In wake of countless student loan myths appearing in media reports nowadays, it might seem like investing in a financial sector repeatedly referred to as a “crisis” or “bubble” would be a crazy idea. While it’s true that student loan debt is at an all-time high, with more than $1.3 trillion loans outstanding currently, this nevertheless represents an optimal chance for independent investors to invest in student loans by using peer-to-peer student lending.
Peer-to-peer lending has become a favorable alternative for graduates and families struggling with student loan repayments, as these platforms offer great refinancing options that can lead to lower interest rates and payments on higher education debts. Since student loans cannot be discharged even in instances of bankruptcy, refinancing is the best route to financial freedom. Peer-to-peer lending websites offer a win-win opportunity for investors and borrowers alike.
Invest in Student Loans
Peer-to-Peer Lending Overview
Peer-to-peer lending involves individual borrowers seeking funds from accredited investors, which are those with a minimum net worth or annual income, dictated by state laws and regulations. Instead of going through big banks and lenders, borrowers can go directly to the source of the funds. This helps lower their interest rates on existing loans or get comparatively better rates on new loans.
Peer-to-peer lending is most frequently seen in personal loans and even real estate loans. But, student loans are also becoming more popular on peer lending platforms as well.
Rewards of Investing in Student Loans
Higher education is extremely expensive for students these days. In fact, college tuition inflation has risen about 400% since 1985. That being said, enrollment figures at colleges and universities continue to rise in spite of these rising costs. Young adults better understand the value of a college degree. They’re determined to pursue higher education, even if they’re saddled with thousands of dollars of debt.
While the U.S. Department of Education offers millions of dollars in Pell Grants and both subsidized and unsubsidized loans each year, many students still fall short of the funds they need to pay for tuition, textbooks, fees, and room/board. This usually leaves them at the mercy of traditional private student lenders. These lenders can charge much higher interest rates and have much tighter restrictions on repayments.
However, peer-to-peer student lending practices are trying to make college loans more affordable by cutting out these big institutions. By giving students a better chance to repay their loans, peer investors engage in socially conscious lending opportunities while making solid returns on investments because lower interest rates mean loan repayments are more feasible!
Risks of Investing in Student Loans
Of course, peer-to-peer student lending isn’t perfect. Countless borrowers are still drowning in student loan debt. Simply lowering the interest rate through refinancing can’t overcome issues related to unemployment, low incomes, and other personal financial struggles that graduates experience.
As with any form of peer-to-peer lending, borrowers could default. And, even though student loans aren’t dischargeable in bankruptcy, you could still lose money you invest in refinanced student loan packages. This means it’s crucial that you spread out your risk among a variety of borrowers. Peer lending sites often have minimum credit score requirements for borrowers. But, this still doesn’t guarantee protection against default, so proceed with caution.
Should You Invest in Student Lending?
Peer-to-peer student lending will likely become more popular. More and more Americans go to college and federal financial aid resources remain limited. Student loan refinancing is also an increasingly popular avenue for graduates.
Although the media’s obsession with the student loan “crisis” might make this seem like the worst possible option for investors seeking good, consistent returns on their investments, the reality is actually quite the opposite. Students and their families need better access to funding and refinancing options. Peer-to-peer lending is an ideal approach to reducing instances of loan default, decreasing interest rates on loans to make payments more affordable for graduates in entry-level jobs, and attracting investors with reasonable interest rates.