After accepting admission to New York University for this past fall, Max Stephenson started searching for loans. Then living in rural Tewksbury, N.J., the 18-year-old had little savings, and his parents couldn't afford NYU's hefty tuition, which this year hovers around $50,000 when you include room and board.
The Stephensons met with several private lenders, since government aid was inadequate. But like many Americans in need, they couldn't borrow enough: Loans were either unavailable, or they came with double-digit interest rates. As his freshman year loomed, Stephenson was short $25,000.
Unfazed, he hatched a plan. He'd get 10,000 strangers to donate $2.50, $3.50, or whatever they could afford. To thank them, he'd send a piece of his graduation cap or gown. Within weeks, Stephenson's plea—which began as a mid-August e-mail to 250 acquaintances—had circled the globe: Donations poured in from the U.S, Nigeria, Spain, and many other countries. As of earlier this month, he has raised $11,000, more than enough to finance his first semester.
A SEVERE DISRUPTION
Several years ago, such a quest might have seemed absurd. Not so today. As lenders cope with turmoil in the financial markets and fallout from the subprime mortgage crisis, the student loan industry is more precarious than ever. Daring and driven, a small but growing number of students, like Stephenson, have embraced creative financing. But it's not necessarily by choice.
In the past year, conventional lenders have drastically reduced funding for student loans. The financial aid Web site FinAid.org reports that 168 have exited or suspended their participation in the federally-guaranteed student loan program (FFELP), which includes the popular Stafford and PLUS loans. Thirty-eight have also stopped offering private student loans.
FinAid publisher Mark Kantrowitz, who has been following the industry for two decades, says the student loan market is severely disrupted. "In years past, we've seen maybe one or two banks pull out of the FFELP," he says. "This is a lot worse."
That's daunting news for college students, most of whom depend on loans to pay for school. In the U.S., two-thirds of four-year undergraduate students leave college with some debt, and the average among graduating seniors is more than $19,000, according to the National Postsecondary Student Aid Study. Demand is even greater among graduate students: Their average debt ranges from $27,000 to $114,000, according to FinAid.
To seek out funds, some students have turned to peer-to-peer lending sites, such as GreenNote and Fynanz, which focus exclusively on making college loans. After creating an online profile, users can court a variety of financiers, including friends, family, and perfect strangers. According to Kantrowitz, however, peer-to-peer lending funds are limited. "Right now, they're just a drop in the bucket," he says. "But the idea is really interesting. In a decade, who knows what it could become?"
In that vein, brothers Matt and Mike Kopko have just launched GradeFund, a Web site where needy students can solicit anyone—friends, relatives, coaches, strangers—to "sponsor" their grades. The better students score, the more tuition money they'll receive.
Matt Kopko explains the site is similar to those where, say, a person runs a marathon and solicits support for charity. "You get people to pledge toward a [charitable] goal, and everyone benefits."
Unlike GreenNote and Fynanz, GradeFund contributions are gifts, not loans, which makes the site especially attractive to cash-starved students. By earlier this month, almost 6,000 people had signed up, 20% of whom are donors, according to the Kopkos. And as student loan funds evaporate, they predict big growth.
Michael Beck, a freshman at the University of Michigan who created one of GradeFund's first student profiles, says he was initially skeptical. After all, by skipping the site altogether, and just arranging a similar reward system with friends and family, he would avoid the 5% transaction fee (which the Kopkos charge to cover overhead costs and eventually make a profit). However, he says, a site like GradeFund makes the process more formal.
"Everything's spelled out in writing, and you can see all of your donations," he explains. "It's not just like, 'Hey, Mom, can you promise to give me money?'"
NOT A SURE BET
Of course, creative financing can fail. Earlier this year, Brendan Baker, came up with a "ridiculous" plan to help raise the $90,000 he needed to attend the University of Oxford's Said Business School: His Web site, 3bucksforbrendan.com, sought $3 donations from 30,000 strangers.
Confidence notwithstanding, Baker could only raise $11,000—12% of his ultimate goal—and he had to forgo admission to Oxford. —I've been amazed and humbled by all the support,— Baker wrote on his Web site in September, before donating the money to two nonprofits: Engineers Without Borders and Medecins Sans Frontières. On his Web site, he blogs that he still plans to attend Oxford.
To avoid a similar fate and cover his bases if his e-mail plea falls short, Max Stephenson registered with GradeFund, where he was recently named a site spokesperson. He also plans to get a summer job that offers more traditional income, he says.
And if he still falls short? He laughs. "I'll just think of something more creative."