Even as home equity loans are disappearing, students still have options for college financing.

For students trying to find financing for college, the James Taylor song "You've Got a Friend" has new meaning. In the aftermath of the subprime mortgage crisis, websites are filling the lending void and helping students finance their college educations.

Mortgage crisis spillover

Back when the mortgage industry was hopping, homeowners felt pretty comfortable with the prospect of borrowing against their equity to finance their child's college tuition bill. With real estate values suffering around the country and the availability of equity financing drying up, however, many households have no choice but to change their tuition financing strategy.

Timing is everything

These circumstances have created a window of opportunity for peer-to-peer lending websites to step into the realm of student loan financing. This new option involves the exchange of funds between individual lenders and borrowers, without a financial institution intermediary. The Internet provides the medium, by way of auction-style websites, that brings borrowers and lenders together. Prosper.com, the first general peer-to-peer lending site in the U.S., paved the way for other businesses following the same model-and some of these new companies are specifically targeting student loans.

Fynanz and GreenNote are two such companies; each offers a slightly different type of peer-to-peer lending community. On Fynanz, for example, students set up profiles describing themselves, their academic goals, and their financial needs. Individual lenders can search the profiles, and then place bids on all or a portion of selected loan requests. Bids are made in $25 increments, and the loan request listing remains active until the loan is fully funded, the borrower chooses to cancel the loan request, or the listing expires. The loan can be partially funded to the student if the total of all bids exceeds $2,500. Fynanz allows students to choose between deferred payments or interest-only payments until graduation. Interest rates are competitive and largely based on the student's academic performance. Fynanz imposes minimum qualification requirements on prospective borrowers; if the student's FICO score is below 640, that student must have a co-signer to participate.

The color of money

GreenNote emphasizes the student's character and existing social network. The site allows prospective student borrowers to invite friends and family to bid on the loan request. All loans carry a fixed, 6.8 percent interest rate, and there are no co-signer, citizenship, or credit score requirements. Payments can be deferred for up to five years.

Like a Virgin

For those situations where parents can borrow the money less expensively than the student can, Virgin Money offers peer-to-peer lending documentation and payment services. This allows the parents to make a fully documented loan to their child, complete with payment reminders and auto-pay options, so that the student can accept all or a portion of the tuition burden.

With the advent of peer-to-peer student lending sites, college students are finding they do have friends-friends who are willing to invest in their promising futures.

    Published on July 5, 2008