Just say no to peer-to-peer student loans ... at least for now

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According to BusinessWeek, "In recent months, peer-to-peer lending sites such as Prosper and Virgin Money USA have introduced student loans or started marketing existing offerings to families looking for college funds. Others, including startups GreenNote and Fynanz, are focused exclusively on making college loans."

It's not a surprising development. Peer-to-peer lending has been growing in popularity for years and the tightened credit market is making it tougher for some students to secure loans for college.

There may be a future in peer-to-peer student loans but I don't see it happening anytime soon. Here's why:
  • Subsidized student loans are always preferable. Before exploring any private loans, college students should complete the FAFSA form and take steps to see how much they can borrow at artificially low interest rates.
  • Large financial institutions have the ability to tailor loans to the needs of students. The loans can be stretched out over long periods, deferred under certain circumstances, and more. Sites like Prosper.com are really not the place for complex financial instruments.
  • The world of student loans is highly competitive, and various websites including eStudentLoan.com make it easy to compare rates and terms between various banks. It's unlikely that you'll be able to get a better rate from a peer-to-peer site -- unless of course you're borrowing from friends. But if you're borrowing from friends, why do you need a networking site to act as a middleman for a hefty fee?
While the student loan market has tightened, there is still money available for students looking to go to college. If you can't find a conventional bank willing to lend you the money you need, you have to wonder whether you're borrowing too much and need to consider less expensive options.
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