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​The Learning Curve: Crowd finance for students

April 26, 2017 • By TAB team

Student debt is a hot topic in the UK right now. University students in England graduate with higher levels of debt than those in any other English-speaking country. Can other finance providers – particularly the crowd economy – step in to help? We looked at the data to compare interest rates on tuition loans with rates offered via crowd finance platforms.

The problem

Student debt is a hot topic in the UK right now.

University students in England graduate with higher levels of debt than those in any other English-speaking country. According to the Sutton Trust, English students who graduated last year owed an average of £44,500 – higher than those in the US, Canada, Australia and New Zealand.

And now, millions of students (and former students) in England and Wales are likely to face a sharp increase in interest rates on tuition fees and maintenance loans due to rising inflation.

In the autumn of 2017, rates are set to rise from 4.6% to up to 6.1% for those who have taken out loans since 2012. Interest varies depending on the graduate’s income ranging from RPI at £21,000, up to RPI plus 3% at £41,000, meaning the effective rate paid would be a whopping 24 times that of the Bank of England base rate of 0.25%.

And students in England are about to get hit from both sides, with a concomitant increase in tuition fees to £9,250.

The exorbitant cost of borrowing for students versus consumers highlights a worrying lack of regard for education and the crucial role it plays in our society. Without support, many young people will be priced out of higher education and those who can afford to attend university will be faced with a debt burden that can lead to stress and increased mental health problems.

Estelle Clarke from the Intergenerational Foundation describes this development as, “an inexcusable assault on the vulnerability of students with no alternative but to go along with the government’s student finance system.” And a survey by The Independent found that one in seven students are being chased by debt collectors after being unable to pay their rent, and over a third cannot afford their weekly shop.

The solution?

Can other finance providers – particularly the crowd economy – step in to help? We looked at the data to compare interest rates on tuition loans with rates offered via crowd finance platforms.

UK based Prodigy Finance specialises in offering loans to international students who have secured places on masters courses at the world’s top 100 universities. The firm issues bonds on the Irish stock exchange, which mitigates the risk associated with direct lending to a student. These securities can be traded freely, and investors receive a tax-free coupon once the loan has been repaid.

However, rates are not competitive when compared with those currently offered by the UK government’s student finance scheme. A loan of £40,000 repayable over 101 months (equivalent to roughly seven and half years) comes with a rate of 7.8% variable APR when factoring in all fees and the effects of compound interest.

P2P lending platforms are also starting to service demand in the student loan sector. In 2015, Morgan Stanley estimated that P2P student loan issuance will grow at a 20% through 2020 and to date, student loan refinancing outfits SoFi and CommonBond are highly active in this space in the American market.

The UK’s largest P2P lenders offer competitive rates, too. Zopa extends 5-year loans of £25,000 for 3.4% APR and RateSetter offers £35,000 for up to 5 years at 3.9% APR.

It’s also worth mentioning EdAid, a London-based social enterprise that lets students borrow direct from investors, with repayments set at 10% of monthly net income starting seven months after graduation.

A word of caution

Innovative crowd finance platforms are entering the student finance sector. Whether they can provide a sustainable alternative to the government student finance system over the long term remains to be seen.

It’s important to note that student loans are different in their legal structure to those offered by marketplace lenders, a point the Department for Education is at pains to emphasise. A spokesperson said, “Student loans are not like commercial loans as they have more favourable terms, including repayments being linked to income and not to the amount borrowed.”

The bottom line is that young people are unaware of their options, particularly when it comes to innovative alternatives like P2P lending. That needs to change. Students can learn and compare rates by reading around the subject and using Crowdsurfer to compare different options in P2P lending and the broader crowd economy.