Student loan debt has exploded over the past decade, climbing to more than $1.2 trillion and becoming the largest consumer liability after mortgages. With one in five households currently on the hook for student loans, there are more borrowers than ever out there looking for new solutions to help them deal with debt.
Despite the obvious demand, many of the traditional players in the student lending space — aka banks — exited stage left in the aftermath of the financial crisis. Luckily for borrowers, this simply paved the way for innovative new student loan options to take hold. Specifically, peer-to-peer and marketplace lending solutions have stepped in to meet the need.
Why is peer-to-peer lending such a game changer for student loans? Because it brings Silicon Valley creativity to an antiquated system. These lenders can use a wider range of criteria to determine eligibility and interest rate — for example looking beyond factors like credit score to include more forward-looking analysis such as income potential based on a borrower’s school or program. With more sources of capital and a nimbleness that big banks and Congress have yet to display, marketplace lenders are providing borrowers with potentially less expensive education financing options. And because these solutions were born out of culture of technology, the user experience has vastly improved. With intuitive, online applications replacing mountains of paperwork, it’s easier than ever to apply for a student loan.
Perhaps the coolest example of how marketplace lending has changed the student loan game is the fact that, in addition to refinancing and consolidating private student loans, borrowers can now refinance federal student loans with a growing number of alternative lenders. Many borrowers’ financial situations improve within a few years after graduation, which may qualify them for a lower interest rate — and significant savings.
At SoFi, we saw the obvious need in this area and chose to focus on the student loan refinancing space. But as we see new opportunities — for example, personal loans and mortgages — we’ll continue to apply the benefits of marketplace lending to other areas, so that our clients can continue to reap the rewards.
Daniel Macklin is a member of the DailyWorth Connect program. Read more about the program here.