If your financial aid package, federal student loans, and scholarships aren't enough to cover your college-related costs, private (or alternative) loans can help you make up the difference. However, traditional private lenders (like banks) often require a co-signer, and even if you can find one, you still may not receive funding.
If you've been denied a private loan or shopped around and didn't like what you found, you can still turn to other lenders to help you cover your tuition gap. Peer-to-peer (P2P) student loans and crowdfunding may be the right alternatives to alternative loans for you.
What Are P2P Loans?
P2P student loans allow you to borrow small amounts of money from many individuals—like relatives, friends, colleagues, community organizations, or even strangers.
One major difference between P2P loans and conventional private loans is that the latter rely almost exclusively on your credit history to determine your eligibility. While some P2P loans do consider your credit, they also emphasize letting you explain your personal circumstances. This gives potential lenders insight into who you are and why they should lend their money to you.
Another difference is that P2P loans are offered through websites, not banks. These sites coordinate and connect lenders and borrowers. They also manage the loan servicing and collection processes, and they provide formal documentation for their loans.
There are two types of P2P lending websites:
- Friends and family sites: These allow you to set up an online portal where people you know can lend you money for school. These sites provide promissory notes and other documentation for a fixed fee. They also collect your monthly payments, but they charge you a percentage of your outstanding balance for their services.
- Stranger-to-stranger sites: These match you with lenders you don't already know. They also document the loans and perform collection services, and sometimes they provide a guarantee that lenders will receive their money back even if your loan defaults. These sites often have minimum credit criteria for borrowers, and the interest rates are generally higher than friends and family P2P sites.
P2P loans are popular for borrowers who need to cover an expense that may not qualify for other types of student loans. Some examples include:
- Enrolling in an unaccredited school.
- Paying a debt owed to a school before re-enrolling, graduating, or transferring.
- Borrowing money for school if you're an international student.
However, if you qualify for federal student aid, you may still want to max out those funds before turning to P2P loans. That's because federal loans do have some advantages over P2P loans.
The Downside Of P2P Loans
There are challenges to borrowing a P2P loan. For instance, your request may not be fully funded—or funded at all. College is expensive, and lenders will be taking a risk on you. For that reason, they generally don't loan very large amounts to any one borrower. After all, they'll want to get their money back (with interest), eventually. So, you may need to connect with several lenders to achieve your funding goal.
Also, most P2P loans need to be completely repaid within 3 years—and in some cases, you could have as little as 1 year to repay. This is very different from federal loans, which give you at least 10 years to finish repaying and options to extend, postpone, or even forgive your payments if you qualify.
Finally, there may be fees with your P2P loan. So, in addition to repaying the amount you borrow, you could have to pay the website for the services they provide.
You may be familiar with crowdfunding from websites like Kickstarter and Indiegogo. These sites allow people to view projects that need funding and decide if they want to donate to the cause.
As crowdfunding gained popularity, students started using these platforms to raise funds for school. As a result, new crowdfunding websites were created specifically to help them solicit donations for education costs.
The concept is similar to P2P lending in that you choose a site, set up your personal page, and share your story and funding goal. The main difference is that there's no loan to repay with crowdfunding.
When it comes to how fundraisers get paid, crowdfunding sites generally follow either an "all or nothing" or a "keep it all" model. Under the "all or nothing" model, you'll receive all of the money donated through your page (minus a fee paid to the site), as long as you meet your funding goal. If you don't meet the goal, you'll receive nothing and the amounts pledged are returned to the individual donors. To encourage people to donate, "all or nothing" projects usually reward their supporters—in general, the bigger the donation, the nicer the reward.
The "keep it all" model allows you to keep the entire amount pledged through your page, even if you don't meet your goal. However, "keep it all" sites generally charge more in fees. Still, this may be the way to go if you aren't confident that you'll meet your goal.
The Downside Of Crowdfunding
The competition for donations is fierce among students who use crowdfunding sites to raise money for college. Since donors can support any student they choose, you'll likely have to get creative to differentiate yourself from the crowd. This requires a lot of hard work.
Some people gain interest in their cause by posting a moving or emotional personal story on their crowdfunding page. However, most successful fundraisers also lean heavily on email and social media to drum up support, and rely on friends and family to help spread the word about their fundraising effort.
Fundraisers who choose the "all or nothing" model generally need to entice donors with rewards—and sometimes these rewards can be just as expensive as private loans. Students have even offered a percentage of their future salary in return for donations, which seriously blurs the line between crowdfunding and P2P loans.
If you're not sold on crowdfunding, applying for scholarships may be the right alternative for you. These options offer similar benefits in that they both give you the opportunity to tell your story and compete with other students for free money. They both require you to put in a fair amount of work to succeed, too. But with scholarships, you get to keep the entire amount that you win—and there are thousands of opportunities to apply for.