Federal student loans don't provide nearly enough money to pay for a year's tuition and college costs. And the current credit crunch isn't helping as students and their parents try to raise money for college.
As the nearby chart based on College Board statistics shows, there is a huge funding gap -- even beyond the various education tax benefits, grants, and federal student loans that are given out each year.
How do American families find that extra $113.5 billion dollars to pay tuition bills and other college expenses? And whose burden is it really: the student's, or the parents'?
Those questions are troubling the American system of higher education just at the point when we need more educated and skilled college graduates to keep our economy competitive in the 21st century.
Fortunately, technology is coming up with new ways to approach the problem of the college funding gap.
Here are two new services that hope to provide an answer to the problem of raising money for college:
Virgin Money Student Payback Service
(a unit of Richard Branson's Virgin Group) has long offered services to document and service private loan agreements and repayments, such as intrafamily mortgages. Now, they're applying the same technology to student loans.
A recent survey shows that nearly 75% of Americans believe their children should pay for at least part of their college tuition. So, while many parents borrow through PLUS loans, home equity loans or 401(k) loans, Virgin Money has created a mechanism for students to repay at least a portion of those debts that their parents have incurred.
CEO and founder Asheesh Advani says this structured loan repayment makes the process easier for both students and parents. The Student Payback loan can be structured to accrue at a very low interest rate (or at no interest). He notes that about 25% of the loans in the program so far are no-interest, while the average rate being charged on interest-bearing loans is around 4%.
(Non-interest bearing loans under $10,000 are not considered a gift, and a new loan can be created for each year's tuition.)
Flexible terms allow families to be creative. You can, for example, set up a plan for your kids to start repayments three or four years after graduation. Those payments can be stretched out over a period of years, or structured to end in a balloon payment at some date in the future. There is even a provision for "loan forgiveness," which would typically be kept to an amount below the current $12,000 per year ceiling for gifts.
Paperwork is minimal, and handled online or by phone. Repayments are administered using direct debit and direct deposit. You can securely check your amortization or balances at any time. And if the lender agrees, the terms can be changed at any time.
With the Student Payback loan at Virgin Money, the family can save money through lower rates and more flexibility, while the student is empowered to cost-effectively share the burden of his or her education.
The cost is minimal -- only $199 to set up and document the loan as well as creating the repayment schedule. Collecting the money is subject to a charge of $9 per payment -- one reason most loans are set up with a quarterly repayment plan.
Networking for a Loan
Social networking is being used for everything these days, and the latest idea is to use this concept to raise money to finance a college education. Starting later this week,
will launch a new site dedicated to social networking aimed at raising money for college.
The idea is to get low-cost loans from family, friends, or anyone in a social network who is interested in helping a worthy student. Even altruistic strangers might decide to get involved.
It's sort of like an online "wedding registry" letting friends and family know what gifts you like. Except in this case, the people who get involved by offering money also get a rate of return on their investment in a student's education.
The student simply creates a profile at GreenNote describing his or her talents, goals and financial needs. Prospective lenders respond with offers. Then, GreenNote formalizes the agreement between the student and lender into a legally binding note, and sets up a repayment program.
There is no credit check required of the student, and no citizenship or co-signer retirements. The fixed interest rate on the note (interest starts accruing as soon as the funds are taken) is currently set at 6.8% (the same as unsubsidized Stafford loans). But the lenders can choose to waive the interest or charge a lower rate, or no interest at all.
Repayment can be deferred for up to five years after graduation, and must be completed within a 10-year term. There are no prepayment penalties.
This program costs the student only a one-time documentation fee of 2% of the amount borrowed. The lenders pay a fee of 1% of the outstanding amount over the term of the loan. If the student has multiple lenders, the student makes one payment and GreenNote distributes the payments to the various lenders, pro rata, by direct deposit to their respective bank accounts.
I'm sure you're asking yourself why a perfect stranger, or even a relative, might be willing to lend money that is basically unsecured.
Founder and CEO Akash Agarwal says: "We're just streamlining an existing process that already has billions of dollars being lent informally every year to help finance education. It's true microfinance. These borrowers are not asking for a handout, but the lenders are doing a very good deed in building a student's future, as well as using their money effectively because they get a fair return."
Agarwal must have something going for him because this new venture has the former CEO of PayPal and Intuit on board, as well as major venture capital financing.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.