Review & Outlook

Our take on the investing, financial, & economic themes of the day

Will Peer-to-Peer Lending Disrupt the Trillion Dollar Student Loan Market?

22 December, 2014 by Ben O'Brien in Commentary

Often the high-flying, hype-filled world of Silicon Valley startups seems frivolous.  But every once in a while a new company appears that addresses an important need. This is the case with two student loan startups that were profiled recently in Forbes. These companies use peer-to-peer lending to refinance student loans of high-earning graduates from top colleges. The service lowers the cost of borrowing substantially while also providing an attractive return for investors. Investors can even choose to invest in loans exclusively from their own alma mater.

The companies serve “folks with five- or six-figure student debt racked up earning pricey and prestigious graduate degrees. Their earnings potential and expected low default rates make them such attractive borrowers that smart private investors can lend to them at less than Uncle Sam’s one-size-fits-all student loan rates and still make a nice return, even after the cost of free organic pizza and such extras as career counseling.”

It will be interesting to see how these small companies develop. It’s still not clear whether they will revolutionize the student loan market or be acquired or squashed by regulation. Either way, this is a welcome development in the financial world where innovation is usually associated with overly complex and risky securities rather than serving the pressing needs of consumers.