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Changes in crowdfunding and alternative finance in the past few years have made it so that you can raise money online for just about anything. Peer to peer lending services now exist that allow students to raise funds for their education online. Having this new option available can be helpful for students in certain situations, but as usual the practice has some downsides and is not a perfect match for everyone.
If you are searching for the loan type that best suits you, here are a few things you should know about the way peer to peer lending for students works today:
According to Forbes, student loans are “are the second largest amount of debt in the United States behind mortgages.” Of course, investors have realized the market potential for lower interest loans and they have worked to bring about peer to peer lending sites specifically for students. These sites can simplify the loan process by connecting borrowers with accredited investors as well as friends and family.
What is Peer to Peer Lending?
Source: Prosper and Visual.ly.
Benefits of Peer to Peer Lending
One of the main benefits of peer to peer lending for students is that with good credit, you can get a much lower interest rate than you would with most traditional student loans. Peer to peer lending can also make it easier for students with a bad credit score (or those who can’t find a suitable cosigner) to be approved for a loan – even though the interest rates on these loans will be higher. Another advantage is that the application process is usually simpler and you find out faster whether or not the loan is approved.
An article by Bankrate warns that students should still do their due diligence before applying for a loan on a peer to peer lending site, just like they would for a traditional loan:
“Remember, borrowers who take out P2P loans have the same obligations as they would after securing a bank loan. Defaulting on the loan will cause the P2P Web site to report the delinquency to the credit bureaus, which will damage the borrower’s credit score.”
A post by eStudentLoan outlines different kinds of peer to peer student loans and their advantages and disadvantages. Specifically, it is noted that there are two main types:
– friends and family loans.
– stranger-to-stranger loans.
When it comes to both types of loans, platforms typically offer discounts for choosing automatic payments, while some may have the option for an unemployment protection plan.
Disadvantages of Peer to Peer Lending
Several of the disadvantages they outline are that these platforms do not allow things like income based repayments and that peer to peer student loan terms tend to be shorter (about 1 to 3 years). Another point made by eStudentLoan is that if you go with a friends and family loan, then:
“[Y]ou 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.”
This is partly because investors in peer to peer loans often invest small amounts into a larger number of borrowers in order to reduce the risk of losing their money if the borrower can’t pay the loan back. This can mean that a student needs to raise money from a bigger number of investors to reach the full loan amount, which can take some time.
The main platforms that currently specialize in peer to peer student loans are: Commonbond, SoFi, and Zero Bound (see more here). It is important to note that some of the more specialized platforms, like Commonbond, only offer their services to graduate students.
To get a better idea of the growing popularity of these platforms and the kind of savings you can get by applying for a peer to peer student loan, take SoFi as an example. SoFi, which stands for Social Finance, has recently “raised $200m in a financing round that values the four-year-old start-up at $1.3bn ahead of its upcoming initial public offering.” Their website claims that members who refinance with them save an average of $11,783.
Alternatives to Peer to Peer Lending
Remember that if these kinds of loans don’t sound right for you, reward and donation crowdfunding platforms like GoFundMe and Indiegogo also allow users to raise funds for education costs. For tips on how to do that, I recommend checking out this article. Overall, knowing your options is the best way to get a good deal on a student loan while choosing a plan that works well for everyone involved.
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