Peer-to-peer lending high-risk practice, administrator says

A new alternative for student financial aid called person-to-person lending has emerged, but a financial aid officer said this type of loan is risky.

The way the new program operates seems to be unregulated, said Melet Leafgreen, assistant director of scholarships and financial aid. Federal and private lenders have structures and rules to protect students, and this program lacks in that aspect, she said.

“P2P” lending is conducted online. A student can create an account by visiting a P2P lending Web site and making a profile including information such as how much money is needed, what the money will be used for and what interest rate a student is willing to pay, said Neal Coxworth, director of marketplace development at Fynanz, a P2P lending community.

Anyone who would like to be a lender can log on, search borrower listings and bid to fund the loan at the lowest interest rate possible, he said.

Many treat it like a “MySpace for loans,” said Chirag Chaman, founder and CEO of Fynanz.

As of now, 26 students have applied for student financial aid using the P2P program through Fynanz, Chaman said.

The first few borrowers have had a good lending experience without problems, Chaman said.

Fynanz is a small online financial marketplace that saw the “opportunity to fill the need for student financial aid” in a troubled loan market, Coxworth said.

The company created the new program specifically for students to act as an alternative loan option for borrowers seeking higher education, Coxworth said.

Undergraduate students can apply for a maximum amount of $120,000 in loans, while graduates would max out at $150,000, Coxworth said. That amount would cover all four years of college, not individual semesters, he said.

Fynanz is not as strict as most other lending companies in that credit scores and GPA checks are not a major factor in considering whose applications are accepted, Coxworth said.

This lenient approach to “background checking” is not a good idea because it does not provide protection to a lender if a student decides to default a loan, meaning the loan cannot be paid back, Leafgreen said.

Other P2P sites such as Prosper and Lending Club offer the loan program, but Fynanz is the first company to specialize in student loans, Coxworth said.

Representatives at Prosper and Lending Club did not return phone calls seeking comment.

Fynanz has been running this program for one month, and currently the loans are offered to students attending schools in five states, he said. Texas is not yet one of them; however, TCU is listed on the Fynanz Web site as a potential school that could offer P2P loans.

Loans are in the offseason right now, and applications will probably not be submitted until later this summer when students will need loans for the fall semester, Chaman said.

As the program improves with time, Fynanz will be in contact with financial aid officers from schools across the nation, including TCU, Coxworth said.

Students seeking alternative lenders for financial aid at TCU will be advised to stay away from P2P lending, Leafgreen said. She said it is a bad idea to go down an untested road.

“I would not ever recommend this program to any student,” Leafgreen said.

If students go through P2P lenders and find themselves in trouble regarding debt, Leafgreen said, neither she nor the university could help.