Peer-to-peer (P2P) student loans are a type of peer-to-peer loan. Peer-to-peer student loans can be a practical alternative to more traditional forms of education financing and credit cards for students and parents who have a short-term need for small amounts of funding. Peer-to-peer student loans are popular for purposes that might not qualify for federal or private student loans, such as enrolling in an unaccredited school, paying a debt owed to the college before the student can reenroll, graduate or transfer to another school or borrowing by an international student.
Peer-to-peer lending is a form of crowdfunding, where consumers borrow money from many individual lenders, each contributing small amounts of money toward the borrower’s goal. The lenders may include relatives, friends, colleagues, community organizations and complete strangers. This is in contrast with traditional student loans, where the money is provided by a single lender, such as a bank or other financial institution, government agency, college or university. Peer-to-peer lending is also known as person-to-person lending, social lending and microlending.
There are two main types of peer-to-peer loans: friends and family loans and stranger-to-stranger loans.
There are several disadvantages to peer-to-peer student loans from the borrower perspective.
Most of the peer-to-peer lenders that specialized in peer-to-peer student loans stopped making peer-to-peer student loans in the U.S. because of changes in disclosure requirements. For example, GreenNote started as a friends and family peer-to-peer lender, but now enables students to solicit donations from their personal network in a more traditional form of crowdfunding. Fynanz, now known as LendKey, previously specialized in peer-to-peer education loans, but subsequently created CU Student Loans to combine student loans from more than 100 non-profit credit unions into a single interface.
There are still several peer-to-peer lenders that will make P2P loans, albeit not specialized for higher education. These include Prosper and Lending Club, as well as the friends and family lender LoanBack. In the UK, there are RateSetter and Zopa. Kiva still makes loans to individuals in developing countries.
There are two lenders of private student loans that were inspired by the peer-to-peer model, SoFi and CommonBond. Both claim that they enable alumni to invest in current students and that this social connection yields benefits for borrowers and investors. It is unclear, however, how much of the loans are funded by alumni and how much by institutional investors and venture capital.
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