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What are Peer-to-Peer Student Loans

Peer-to-peer (P2P) student loans are a type of peer-to-peer lending. 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. P2P student loans are popular for purposes that might not qualify for federal or private student loans, such as enrolling in an unaccredited school, paying for expenses not covered by financial aid, or borrowing by an international student.

 
  • Interest Rates
    • Fixed as low as: 4.25% APR1
    • Variable as low as: 1.25% APR1
  • Interest Rates
    • Fixed as low as: 3.49% APR1
    • Variable as low as: 1.09% APR1
  • Interest Rates
    • Fixed: 4.24% APR - 12.99% APR3
    • Variable: 1.24% APR - 11.99% APR3

What Is Peer-to-Peer Lending 

Peer-to-peer (P2P) lending (also referred to as person-to-person lending, social lending, and micro lending) is an option for people to get the funding they need from other individuals (investors) instead of a traditional bank or credit union. Think of it as community lending amongst strangers who want to help each other out. The investors are able to get a return on their investment and the person borrowing can often get the financing they need with multiple types of loan terms available.

However, please note that your research and homework will be necessary because not all P2P loans offer competitive rates or fees. In some cases the rates could be as high as 30% or more depending on your credit.

Before you commit to a P2P loan, you’ll want to consider whether you could get a better deal with a traditional lender instead. Also, not all peer-to-peer lenders operate in every state so be sure to read the fine print.

Stride Funding: Explore income share agreements, a flexible way for students to pay for their education with no interest payments. Learn More

There are two main types of peer-to-peer loans: friends and family loans and stranger-to-stranger loans.

  • Sites that support friends and family loans provide formal documentation of the loan, such as a signed promissory note with specific terms and conditions that comply with federal and state laws and regulations. These sites may also provide servicing of the loans, such as collecting payments and reporting on-time and delinquent payments to credit reporting agencies.
  • Sites that support stranger-to-stranger loans help match borrowers with lenders. Interest rates on stranger-to-stranger loans may be higher than interest rates on friends and family loans. Eligibility for stranger-to-stranger loans may depend on the borrower’s credit scores, although minimum credit scores may be lower than on most private student loans. Peer-to-peer student loans are also an option for students who are unable to obtain a creditworthy cosigner.

Disadvantages of Peer-to-Peer Student Loans

There are several disadvantages to peer-to-peer student loans from the borrower perspective.

  • Difficulty attracting funding. Less than ten percent of peer-to-peer student loans are fully funded. Lenders diversify their investments to reduce the risk of default by lending small amounts to numerous borrowers. Borrowers often need funding from dozens and dozens of lenders to get fully funded. Borrowers seeking smaller loan amounts at higher interest rates are more likely to be funded.
  • Lack of borrower benefits. P2P loans do not come with the same protections or perks that the federal student loan program (and some private loans) offers. This includes the ability to defer payments and potentially qualify for loan forgiveness.
  • Eligibility for the student loan interest deduction. Peer-to-peer loans between family members are unlikely to qualify for the student loan interest tax deduction or to qualify for the exception to bankruptcy discharge, since the definition of “qualified education loan” under the Internal Revenue Code of 1986 at 26 USC 221(d) excludes “indebtedness owed to a person who is related . . . to the taxpayer.” Stranger-to-stranger loans, however, will most likely qualify for the student loan interest deduction.
  • Short-term loans. Most peer-to-peer loans are short-term loans, typically requiring repayment in 1-3 years. Some peer-to-peer lending sites have created more specialized student loan programs with longer repayment terms.

Sources of Peer-to-Peer Loans

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.

For international students looking for peer-to-peer lending options, there are P2P lenders in the UK such as RateSetter and Zopa, and 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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