Where 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.
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 Most peer-to-peer lenders also give you a discount if you choose to have your payments automatically withdrawn from your bank account.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.
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.