Social lending offers alternative to bank, federal loans for students seeking funds

With the economy in poor shape, college students are seeking ways to pay for college other than through scholarships, grants and federal loans.

One such alternative is known as "social lending" or "peer-to-peer lending."

With social lending, borrowers secure loans through

family members, friends and even strangers from social lending Web sites like VirginMoney.com and Fynanz.com.

Eric Thompson, an associate professor of economics at UNL, said with tight credit and a poorly functioning market, students are seeing social lending as an alternative way to get loans.

Lenders and borrowers are able to find each other directly on the Web. Thompson said social lending is becoming more of an option for students. Because of their familiarity with the Internet, students are more willing to take a chance with alternative loans.

"With any technology, a big part is putting trust in it," Thompson said.

Another reason is a decrease in lending from banks, he said.

According to an April 2008 report by the Federal Reserve Board, 40 percent of the banks that originated student loans under the Federal Family Education Loan Program expect their commitments to provide to decrease. Forty-five percent of those banks also expected the number of schools they provide loans for to drop.

Craig Munier, director of the office of scholarships and financial aid, said students with financial need are finding that federal loans meet the needs of the students at the university.

However, he said, alternative loans are probably more popular with students at the more expensive colleges and universities.

Erika Franta, a freshman pre-med, biology and Spanish major, has received a lot of money in scholarships and will be able to pay off the rest of college with student loans.

"All of the money I'm getting is from the university," she said.

One of the appeals of social lending is cutting out the middle-man - the banks.

"It's possible a student could qualify for an alternative loan when they didn't qualify for federal loans," Munier said.

Munier said students exploring getting a loan through social lending should read the fine print carefully and look at the terms and conditions.

"Are there any up-front fees, and, if so, how much are these up-front fees?" Munier said.

Additionally, alternative loans may not have the same built-in protection as federal loans, he said. The loans may lack loan forgiveness provisions, as well.

Using alternative loans, students may be charged a higher rate of interest. While the actual rate of interest might be appealing for students, Munier said there could be possible back-end fees, which would make the interest rate higher than that of federal loans.

He was also uncertain about the regulation and safeguards used with alternative lending.

"What's to protect students from paying an up-front fee and not receiving a loan?" he said.

Other things for students to consider are penalties for late payments and whether they can secure loans without a cosigner.

A student also should compare the interest rate of the loan and how it compares to other loan providers. Munier said the interest rates and terms of condition vary from lender to lender.

For instance, a student receiving a loan through the Web site Virgin Money is able to pick his or her interest rate, while a student getting a loan through Fynanz.com would have an interest rate based on academic performance.

Munier said federal loans are more desirable for students than private alternative loans.

This is because federal loans are cost-subsidized by taxpayers and generally have a lower rate of interest.

"We always want borrowing to be a last resort," Munier said.

Munier said students should apply for grants, scholarships and the FAFSA.

Both Franta and Jared Uhing, a junior business major, have federal loans, not alternative loans.

Uhing applied using the FAFSA and was able to receive student loans. Unlike Uhing, Franta did not receive any loans through those channels.

Uhing said he is not concerned about paying the loans back because he is already paying some of them now. He said he doesn't really need to consider alternative loans.

"What I've got right now has been working," Uhing said.

kimbuckley@dailynebraskan.com