More students turning to peer-to-peer loans to pay for college

As credit continues to be tight, college students are increasingly turning to peer-to-peer loans, usually over the Internet, to fund their share of higher-education expenses.

According to a poll released this week by Gallup and student loan lender Sallie Mae, students on average cover 30 to 55 percent of their college costs. About 45 percent comes from parents. Grants and scholarships, obtained by about half of all students, make up the rest.

Nontraditional loans are only a small fraction of the market today, but it is an emerging market, said Mark Kantrowitz, a financial aid and college planning author and founder of the online college aid resource Finaid.org.

These new loans can come in many forms, for example:

Web sites like Prosper.com will set up loan auctions, where hundreds of faceless online investors each contribute $25 to $100 toward a student’s loan.

LendingClub.com and GreenNote.com pair with borrowers’ social networks to tap friends, relatives and alumni from sites like Facebook.

Such networks go by the name of peer-to-peer, or P2P, lending.

"It’s an intriguing idea of investing in individuals," Kantrowitz said. "Give it a decade or two as the industry matures, and it will probably have an impact on student lending."

P2P lenders hope for quicker adoption by students and lenders.

"This emerging market is definitely filling a gap," said Paul Rehnberg, CEO of Cology.com. The Scottsdale, Ariz., organization brings students together with credit unions, community banks, corporations, alumni associations, endowment funds, foundations and, through its GreenNote subsidiary, individuals.

This year, Cology has processed more than $279 million in loans for students from 84 new private lending sources, Rehnberg said. Lenders in Texas include NASA Federal Credit Union and the credit unions of the cities of San Antonio and Irving.

Irving Federal Credit Union has made two student loans through Cology since it began offering the program last fall, said Lauren Horton, president of the credit union, which is open only to city employees.

"We encourage our customers to look for grant money and anything else available before they come to us," she said. "We’re here to fill in the gap."

With a current annual percentage rate of 4.9 percent and deferment of payments until after graduation, the credit union is using the loans more as a way to attract young people who may become lifelong clients, Horton said.

"We’re not looking at making money on these loans," she said. "It’s offering a service to our members and giving us a way to reach new members."

Not all P2P loans are so cheap, but most are less expensive than bank loans not backed by the government.

To pay off high-cost student loans, a borrower on Prosper.com recently funded a $3,000 loan at an APR of 12.41 percent for three years. The loan, which is posted among other borrowers’ anonymous profiles on Prosper’s Web site, was funded in three days by 126 investors who put up $25 to $100. The lenders’ return is listed as an annual yield of 9.3 percent.

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