Money is tight. While college costs are rising, monies from both government and from private financial institutions have dried up. Also, college savings accounts such as 529s and individual investment portfolios may not be worth enough now to cover the full cost of college.
Of course, you have all most likely started with filling out the free application for federal college monies, the FAFSA. FAFSA, by the way, should meet each college’s financial aid deadline—usually February 15. The FAFSA will determine what grant monies and loan monies will be available to you for your college education. Although these monies are real and help substantially, especially those who are going to less expensive public schools and universities, there usually still is a gap between what you can receive from the government in grants, which do not have to be repaid, and loans given at reasonable interest rates. In the instance of private colleges, that gap can be very large, indeed. How do you cover those extra costs?
One new and fast-rising alternative is social lending. Social lending is person-to-person lending which has now hit the online market. Unlike the traditional lending system, in social lending the commercial trappings, such as branch costs, management personnel salaries, etc. have been by-passed to save on overhead. In this system individual lenders can find individual borrowers and vice versa. Social lending also allows for groups of lenders to find borrowers. Although social lending often provides loans for small business and personal loans, it also provides loans for college students and their families. For example, a group of businessmen may want to invest money to offer a borrower who will train to be a potential employee in that business sector. It’s a win-win situation. These lenders make money from the interest on what they lend and replenish their pool of good employees.
One well-known online social lending company is Lending Club. Lending Club is a social lending network where members lend and borrow money from each other at better rates, bypassing the banks. In this poor credit market traditional loans are being offered through commercial banks at interest rates of anywhere from 8% to 13%. Federal loans, although better, can also rise to rates as high as 9% (PLUS Loans). Lending Club offers a 7.88% rate to its best credit risks.
How is your credit rated? Lending Club starts with a traditional credit scoring and may add an additional assessment from customers’ reputations within their social networks. Networks range from FaceBook to national scholarship programs, which provide hidden underwriting information. In fact, because this kind of loaning (P2P Personal Loans) provides some community trust, traditional banks may be enticed to reward these low risk loans by providing funding to places like Lending Club to grant more and more loans, making these social lending systems more and more popular.
Since its first loan in June, 2007, Lending Club has facilitated $236 million in loans. The way it works is Lending Club acts as a middle man between a lender and a borrower seeking an unsecured loan for an amount anywhere from $1,000 to $25,000. Borrowers pay a rate of interest determined by the loan amount and the borrower’s credit risk along with a .75% to 3.50% processing fee on the principal borrowed. Investors bid on loans they wish to fund and the amount they wish to contribute to the loan, anywhere from a few hundred dollars to the total amount. Lenders make their money from repayment plus the interest minus a 1% service charge which goes to Lending Club.
The internet has allowed the exchange of money to become more immediate, between people with less overhead, and with more reasonable fees. Online entities like Lending Club are providing a great service. Such a system may be a good alternative for covering college costs in today’s financial world.