Peer to Peer Lending: Another Financial Aid Option?

You may have already had to get your financial aid ducks in a row for this semester, but for those students who are still scrambling to find tuition money, or have maxed out their federal loans, consider this new trend in financial aid options: peer to peer lending.

student lendingPeer to peer lending is a type of loan that individuals seek from ordinary people looking to lend money, without the formalities of going through a bank, credit union, or other financial institution. But, this isn’t just free money for school offered up by people out of the goodness of their hearts; there is some structure to these transactions.

If you were looking to borrow money through peer to peer lending, you’d go about it via an “online marketplace” or through your own social network (friends, family, and business colleagues).

The online marketplace connects you with lenders through an auction-like process. You would benefit because, in this case, you would secure the lowest rate for the loan since the lenders compete with each other to “win” the ability to lend you the money. But, these lenders usually factor in your credit score & debt when they make their decision to offer you a certain rate. So, even if they are competing, your lowest rate may not be very low if you have significant debt, a low credit score, or limited income.

The social network method is where you approach your network of friends & family to ask for small student loans in the hopes that one or more of them will lend you a portion or the entire amount that you need. You’d be wise to use one of the sites below to do this because, while your request is personal and you know everyone you’re reaching out to, the sites formalize the process, including the repayment terms and other fine print that you might not be familiar with or you just might feel uncomfortable discussing.

The main peer-to-peer lending sites are:

Though the rates and terms are often much more favorable for lenders and borrowers, there are some drawbacks to this type of financial aid for students that are interested. David K. Randall at Forbes mentions one in particular:

Under current IRS rules, the interest paid on conventional student loans is deductible from income taxes, as long as the borrower had an adjusted gross income of less than $70,000 (or $145,000 for married couples filing jointly.) Peer to peer loans from friends or family generally won’t qualify as educational loans under the government’s definition, which bars loans between family members.

So, have you looked into peer-to-peer lending? Any recommendations or horror stories? Share in the comments!

One comment to “Peer to Peer Lending: Another Financial Aid Option?”

  1. Loved reading this.

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