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Student Loans May Be Easier to Find Online
05/01/08 - 04:48 PM EDT
Before some college-bound kids hit the books this fall, they may have to hit the pavement searching for cash. Funds have become scarce as dozens of lenders have stopped providing new student loans or shuttered their doors entirely. That's because a new law cut federal subsidies, and the market for repackaged student-loan securities dried up amid the credit-market turmoil, making student loans unprofitable and unsellable. Bank of AmericaBAC, JPMorgan ChaseJPM and CitibankC all said they will halt some student lending this month. Loan guarantor The Education Resources Institute declared bankruptcy on April 10 due to market conditions. Sallie MaeSLM, the country's top student-loan provider, said earlier this month that it can no longer earn profits on loans and that the market is heading for a "train wreck" in mid-2008. Outlets that are still lending are especially averse to risk because of the mortgage-market collapse and worries about the health of the economy. That means students who were once eligible for loans might not be anymore, since standards have tightened dramatically. Lawmakers are working toward a bill that would allow the federal government to bail out student lenders by purchasing more of their debt, but it's unclear if that legislation will ultimately pass. So how are some students shoring up college cash? Online, of course. "Peer-to-peer" lending sites have allowed facilitated loans among users for years and may offer an attractive alternative to traditional loans. In many cases, borrowers outline the type of loan they are seeking -- including amount, purpose, duration and interest rate. Lenders review borrower profiles, photos and credit scores to choose a candidate, balancing the risks and potential returns. Then they bid on loans, usually in $25 or $50 increments, with higher demand leading to lower interest rates. Other P2P sites simply set an interest rate based on the borrower's credit rating. Usually, the sites earn money by attaching fees to their services.
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