Peer-to-Peer Student Lending Explained

Pursuing an MBA or other types of higher education requires financing – especially if you are aiming for a program at a top university. In recent years, postgraduate fees have continually been on the rise and the accessibility of attractive traditional student loans have decreased. In the search for better interest rates and more flexible terms, students can advantageously look for loan options outside the traditional financial sector. Here, peer-to-peer (P2P) student lending offers interesting possibilities for both investors looking for a stable return and students looking for attractive loan terms to finance their education.

What is P2P Student Lending?

As the name implies, P2P student lending is a type of peer-to-peer lending with a focus on providing financing for students by matching borrowers and lenders. This is facilitated by peer-to-peer platforms, who can have their focus either solely on education finance or on a range of different types of P2P lending with student lending being just one among many. Lately, more specialised P2P student lending platforms are emerging, which might turn out as a big advantage for both students and investors, as more platforms focusing on student lending will result in more competition for both borrowers and lenders.

Compared to traditional banks, P2P platforms in general have lower overhead costs enabling them to provide higher returns for lenders/investors and lower interest rates for borrowers/students. Thus, a more competitive environment will force platforms to share more of the profit with their investors and borrowers.

If you are interested in getting a more thorough understanding of P2P lending and how it works, a good place to start is our article explaining what Crowdlending aka P2P Lending is.

How Can I Invest in P2P Student Loans?

For investors looking for attractive and stable returns while making a social impact investment by helping aspiring students achieve their goals, peer-to-peer student lending can be an interesting alternative to stocks, bonds, real estate, and other traditional assets.

To be able to invest in student loans, investors need a P2P platform to facilitate the process. An example of a platform specialised in P2P student lending is the British platform Lendwise, which we will use to illustrate how the process of providing finance for student loans works for investors. However, it is also possible to invest in P2P student loans on platforms covering a wider range of P2P lending types, such as Bondora, Splendit and Prosper.

The lending process at Lendwise consists of seven steps that are applicable for most peer-to-peer student lending platforms:

Students accepted at a qualifying education/course files a simple application with their details.
The application is analyzed by the platform. If the application is accepted, the platform returns a funding proposal to the student, including repayment schedule, interest rate, and amount.
If the funding proposal is accepted, the loan agreement is finalised with the necessary information.
The loan is made available for investors on the marketplace of the platform.
The loan is funded by investors. This can be done either manually or automatically, depending on the features available on the platform.
The platform disburses the loan to the student or directly to the academic institution involved. Tuition fees are usually paid directly to the school to ensure that funds are used for their intended purpose.
The student starts repaying the loan. How the repayment schedule is structured may depend on the duration of the loan and the type of education.

Advantages for Lenders/Investors

As a lender, you can expect average returns of up to 8% per year, which is well beyond what you can expect in a regular bank account. As with all types of investments, the possibility of a high return of course also means that there is a significant risk involved that you need to be aware of.
Investors get to support students in pursuit of an education, which means they are using their funds to both make a positive social impact and a financial gain. If manually investing, you also get to support the students and the choices of education you find most promising – both in terms of individual potential and their ability to repay the loan.
Most platforms make sure that potential borrowers undergo a thorough credit assessment to reduce the risk of loan defaults.

Advantages for Borrowers/Students

The application process is fast, and many platforms will provide you with an answer within 48 hours, while the loan might take some additional weeks to get funded.
Many platforms offer you the possibility to start repayment after you graduate – especially if you are entering a full-time postgraduate program. In many cases, you will also be able to postpone repayment for an additional period after graduation to allow you time to begin work.
The terms offered by most platforms are transparent and will contain no early repayment fee.