As you've probably noticed, the
current student loan market is not so great. Between lenders
backing out of the
Federal Family Education Loan Program and temporarily or permanently suspending
private loan operations, finding a loan has gotten tougher. Family
financial troubles and lenders' increased credit requirements for private student loans have made qualifying for a loan more challenging, as well. While
scholarship opportunities remain available, and many colleges and universities are even
implementing new plans to help students cover college costs, many students and families are still coming up short on their tuition bills.
New models for student lending have surfaced in recent years, but have gained media attention as the troubles with
student loans have continued throughout 2008. One idea, which we've
blogged about previously, is peer-to-peer lending, where students set up deals with friends, family members, or other interested parties to borrow money for college. These deals are brokered through a lending company, and since the parties involved typically know each other, interest rates and default rates are expected to be low.
Another lending model that has succeeded in other countries and is now being tested in the United States, is more akin to investing than lending. Investors, such as individuals or companies, agree to pay for a student's college education. In return, the student agrees to repay a portion of their income to the investor for an agreed upon period of time. In some ways, this resembles the income-contingent repayment plans available for federal
consolidation loans. These contracts are also meeting criticism, including comparisons to indentured servitude. Others worry that students with prospects for high income will not be interested and that few people will want to invest in humanities students, who are likely to provide low returns on their investments. Nevertheless, such "human capital" contracts are expected to be well-received by many students and investors. As reported by
The Boston Globe, one company is already piloting a human capital contract program with a handful of
business school students pursuing MBA degrees.
While human capital contracts and peer-to-peer lending are unlikely to wholly replace private student loans, they may provide students with more alternatives to the current forms of "alternative loans." While
college scholarships, institutional aid, and
federal student financial aid should always come first,
some families do need to borrow significantly to
pay for school, and many are likely to welcome a wider range of options for doing so.
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