The Latest Twist in Student Loans

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Virgin Money USA: This site (virginmoney.com) formalizes loan arrangements between friends and family. While some 11% of the $300 million in loans it has arranged have been used to fund education, it only recently launched a product, called Student Payback, that's specifically for students. President Asheesh Advani touts the loan's flexibility: Payments can be postponed until graduation, he says. And "every year, for no extra fee, borrowers and lenders can change the payment schedule." Negotiated between borrower and lender, the interest rates are typically about 4% or 5%—or far below the 6.8% rate on federally backed Stafford Loans. A lender can sign over up to $24,000 a year without triggering a federal gift tax.

While many parents dig into their pockets to make loans, some take out home equity or Federal PLUS loans—and use the site to formalize a student's pledge to repay those amounts. "Parents are more apprehensive about retirement now. This really provides them with peace of mind," says Advani. Still, peace of mind doesn't come cheap. Up-front fees on the loans range from $199 to $299, depending on whether a student borrows once or multiple times. When a student graduates and begins to repay a loan, Virgin pockets yet another $9 fee per payment to service the loan.

Fynanz: Launched in March, the site (fynanz.com) makes students loans in seven states, including New York, New Jersey, and Massachusetts. By early 2009, CEO Chirag Chaman expects it to go nationwide.

For lenders, Fynanz takes some of the risk out of making loans. It guarantees repayment of anywhere from 50 cents to 100 cents on the dollar. The guarantees rise with a borrower's credit. It also requires borrowers to obtain co-signers, who become responsible for repaying loans that default. The site is picky about whom it selects: Currently, it turns away about 12 applicants for every borrower it accepts, Chaman says. "Our job is to reduce default rates."

The site offers some benefits to borrowers. By summer, it will launch a product that will exempt college juniors and seniors with credit scores of at least 640 from the co-signer requirement. And it shaves 1% off a borrower's interest rate once 10% of the loan is repaid. The site sets rates—which are variable and currently range from 5.6% to 10%—at auction. It charges lenders 1% a year to service the loans. Borrowers, who pay from 2.9% to 6.9% of the loan amount up front, max out at $120,000 as undergrads.

GreenNote: Currently available to students at 12 colleges, this program will officially launch in early June. The site (greennote.com) doesn't plan to require students to line up a more creditworthy friend or relative to co-sign its promissory notes. Nor does it plan to check borrowers' credit scores. "It's a platform that allows students to tap into their social networks. This can be friends, family, alumni of the same school, or friends of friends," says founder and CEO Akash Agarwal.

The site collects and transfers the amounts lenders contribute to schools. Students can postpone repaying these loans until after graduation. The interest rate is low—a fixed 6.8%, to conform to the maximum under the federal Stafford Loan program. "Lenders can choose to reduce or waive the interest at repayment, turning the loan into a gift," Agarwal says. GreenNote charges lenders a 1% documentation fee. Borrowers pay $49 or 2% of the loan, whichever is greater. The risk? If your network doesn't kick in all you need, you'll have to shop around for other loans.

Zopa: When a student or parent applies for a loan, the site (zopa.com) runs a credit check. Zopa charges no fees but interest rates can be high—some 8.5% to 17%, depending on a borrower's credit score. Where's the peer-to-peer angle? Borrowers can ask friends and family to purchase one-year CDs from the site. Those who do are required to devote at least 0.10% of the current yield of 3.75% to helping a borrower meet his or her monthly payments. Because some CD holders are willing to part with far more than 0.10%, a borrower may see his or her monthly interest payments wiped out. A few even pocket enough to help pay down principal. As with other CDs, these are insured against losses. And when they mature, the principal is returned to the investor. The loans, which must be repaid over five years, are capped at $25,000. This summer, the company plans to launch a student loan product with a longer repayment term.

Tergesen is an associate editor for BusinessWeek in New York .