People Capital

President Obama’s plan to have the government provide loans directly to students instead of using commercial lenders was resurrected on Thursday, when Democratic leaders agreed to bundle it into an expedited budget package along with the health care overhaul. Now, the student loan measure, which had been unlikely to pass on its own, could be passed in the Senate along with the health care measure by a simple majority vote.

Still, there’s no guarantee of passage for the measure, which would also expand the Pell grant program for low-income students. In the meantime, there’s another new source of student loans emerging for students looking for additional education financing: wealthy investors.

Earlier this month, the online student loan Web site People Capital began a peer-to-peer student loan service that matches students looking for loans directly with potential lenders, including individual lenders, and takes financial institution brokers out of the loan-finding equation.



Here’s how it works: Students sign up on the site and put in their loan requests. Lenders, meanwhile, sign up on the site and put up at least $1,000 for loans in a People Capital account. They then can bid on the various loan requests from students and assess various students’ risk and ability to repay with the help of People Capital’s proprietary “Human Capital” score, which combines variables like SAT scores and grade point averages to determine a student’s future income potential and ability to repay. A spokesman said People Capital also follows the student loan industry standard verification processes that includes confirmation of SAT and G.P.A. data by a student’s college or university.

In the auction process, the lender offering the lowest interest rate wins the loan, and money from the lender’s People Capital account is then sent to student’s college.

To participate, lenders must be accredited investors and meet certain criteria, including either an annual income of $200,000 or assets of at least $1 million. Financial institutions could sign up to be lenders, but so far all five investors who have signed up to give loans have been wealthy individuals.

Why would someone sign up to be a lender? Alan Samuels, People Capital’s chief product officer, said two main motivations emerged in the discussions with lenders during the development of the platform: a desire to increase profits through diversification and philanthropic reasons. “There is definitely a profit maximizing objective — people looking at a student loan as a slightly different asset,” he said. “And there is another group of investors that say, ‘I want to make a return, but I want to be doing good at the same time.’”

Unlike more general consumer loans available on other peer-to-peer lending sites, qualified education loans available through People Capital are private student loans that are legally compliant, offer tax-deductible interest payments for borrowers and can’t be discharged in bankruptcy.

But unlike some government-backed student loans, repayments aren’t deferred until after graduation. Instead, the loans, which come in various short-term and longer-term forms, have more immediate repayment mechanisms, like interest-only or minimum payments. Al Alper, president of People Capital, said such requirements aren’t too much of a burden to students. He said, for instance, that a minimum monthly interest-only payment of $50 would be about the equivalent of having a pizza a week in a dorm room.

People Capital takes an origination fee of a few hundred dollars from the student and servicing fees of about 1 percent from the lender.

Why would a student sign up for such loans? The People Capital spokesmen said the service gives students more access to capital at a time when tuition is increasing and many other sources of financing are harder to get, especially for students with a limited credit history. To receive one of the qualified student loans, a student must be enrolled in an eligible university program, must be a United States citizen and be at least 17 or 18 years old depending on the state, among other requirements.

As of this week, the five investors have lent a total of about $100,000, split among five to six students. Meanwhile, about 45 students have put in loan requests for a combined total of about $500,000 and another 100 or so students are going through the sign-up process.

Of course, students should make sure to maximize low-rate federal student loans first.

What do you think of peer-to-peer student loan lending? Would you make such a loan to student or sign on to one yourself? Why or why not?