Learn About Student Peer To Peer Lending


Costs for higher education are soaring, and with students up against rising interest rates, it’s harder than ever to finance a college education. Students and parents borrowed an estimated $17.1 billion in private loans in 2006-7, representing 22% of all lending that year. Now the subprime mortgage meltdown has changed the student loan landscape, and not necessarily for the better.

“A lot of easy money was going into education via the home acting as a piggy bank through refinancing,” says Akash Agarwal, CEO of GreenNote, a social networking and microfinance website. “That has completely stopped.” It’s increasingly difficult for parents to take out home equity lines, and students are looking away from traditional avenues such as Sallie Mae (SLM) and Bank of America (BAC) in favor of more creative ways to finance their education. (Yearly expenses for a public university, including room and board and financial aid, have risen to $9,980 a year from $7,650 according to the College Board, a non-profit examination board. The average net cost for a private college is $23,000, up from $18,050.)

Enter social networking and the phenomenon known as peer-to-peer lending. New companies such as Fynanz and GreenNote are offering students another place to look for loans, the internet. Fynanz offers an online marketplace similar in structure to peer-to-peer lending sites such as Prosper.com, but focuses solely on the student loan market. After a student creates online profile detailing goals, interests and financial need, non-institutional lenders can shop through profiles based on majors, academic institutions or other interests.

The student gets to set the terms of the loan, like whether to start paying it back immediately, pay only the interest, or wait up to 20 years. “We’re the first peer-to-peer marketplace that provides guarantees, anywhere from 50 cents to 100 cents on the dollar,” says Chirag Chaman, CEO of Fynanz. The guarantee is determined by one of six grades assigned to the loan, based on the student’s academic characteristics, like GPA, the institution, and whether they are enrolled full or part-time. And, borrowers must meet a baseline credit criteria (a 640 FICA score) to be considered, or get a co-signer like mom or dad, to come on board.

“From a borrowers standpoint our rate is anywhere between 7% and 12%,” says Chaman. As the first peer-to-peer loan to offer variable rate loans, Fynanz offers a unique benefit to lenders. “As interest rates rise, they’re not stuck in a low interest rate. That’s a big distinguishing point for the lenders,” says Chaman. But getting a great interest rate isn’t why investors use Fynanz. “This is about, to a certain extent, building a future for students.”

And not all students need good credit to finance their education. According to a new company called GreenNote, all they need is a strong social network. On GreenNote, which is scheduled to launch June 4, students will be able to create a profile, and then use it to solicit friends and family for funds. “GreenNote will formalize a loan so there is a structure in place to aggregate all the money, take a promissory note and then route the money on [the student’s] behalf to the school,” says Agarwal of GreenNote. Whereas Fynanz is strangers lending to strangers, GreenNote hopes to capitalize on a community model. “Your social network is bigger than you think it is,” says Agarwal. “You invite people, those people go to people. It includes local employers in the area, community-based organizations, places of worship, sports teams, anything.”

Loans filtered through GreenNote are fixed at 6.8%, a significant drop from the up to 16% rate that is more typical of private loans. Lenders are charged a 1% documentation fee and borrowers pay $49 or 2% of the loan (whichever is greater). Students can defer payments up to five years, and there is a 10-year cap on repayment.  “We believe all students deserve access to low cost loans and can leverage their social network,” says Agarwal. “And the stigma of asking for money is taken away when done through a platform like ours.”

Virgin Money is also entering the mix with Student Payback, a new program geared towards formalizing student peer loan agreements. Student Payback allows the borrower and lender to negotiate their own interest rates, which are typically around 5%. “Because students don't have a track record with banks, they are often charged twice what their parents are when borrowing for college,” says Asheesh Advani, Virgin Money CEO and founder. “Why not just do a deal within the family, so the parents borrow at their lower rate, and the student pays them back after graduation?” But structuring a loan between a student and parents can be costly. Packages range from $199 to $299, plus a $9 monthly fee.

So before logging onto your computer and hitting up friends, family or perfect strangers, make sure to explore your government loan options first. “People should view [GreenNote] as another alternative source,” says Agarwal. “Our position is please get the federal and low cost loans from the government on good terms first. Then come to us.”

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