With Funds Tight, College Students Get Creative

E-mail pleas, peer lending, and a new pay-for-grades site are supplementing traditional college funding plans

By Dan Macsai

After accepting admission to New York University for this past fall, Max Stephenson started searching for loans. Then living in rural Tewksbury, N.J., the 18-year-old had little savings, and his parents couldn't afford NYU's hefty tuition, which this year hovers around $50,000 when you include room and board.

The Stephensons met with several private lenders, since government aid was inadequate. But like many Americans in need, they couldn't borrow enough: Loans were either unavailable, or they came with double-digit interest rates. As his freshman year loomed, Stephenson was short $25,000.

Unfazed, he hatched a plan. He'd get 10,000 strangers to donate $2.50, $3.50, or whatever they could afford. To thank them, he'd send a piece of his graduation cap or gown. Within weeks, Stephenson's plea—which began as a mid-August e-mail to 250 acquaintances—had circled the globe: Donations poured in from the U.S, Nigeria, Spain, and many other countries. As of earlier this month, he has raised $11,000, more than enough to finance his first semester.

A SEVERE DISRUPTION

Several years ago, such a quest might have seemed absurd. Not so today. As lenders cope with turmoil in the financial markets and fallout from the subprime mortgage crisis, the student loan industry is more precarious than ever. Daring and driven, a small but growing number of students, like Stephenson, have embraced creative financing. But it's not necessarily by choice.

In the past year, conventional lenders have drastically reduced funding for student loans. The financial aid Web site FinAid.org reports that 168 have exited or suspended their participation in the federally-guaranteed student loan program (FFELP), which includes the popular Stafford and PLUS loans. Thirty-eight have also stopped offering private student loans.

FinAid publisher Mark Kantrowitz, who has been following the industry for two decades, says the student loan market is severely disrupted. "In years past, we've seen maybe one or two banks pull out of the FFELP," he says. "This is a lot worse."

That's daunting news for college students, most of whom depend on loans to pay for school. In the U.S., two-thirds of four-year undergraduate students leave college with some debt, and the average among graduating seniors is more than $19,000, according to the National Postsecondary Student Aid Study. Demand is even greater among graduate students: Their average debt ranges from $27,000 to $114,000, according to FinAid.

GETTING CREATIVE

To seek out funds, some students have turned to peer-to-peer lending sites, such as GreenNote and Fynanz, which focus exclusively on making college loans. After creating an online profile, users can court a variety of financiers, including friends, family, and perfect strangers. According to Kantrowitz, however, peer-to-peer lending funds are limited. "Right now, they're just a drop in the bucket," he says. "But the idea is really interesting. In a decade, who knows what it could become?"

In that vein, brothers Matt and Mike Kopko have just launched GradeFund, a Web site where needy students can solicit anyone—friends, relatives, coaches, strangers—to "sponsor" their grades. The better students score, the more tuition money they'll receive.