Paying your way through school with social loans

By Steve Goodman

Getting a good education just keeps getting more expensive. According to the College Board, the not-for-profit organization that created the SAT, annual expenses including room and board for a private university in 2007 was $23,000, up from $18,050 in 2006. The stats for a public university do not look much better – $9,980 in 2007, up from $7,650 in 2006, including room, board and financial aid.

To make matters worse, interest rates on private student loans are topping 16 percent in some cases. That’s if you can even get the loan. Citigroup and Bank of America pulled out of the student loan business in the spring and Wachovia recently reported it would stop financing undergraduate loans. Add the mortgage and stock market crises leaving fewer parents able to tap into savings, fewer endowments and scarcer scholarships, and what’s a cash-strapped parent or student to do?

Federally funded student loans are always the preferred way to borrow for college because of their low interest rates and deferred payment schedules. But if you don’t qualify or have tapped out this source, try a social lending site geared toward students.

What to expect at social lending site for students
Student social lending sites work much like mainstream social lending sites like Prosper.com. You post a profile asking for a certain loan amount and sit back and wait for lenders to fund your loan. The site consolidates all of the small, individual loans you receive, applies a single interest rate and disburses your payments to your lenders.

The biggest difference in a social lending site geared for students is that the money you raise goes to your school, not directly to you. (Nope, you can’t use the money to rent that apartment on the beach or spend spring break in Paris.) These specialized sites also offer student-friendly features as 10-year loan terms and deferred payments, which Prosper and LendingClub lack, despite their claim to offer student loans.

Mark Kantrowitz of FinAid.org, an information site for funding a college education, thinks peer to peer student lending is going to grow significantly in the years ahead, and is likely to catch on in other ways, too. “There is the potential here for colleges to set up their own peer to peer lending networks where they would connect alumni with current students as a way to increase enrollment,” he said.

Good grades = guaranteed loans and lower fees at Fynanz.com

Currently two social lending sites specialize in student loans: Fynanz and GreenNote.

Good students with solid credit histories already under their belt might prefer Fynanz, a stranger-to-stranger lending site. Student borrowers must have a FICO score of at least 640 or a co-signer. The site assigns each loan one of six possible grades based on the student’s academic characteristics, the institution, and whether they are enrolled full or part-time. The better the grade, the lower the upfront fee, which ranges from 2.9 percent to 6.9 percent of the loan amount.

On the plus side, Fynanz guarantees its loans, which attracts quality lenders’  and a lower interest rate for you. The higher the grade a loan has been assigned, the more of the loan Fynanz will guarantee, ranging from 50 cents to 100 cents on the dollar.

Fynanz’s up-and-coming competition, recently launched GreenNote, takes a more laid-back, personal approach. It does not offer lenders a guarantee, but it has no credit requirements and lets borrowers invite family and friends to contribute to a loan. It’s up to you whether your loan profile can be viewed publicly.

All loans are assigned an initial interest rate of 6.8 percent, which generous lenders can lower or even waive. It’s all about tapping into people who know and like you, says GreenNote CEO Akash Agarwal. (You invite people, those people go to people. It includes local employers in the area, community-based organizations, places of worship, sports teams, anything.)

Already have a loan lined up? Go Virgin

A third option worth noting if you already have your money lined up and just need to document it: Virgin Money USA, a loan servicing site aimed at formalizing pre-arranged loans between family and friends.

Virgin has some cool calculators aimed at students (the “Lender Blender” lets you see what your final interest rate would be after combining various types of loans including federal, bank, personal and even credit card advances).

Plus, Virgin’s Student Payback plan offers a processing fee break on up to 10 sequential loans, a boon for parents who plan to dole out money to their students a semester at a time.

Which one’s best?

With its lower fees, one interest rate for all, simple process, and no credit score requirement, GreenNote is probably the best choice for the majority of students looking to raise college funds through a social lending site. A hang-loose student-oriented site, GreenNote encourages students to stay in touch with lenders during their school career and offers lenders the opportunity to forgive all or part of loan, before it comes due.

With its loan guarantee and rating system, Fynanz is weighted more heavily in favor of lenders; however, it is the site’s ability to attract competitive lenders that results in interest rates as low as 3.5 percent.

For parents with financial means, good credit, or sources of equity funding, the Virgin Money approach is a good one. It allows parents to obtain loans at good interest rates and share those funds with the student. It keeps it (all in the family), but makes it official.

Graduate student Christina Christopher is happy with her choice. Christopher was entering the last year of her MBA program when she discovered she had maximized the amount she could receive in federal student loans. With time running out she turned to GreenNote.

(The process was very simple. All I did was create a profile, put in my situation and the time I needed the funds by, and the amount needed, send e-mails out to all the people I know, and within a month the funds were issued to the school.)