I got excited while reading a recent article in Forbes titled "An Alternative To Student Loans." Having posted about peer-to-peer before, what caught my attention was the headline, which I hoped would indicate that progreess had been made. This specific article describes the pros/cons of the peer-to-peer student lending model and identifies key players in the market, including Lending Club, People Capital, GreenNote and Virgin Money. My concern about this article as well as others that have come before is that I believe they overstate where peer-to-peer lending is today. Given the shortage of capital in the private loan market, I certainly root for the success of the peer-to-peer model, however, I worry that recent reports are overstating where the industry stands today. I also understand that for this model to succeed it needs some sizzle and excitement to attract both students (which they have no problem to date) and investors. I haven't come across any figures anywhere indicating the volume of student loans that these companies are processing (which is usually not a good sign).
If you go to Lending Club's site as an investor you discover the following (bold is mine):
- Selective criteria: Many borrowers apply, but less than one in ten are accepted. Lending Club approves only creditworthy borrowers as members.
- Here is how creditworthy is defined: "Lending Club is open to US residents. In order to qualify to list a loan request on our site, you will need a FICO score of at least 660 with a debt-to-income ratio (excluding mortgage) below 25%."
- Loan term: "Borrowers pay a fixed rate for the 3-year life of the loan."
So, in summary loans are hard to get (1 in 10 accepted) and they have to be repaid in 3 years, which may prove challenging to students who often rely on deferments while they are in school.
Meanwhile, at GreenNote, among the 29 students requesting funds on their peer-to-peer website, here are the statistics, as of this evening:
- 1 student requesting $2,150 has been fully funded.
- 1 student is 40% toward their goal of $5,000
- 1 student is 12.5% toward her goal of $8,000
- 1 student is 2.86% towards their goal of $7,000
- 25 students have not made any progress toward their goals
On the Virgin Money site, I have to admit being a fan of the LenderBlender concept (but wasn't sure why Stafford loans were not presented as an option for my student smoothie). Their Student Payback product, launched in 2008, facilitates borrowing between students and people they know (peer-to-known peer). Virgin Money handles all the back office work including helping to "settle any awkward disputes, facilitate repayments, provide customer service, and provide reports for accounting and tax purposes." Cost $199 + $9 per payment. Total administrative cost over standard 10-year loan term = $1,279. I haven't come across any run-rate figures for this product since its launch.
- It was interesting to see this evening that when I googled "student loans," this Sponsored Link appeared for Virgin's mortgage product:
Give it the Right Mortgage
Meanwhile, People Capital appears ready to launch. I have posted on them here and here. Their business model has two unique characteristics: bringing institutional investors into the market (i.e. investors with large sums of money) and assessing borrower risk through a proprietary model they call their Human Capital Score. As I noted in an earlier post, their success rests on their ability to attract investors comfortable with some of the structural challenges of this asset class: deferments, long repayment terms and credit risk to name just a few. With their launch right around the corner, we should have some answers shortly.
Given the limitations of the peer-to-peer models in operation today, People Capital's incipient launch may presage whether peer-to-peer becomes a long-term, sustainable and significant alternative to the private student loan market or remains a relatively minor niche. Stay tuned...