Whether you are a young man or woman heading off to college or an adult whose school days are a distant memory, the month of September carries a familiar association: back to school. The years we spend in formal education can be among the most transformative and memorable of our lives. Nevertheless, the rising cost of education has sparked debate in the United States and around the world. In today’s analysis, we examine the role marketplace lending might play in the financing of education.
In our recent analysis on real estate lending, we included the following graph, showing the major sources of U.S. consumer debt as of 3/31/2014.
As of this June, the U.S. Federal Reserve put the balance of outstanding student loan debt at $1.27 Trillion, exceeding the levels for other common sources of spending, including auto loans and credit cards. Perhaps some students will be turning to marketplace lenders to obtain the funds necessary for their education.
Education Loan Volumes
While overall educational lending has increased in the United States, leading marketplace lenders LendingClub and Prosper both stopped making education-purpose loans on their platform in 2010. This is due to certain provisions of federal law surrounding loans for “post-secondary education expenses”. Loans for this purpose are subject to conditions beyond those required of other loan purposes, making such loans incompatible with the structure of P2P lending platforms.
Given the lack of data available from U.S. platforms, let’s instead take a look at Europe. Bondora, the rapidly-growing pan-European marketplace lender, does offer loans for educational purposes, and while the volume for this purpose is still quite small, it does make available some compelling data that should give us a sense of these borrowers and their profile.
Bondora Education Loans – Demographic Data
In the chart below, we show 2014 Bondora loans by country. Estonia and Spain are the clear leaders, with Spain surpassing even Bondora’s home country.
As interest rates tend to vary by locality, it is useful to examine the distribution of interest rates by country (excluding those with very low volume). In the graph below, we can see that rates range from 12.5% to 37.5%, with Estonia having a somewhat wider distribution than Spain.
In the graph below, we compare the interest rates of education loans to those of non-education loans. There does not appear to be a much of a meaningful difference.
In the way of demographics, Bondora also happens to make available certain data that is typically harder to come by in the U.S., including education, age, gender, and marital status.
Credit Quality and Performance
As the increase in education-purpose loan volume on Bondora has been relatively recent, we are not yet in possession of enough performance data to truly compare this versus other loan purposes. We plan to check back in 6 months or so to conduct a more thorough analysis.
While LendingClub and Prosper stopped making education-purpose loans in 2010, there is certainly a desire in the alternative lending community to fund education. Companies such as Commonbond and SoFi have been lending to people for the purpose of paying for school or refinancing student loans, with notable success. There are also some companies introducing loan products for very specific educational uses, such as to fund attendance at various coding schools. Needless to say, we’d love for some of these companies’ data to be publicly available so that we could understand the borrower dynamics and loan performance. While we are in the early days of applying marketplace lending to education, we are optimistic about the potential for simpler and more efficient student lending.