredited online degrees—but it could be. Currently it’s weakly regulated, it’s not legal in all states, and there are still other risks. However, there are also considerable risks in taking out private and federal student loans as well—even at better rates. For some people, peer-to-peer lending may be just what they need to finance an education.





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