Spending It - Loans in the Time of Facebook - NYTimes.com
Spending It
Loans in the Time of Facebook
By LAURA PAPPANO
Published: October 30, 2008
If ever there was a time to ask friends and family — and strangers — for a college loan, this is it. You don’t have to be an economics major to see that turmoil in the financial markets has made loan money scarce and expensive.
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My Rich Uncle, Campus Door (owned by Lehman Brothers), the College Loan Corporation and Education Finance Partners have eliminated or cut back on private loans. Tim Ranzetta, founder of Student Lending Analytics, which evaluates student loans for financial aid offices, estimates that lending capacity for private student loans has shrunk 20 to 27 percent since last year. That means up to $5 billion that students could borrow in 2007 is no longer available.
With this bleak backdrop, “social lending” or “peer-to-peer lending” (P2P if you’re hip) might be the Facebook generation’s answer to the crisis. Peer-to-peer lending has been around for several years for buying cars and starting businesses. In recent months, a half-dozen companies have applied the approach to student loans, aiming to help fill the gap between government financial aid and the cost of college.
The idea is to connect students who need cash with people who will lend it to them. The sites deal with the paperwork and servicing (no confusion about when that payment is really due). And a student might be able to get a lower interest rate than those available through traditional loans, because lenders are willing to look beyond conventional criteria for a chance to earn better returns on their money. The lender may also be swayed by a connection with the student. Think alumni, fellow bass guitar enthusiasts or computer science majors.
Because peer-to-peer student lending is so new and so little data is available, it’s impossible to know how many students are getting loans or to predict whether this option will ever be a major source of money for college. That’s certainly not likely for many years, says Mark Kantrowitz, publisher of FinAid.org.
The companies take different approaches. Virgin Money (virginmoneyus.com), Richard Branson’s foray into lending, focuses on formalizing and servicing loans among friends and family members. On Fynanz.com, strangers are the target lenders, and student profiles — brief and jazzy personal statements and photos — the lure. (Tip from the C.E.O.’s: sob stories don’t work.)
Lenders can spread their money around, offering as little as $50. Click around and weigh the merits of lending to Keith, the Occidental College student seeking $17,000 for a semester in Chile; or the 42-year-old single mother who needs $7,000 to go back to college to become a nurse; or the Columbia freshman Dominique, who has plans for medical school but right now needs $5,500 for books and expenses.
Of course, the loans are unsecured and few students have credit track records, so lenders must judge the likelihood of a default. GreenNote.com, whose interest rate is fixed at 6.8 percent, does not do credit checks but disburses money only to the college.
As does Fynanz. But Fynanz has developed its own rating system for borrowers: students must have a credit score of 640, and are graded — and their interest rates set by a calculation that includes year in college (the closer to finishing, the better), G.P.A. and college attended. Fynanz guarantees 50 to 100 percent of the loan depending on a student’s grades. (Less risky students give investors more peace of mind but lower returns.) The average interest rate, says Chirag Chaman, who runs Fynanz, is 8 to 9 percent.
Prosper.com, the nation’s largest peer-to-peer site, is currently tweaking its model. Because peer-to-peer sites will undoubtedly attract more would-be borrowers than lenders, Prosper is hoping to grow by creating a market in which lenders can sell the loans they make rather than having to hold them to maturity, following the lead of a rival, the Lending Club. Until Prosper receives regulatory approval, it announced last month, it is not processing any new loans.
Most companies won’t disclose the dollar amounts committed; the exception, Virgin Money, reports assisting with $12 million in student loans since June, when it began offering them.
Robert Shireman, president of the Institute for College Access and Success, calls the whole idea “potentially interesting” but says that because of the high risk of lending to a student, “the peer-to-peer approach only really works if there is some level of charity.” As for borrowers, he urges students to look carefully at fees. There’s generally no listing charge, but often a flat fee, or a fee based on a percentage of the loan, or a transaction fee with each payment.
Perusing the lending sites also makes clear how many students needing support are not finding it. At GreenNote, for example, page after page shows students with zero progress — in early fall, the tail end of the loan season, the sites featured as many as 1,000 profiles.
The ability to find a lender may also reflect a student’s connections. Akash Agarwal, GreenNote’s founder, says on his site, “A lot depends on the person’s social network.”
For some that’s a problem. Bakari Pace, a sophomore at Morehouse College who plans to go to law school, would seem a good bet for success. He gets federal and institutional aid and worked last summer at both a law firm and at a Costco, where he gave out samples of a new energy drink. One of five children in a family that survives on donated food, Mr. Pace was short of money. In August, he put his profile on GreenNote, seeking a $10,000 loan, but received no offers: none of his contacts have any money, either.
Mr. Pace went to school this fall with $4,000 on his bill and no money for books or a meal plan. Financial aid officers eventually found scholarships to cover his costs — for this semester.
For students like Mr. Pace, peer-to-peer lending may not be the best answer.
“I hope this takes off and works well,” says Richard Toomey, head of financial aid at Santa Clara University in California. With some students paying 10 to 20 percent interest for private loans, he sees GreenNote as a cheaper option; its rate is the same as a federal Stafford loan. Mr. Toomey says 26 Santa Clara students have profiles on GreenNote, and four have received loans. He personally “invested” $100 in a student whose story he found compelling.
The peer-to-peer C.E.O.’s say students are more likely to get money if they ask for less. “If you write that I am only looking for $4,000 to pay for X, Y and Z, it sits a lot better than if you try to get $15,000,” Mr. Chaman says. Three New York University alumni, he says, have committed to making $500,000 in loans to N.Y.U. students through Fynanz, which started up in June.
Crystal Gnemi, a University of Kansas senior majoring in arts and architecture, credits her snappy profile for helping her get a $7,000 loan in 48 hours on Prosper, which uses an eBay-like bidding system for interest rates.
Lenders offer amounts at particular interest rates; those with the lowest rates get in on the deal. Ms. Gnemi wrote that she planned to get a master’s in architectural engineering and that she had a 3.6 G.P.A. “while working 30-hour work weeks while taking 18 credit-hour semesters.”
Ms. Gnemi, whose father is an architect and mother a substitute teacher, does not qualify for need-based aid. Though she works as a lifeguard and interior designer, she needed a loan to cover tuition and costs. While she was willing to pay up to 10.92 percent for the loan, so many lenders — 221 — bid in amounts from $50 to $480 that the rate dropped to 8.95 percent (in the end, 123 lenders participated). A bonus: e-mail notes from 17 Kansas alumni. “I have zero friends and zero family investing,” she says. “It is fully funded by people I do not know, but have become friends with since.”
