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A New Class of Student Loans

As the credit crisis causes banks and government agencies to pull back from the market for private loans, a new breed of lender is popping up. A raft of peer-to-peer lenders is trying to persuade students to rely on friends, family, or even total strangers to finance their college loans.

In recent months sites like Prosper and Virgin Money USA have introduced student loans or started marketing existing programs to families looking for college funds. Others, such as startups GreenNote and Fynanz, focus just on college loans.

Sites like Virgin Money and GreenNote mainly seek to formalize loans between friends and family. Others, like Prosper, let borrowers publicize amounts they want to raise and the rate they're willing to pay. Lenders bid on funding a slice of the loan.

Borrowers get the chance to secure a rate below the 6% to 16% conventional lenders are charging these days for private loans. (Virgin Money says a typical negotiated rate is 4% to 5%.) Lenders can earn a decent return while helping a student. But sites say it's too soon to know what percentage of borrowers will default.

Oh, the Misery

The cost of filling up at a gas station is soaring. So is the tab at the grocery store. And companies have reduced their payrolls by 260,000 jobs over the past four months. As Presidential candidate Ronald Reagan memorably asked during the 1980 race for the White House, "Are you better off than you were four years ago?"

Back then the answer was a resounding no. The same's true today, at least according to the "misery index." The gauge was devised in the 1960s by an economic adviser to President Johnson. Designed to roughly capture how difficult life was for average households, it adds together the rates of inflation and unemployment. From 2001-2007, the index averaged 7.89% under George W. Bush, slightly higher than during the Clinton years. So far in 2008 the index is averaging 9.01%--its highest level in 15 years--though it's still well below the 21.98% peak reached under Carter. The big difference between 2008 and 1993: Rising prices are a greater influence on the index now, while the unemployment rate mattered more 15 years ago.

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