Mortgage Crisis & Student Loans

A recent article from Businessweek Online highlighted the high interest in peer-to-peer lending within the student loan sector. According to the article, the sustained situation of the mortgage crisis, as well as an otherwise downtrodden financial outlook, allows only the borrowers with high credit ratings carry enough clout to obtain private college student loans. In a shift away from lending mainstays such as Sallie Mae and other corporate banks, students and their parents are relying on peer-to-peer loans. Peer-to-peer lending, which facilitates loans between friends, family, and even strangers, is on the rise for sites marketing to those searching for college funds solutions.

The lending sites offer a variety of approaches to solving to college funding problem. For example, Prosper allows potential borrowers to publicize their loan needs and terms and have potential creditors bid on portions of the loans. Ideally, competition will lower students’ interest rates through the bidding. Other sites, such as Virgin Money USA simply formalize the loan process between friends, families, and others. Focusing on other types of loans initially, the site now processes a tenth of its business in the form of student or higher education loans. The Virgin Money USA’s president Asheesh Advani, notes the benefits of this organization in the flexibility of the repayment plans as well as relatively low interest rates. Commonly within the site, interest rates on loans range from 4% to 5% on the principle amount. Considering the federally backed Stafford Loan included a 6.8% interest rate, the loans within the site prove highly beneficial to both lender as well as borrowing students. In almost all cases, the terms of the loan agreement are privately arranged between the borrower and the lender, thus, the extremely flexible loan agreement and repayment terms.

For those unable to reach potential lenders in their own social networks, GreenNote, another peer-to-peer lending site, allows students to tap into these social networks and seek potential lenders. The site officially goes live sometime in June, however, a soft-opening at twelve colleges prompted the nationally emergence of the site. The loans come in the form of a fixed 6.8% interest rate with option to forego the interest repayment of the loan at the end and write-off the loan as a gift.

Another version of the peer-to-peer loan websites is Prosper. Prosper offers students three-year loans, which the repayment on the loan begins immediately. Interested borrowers allow the site to run in-depth credit checks and define a risk measure. The defined risk measure informs interested investors of the site’s assessment of borrowers risk through a uniform rating system. Lenders then bid on portions of loans, and with increased competition, loan interest rates for borrowers potentially decrease. The website, Prosper, earns revenues through processing the loans in the form of fees. Borrowers can expect to produce one to three percent of the loan amount initially and as far as lenders constraints, a service fee of one percent is charged annually.