In this final installment in our state of p2p lending series we are looking at student loans. The idea of applying peer to peer lending to student loans has only been around a couple of years. But in that time there has been some dramatic changes. The two leaders in this niche, Fynanz and GreenNote have completely shifted their focus and have exited the space as far as investors are concerned. But there is one new comer, People Capital, that gives us some hope that p2p lending can work for student loans.
People Capital (http://www.people2capital.com/)
There is really only one option these days for peer to peer investors wanting to participate in student loans: People Capital. They have successfully come through one student lending season and are looking to increase loans in the coming year. They launched their online p2p platform in the summer of this year for the 2010-11 academic year.
According to Al Alper, president of People Capital, they funded roughly $2 million in student loans out of $8 million loans that were available on their site. The interest rates ranged from 6% to 14% with most loans at the lower end of that range. The loans work in a reverse auction process similar to Prosper where a borrower will set the maximum interest rate they are willing to pay and then lenders bid the rates down.
The great thing about People Capital is that is available to lenders and borrowers in all 50 states, the only p2p lending site in the country that can say that. But there is a catch for investors. Not any old investor can sign up like they can with Lending Club and Prosper. You need to be what is called an accredited investor, which basically means you need $1 million in net worth or you have to be earning $200,000 per year. So, obviously that reduces the investor pool dramatically for People Capital. It has also allowed them to sidestep the SEC regulatory quagmire that has stifled other companies in this industry.
The advantage that People Capital has as a company is that p2p lending is only a small part of what they do, so they don’t need to rely on the income produced here to become a viable business. They have a white label product that allows any financial institution to offer student loans. They also have an interesting business called the Human Capital Score that provides a FICO like score for student that is based on their future ability to pay taking into account a variety of factors.
GreenNote launched back in 2008 as a peer to peer lender for student loans after raising more than $4 million in venture capital. But in less than a year it was acquired by TuitionU, a resource that gives students access to direct loan providers. It started with a strong premise for borrowers – all loans would be just 6.8%, payments could be deferred for five years and then students would have 10 years to pay back the loan. It was designed to mimic the federal Stafford loan program.
Once TuituioU bought GreenNote, it changed the program completely, as far as investors were concerned. While maintaining some of its p2p roots, it turned from a peer-to-peer lending site into a peer-to-peer donation site. Now, there are no investors at all, people are purely donors with no returns of interest or capital. One thing that all companies in the p2p lending space could learn from GreenNote is their use of social networking. Because this is a donation program GreenNote relies heavily in a student’s social network, particularly Facebook and Twitter and has integrated this into their site.
While GreenNote is still a good option for students looking to raise money for their education it no longer has anything to offer investors. But if you want steer your philanthropic efforts towards the student population then GreenNote is a good option. Anyone can register as a donor and the minimum donation is just $20.
Fynanz launched in 2008 as the first peer to peer lending platform focused exclusively on student loans. It existed for about a year before it, too, morphed into something completely different. The CEO cited the financial crisis and the inability to attract lenders as the reason for the change.
Fynanz is now a technology provider of custom private student lending programs. Basically, the y have a software platform that a financial institution can use to get into the student loan business. While it is still helping students it has nothing to offer investors any more. But it must be doing ok with this change because earlier this year it raised another $6.5 million in venture capital.
So this concludes our series on the state of p2p lending in the USA. Like any new industry, p2p lending changes quickly, with new players coming and going as companies try different business models. I expect once the industry matures there will be more stability and niche industries such as student loans will become more appealing. But there is certainly room for innovative companies to enter now and make a name for themselves.