If trends in the past decade are any indicator, student loan debt isn’t going anywhere but up. Recently in 2013, student loan debt hit $1.2 trillion, eclipsing both credit card and auto debt.
Student debt has become an increasingly trying aspect of receiving a degree. Steep tuition prices have coupled with a lackluster job market and expanded the risk of student debt exponentially–all while interest rates for PLUS loans have jumped to over 7 percent.
The outlook on student debt may be bleak, but luckily for some who are eager to expand their academic horizons, there may be another option. Peer-to-peer (p2p) lending platforms are taking a crack at mitigating the escalating student debt crisis–and making some money in the process.
Peer-to-peer lending and student loans
SoFi, or Social Finance, is a capital raising p2p lender (a loan between two people) geared specifically towards student debt. Through offering lower interest rates than direct and federal PLUS loans, not to mention boasting higher returns than federal 10 year treasuries, they attract both students and investors with the promise of saving and/or earning some cash. SoFi interest rates are calculated using their own metrics– income and job security being important factors.
They offer refinancing as well as direct loans for those seeking to receive an education. But possibly the most innovative aspect of SoFi is the fact that it transcends loan consolidation and refinancing, into a platform for social networking.
SoFi offers a medium for buyers looking to better their student loan situation, but also offers a place (by utilizing alumni as investors) for those same buyers to network with graduates of their institutions and others. This symbiosis awards the loaner with a higher return than federal treasuries, as well as the satisfaction of giving back to ones universtiy–a relationship which SoFi calls a mutual benefit to both parties involved.
SoFi is not the only player in the p2p student loan arena. Another New York based platform CommonBond is also seeing an opportunity in lessening the financial burden of student debt– though they haven’t yet issued the $840 million in loans that SoFi has. So far, these are the only two platforms of their kind.
What’s the catch?
If you’re one of the 37 million Americans with outstanding student loans reading this right now, your mouth may be watering–but as you’ve been dreadfully expecting–refinanced and consolidated loans through these platforms might not be as viable as desired.[contextly_auto_sidebar id=”MxtXFWYI6RpniV8FnR9ikxko5FsXTCZy”]As it stands, SoFi is only partnered with 78 schools, meaning unless one of these is your alma mater, you are unfortunately out of luck. Likewise with CommonBond, if you are not a graduate of the pre-selected schools, you are not yet eligible.
Some venture capitalists and alumni may also be more hesitant to invest considering the woefully high default rate for federal student loans–though the social networking aspect of platforms like SoFi may help quell some of those concerns.
Additionally, p2p student loans face the same potential pitfalls as regular p2p lending, such as improper diversification, bankruptcy, or the constant threat of increased interest rates.
Where is it going?
The practice of p2p lending is, in the foreseeable future, not an option that most can enjoy. As highlighted earlier, platforms like SoFi and CommonBond are relegated to the primarily private institutions which they’re affiliated with. But expansion, amongst affluent schools or not, may be imminent.
SoFi recently announced that it landed a $151 million securitization of refinanced loans, and also received a Standard & Poor’s rating of “A.” Meanwhile CommonBond has secured over $100 million in funding.
From a student perspective, those receiving an education in business, medicine, and law will benefit the most from SoFi’s expansion. So for now, all you liberal arts folks will have to deal with your $29,000 in student loans.