June 14, 2011
Contemplating the bills for a four-year degree can leave students (and parents) quaking with fear. Most students will muddle through with the usual mix of loans, scholarships and grants, but a growing number are finding creative and offbeat new ways to help pay bills — everything from seeking investors to selling their eggs.
Certainly, the need for innovation has never been greater. College costs are skyrocketing, growing at about twice the rate of inflation, and student debt loads are also rising steadily — even as consumers pay off other forms of debt. The average cost of in-state tuition at a public school is now $7,605, according to the College Board, while private universities charge $27,293 on average. Meanwhile, the unemployment rate for college-educated workers under 25 is 9 percent — double the rate of grads over 25, according to a study by the Economic Policy Institute. No wonder a new study by the Institute for Higher Education Policy found that 41 percent of student-loan borrowers became delinquent at some point during the first five years of paying off their loans.
Among the most promising of the new strategies are programs that aim to pay for education the way angel investors finance start-up businesses. These companies raise funds from investors, then offer students money up front in exchange for a portion of their post-grad earnings. The concept isn’t new – Nobel Laureate and economist Milton Friedman proposed the idea of underwriting education loans with future income in the 1950s – but until recently, it hasn’t been executed successfully. Now, an organization called Lumni, is beginning to offer investment financing U.S. students. “When students borrow money for school, they risk not making enough money to pay their loans back,” says Noga Leviner, CEO of Lumni, U.S.A. “We’re taking on that risk for them.”
Mark Kantowitz, publisher of college funding web sites FinAid.org and FastWeb.com, predicts these educational-investment loans will become increasingly attractive not just to students, but also to universities over the next couple of decades. College discount rates (the percentage of college tuition covered by scholarships and grants) are hitting record highs, and the investment-loans give institutions a cheap way to provide students with attractive finance options. Enzi, another investment-loan company, tested a program with Stanford in 2010, funding two students during their final quarters at school. “It’s a pretty clever idea,” says Kantowitz.
It’s one of many clever strategies, including interest-free loans and peer-to-peer borrowing, not to mention good old-fashioned begging (albeit with a social media spin.) Below, are five innovative – and one slightly desperate — ways to help fund a college education. None of these schemes are intended to cover the full cost of college, but they can provide needed cash to students who come up short after grants and federal loans. We’ve rated them based on how difficult they are to get, and how much they could actually help.
1. Treat Education as an Investment
“Payments are zero when income is zero, and payments are low when income is low,” educational lender Lumni brags on its website. The organization currently operates for-profit and nonprofit education-investment funds in Chile, Columbia and Mexico, where it has raised more than $15 million and financed nearly 2,000 students. Lumni launched in the U.S. this spring, providing supplemental financing for 15 low-income or first-generation California students. The organization pools money from individual and corporate investors, then distributes it to students in amounts averaging $4,000 to 7,000. In return, students pay a percentage of their income over a fixed number of years – terms vary from student to student, but the average is 4 to 8 percent of income.
Lumni says it will fund 200 new students in the coming school year and plans to move into other states in the next two years and hopes to reach a point where it can also fund slightly more affluent students. “Frankly, these days, a lot of middle class and even upper middle class have trouble paying for college,” Leviner says. But there are caveats: A loan like this might be very appealing to a student who lands a job in the public sector or at nonprofit, but those who end up as Investment bankers might begrudge paying back a chunk of their six-figure salaries,and could end up paying far more than they would have through a traditional loan — but it’d be a windfall for their investors.
Rating: 4 out of 5. These loans are not widely available and won’t fund an entire education, but the idea gets high marks.
2. Get by With a Little Help from Your (Facebook) Friends
Back in the day, students had to visit Grandma — or at least pick up the phone — to beg for cash. Now, the process of asking for money has become far easier. Both students and graduates can create free profiles on such sites as Edulender or Sponsor My Degree, where friends, family, and even strangers can donate dollars to college or debt management—often in lieu of graduation, birthday, or holiday gifts. Graduate Kelli Space, whose profile is featured on Edulender, gained notoriety last year after blogging about her struggle to manage $200,000 in student debt and begging readers to ease her load. (Space says she raised more than $10,000 on the site, after her story was picked up by MSN Money and Yahoo Finance, among other media outlets.) But while creating a profile and posting it all over Twitter and Facebook might make the asking easier, at the end of the day, it’s still asking for a handout. And few students are likely to raise anywhere near as much cash as Space did. Experts say this is more like a wedding registry than a student loan.
Rating: 3 out of 5. Sure, it can’t hurt, and many students find money they wouldn’t have elsewhere, but asking for money never feels good—even via the Internet.
3. Skip the Bank, Borrow from the People
Peer-to-peer (P2P) sites bundle loans from several lenders to create an attractive package for students. Some sites, including Lending Club have strict credit requirements but offer fixed rates, averaging 7 or 8 percent, a better option than most private loans which have variable rates. Other P2P sites are aimed at helping students (and parents) with bad credit scores. To qualify borrowers, People Capital considers GPA, SAT scores, college, and even a student’s major to create a Human Capital Score. These sites are attractive, but as a relatively new lending platform, lack the funding to be a reliable source of money for students. “The chances of getting funded are pretty small,” says Kantrowitz of FinAid.org. “There’s not enough liquidity there to have a big impact.”
Rating: 2 out of 5. Difficult to get and rates are higher than federal student loans. But for those who’ve hit their federal limits, this is certainly better than turning to credit cards.
4. Say Goodbye to Interest Rates
Some federal student loans are subsidized, meaning that interest doesn't start accruing until after graduation. But what if there were no interest at all? The Bill Raskob Foundation offers interest-free loans averaging $2,000 to selected students. Many state-specific programs, such as Texas' Abe and Annie Seibel Foundation and the Massachusetts No Interest Loan program, offer even higher interest-free amounts. The catch? The application process is often as rigorous as that for a scholarship or a grant, and the money does, after all, have to be paid back. Kantowitz advises students to avoid jumping through hoops unless the sum is worth it — think $500 or higher.
Rating: 3 out of 5. A nice idea, but they’ll take up more time than other loan applications, but zero interest is hard to beat.
5. Sell Your Body … Legally
No, students aren't selling their kidneys on the black market or working the street corners (we hope). But many are auctioning off what momma gave them to help pay tuition. In addition to selling blood and plasma, one of the most popular — and lucrative — options is donating eggs. At New York University's Langone clinic, women between 21 and 31 get $8,000 per donation, and can donate up to six times during their lifetime. But donors go through a rigorous screening process that includes blood work, genetic testing, and a psychological evaluation, in addition to taking fertility injections in the weeks leading up to the procedure. As with any medical procedure there is a risk of complications and the long-term effects on donors’ fertility are uncertain.
Yet Dr. Nicole Noyes, director of reproductive surgery at NYU's fertility center, estimates that about a quarter of the center's egg donors are college students, with many going through the procedure twice. "$16,000 is a big chunk of change for a college student," Noyes says. Donating sperm is a lot easier, but less lucrative. Sperm donors are paid about $100 per contribution, but can give multiple times per week.
Rating: 1 out of 5. Sure the cash is good, but the risks and physical toll make this a last resort.
Instead of Student Loans, Investing in Futures (The New York Times)
7 Alternative Ways to Pay for College (Bankrate.com)
Making the Grade: MicroFinance for Students (The Economist)