Have You Considered Peer-to-Peer Lending?

  8/27/2014 by    in Private Student Loans   2 Comments

P2P lendingWhere would you turn if you had exhausted your federal financial aid and still did not have enough funding through scholarships and grants to help cover your college expenses? Private students loans, right? For most students that would be the logical next step, but it’s certainly not your only option. Over the last few years, peer-to-peer lending (also known as social lending) has increased in popularity.  Why? It’s simple. Peer-to-peer loans typically offer lower interest rates and they often approve loans to those who may not qualify for traditional private student loans. There are basically two formats you can choose from: (1) framily (friends and family) loans and (2) stranger-to-stranger loans. Both have their advantages and disadvantages.

Advantages

As mentioned previously, both types of peer-to-peer lending formats may give you access to loans with lower interest rates. You may also qualify even if your credit score is less than perfect. The application is much easier to complete and you should receive approval (or denial) in a very short period of time. There are also no prepayment penalties and you may have the option to enroll in an unemployment protection plan. Most peer-to-peer lenders also give you a discount if you choose to have your payments automatically withdrawn from your bank account. The biggest advantage, though, is the ability to obtain a loan without a cosigner in most cases.

Disadvantages

Although peer-to-peer lending has many advantages, there are a few things to consider before you take out a loan. Unlike federal student loans, you generally won’t be eligible for forbearance, income-based repayments, or any loan forgiveness plans if you accept a peer-to-peer loan. You may also have fewer years to pay back your debt. If you choose a framily loan, you may also be ineligible to claim the student loan interest deduction on your federal taxes because it is unlikely to meet the definition of a “qualified education loan” per the Internal Revenue Service (IRS). Another key drawback is that you may or may not receive the entire amount requested and it can take some time for your request to be funded.

Where to Find Them

In general, most peer-to-peer lending sites, such as Prosper and Lending Club, offer personal loans for weddings, home improvements, credit card debt consolidation, and more. There are only a few, however, that specifically offer student loans at this time. Both SoFi and CommonBond offer student loans and refinancing, but it is important to note that they only provide student loans for graduate-level degrees at specific colleges and universities. GreenNote, which used to offer a more conventional type of student loan product, has switched to a crowdfunding platform where friends, family, and strangers may contribute to your college expenses.

We expect, however, that more players will enter the arena soon. As college tuition rates continue to rise, and more families find it difficult to cover the costs of an education, more creative ways to pay for college will be needed and welcomed.

About Tamara Krause

Tamara is the Social Media Coordinator and a regular writer for eStudentLoan.com, ScholarshipExperts.com, and CampusDiscovery.com. She enjoys helping students prepare for college. As a mother of four, Tamara has first-hand experience with many areas of education, including special needs (autism), the International Baccalaureate program and post-secondary education. She enjoys speaking at schools and mentoring others online. In her free time, Tamara enjoys volunteering and supporting her favorite football team, the Jacksonville Jaguars.
2 Comments
  1. claire pacchielat

    Hi, My son owes 60,000 after he completed his MBA. He must consolidate and start repayment soon. Is his best option SO FI loans, government loan consolidation or a personal loan from me at 4.75%.
    If he takes the loan from me he will have no tax benefit.
    He does not have a big salary, 55k per year.
    Thanks,
    ClaireP

  2. Shawn Lindstrom

    Hi Claire,

    SoFi offers a very low rate if he qualifies (school, program and credit are all factors). Plus, he can consolidate both federal and private student loans if he has both types. He may also wish to consider Charter One or Common Bond>/a> for the same reasons. In order to get the lowest rate, he will probably need a cosigner with excellent credit.

    If he only has federal loans, his interest rate will be the weighted average of each of the rates on his loans. While he may be able to get a better variable or fixed rate through a bank or other lender, he will lose some flexibility with respect to repayment options offered under the federal Direct consolidation loan program.

    If you ultimately decide to go the personal loan route, be sure to formalize the arrangement. To do so, it’s always advised to consult an attorney. However, there are websites that offer promissory notes for purchase. If you use such a site, ensure it is reputable and that the document you purchase covers the concerns of both parties.