Using Microfinance to Close the College Funding Gap

“Today, the cost of college is skyrocketing,” Akash Agarwal tells me. “It is growing faster than inflation and faster than the median income. Federal student aid is shrinking. This leads to a college funding gap for many students.”

Agarwal is the CEO of GreenNote, a new college loan provider (launching next month) that aims at using microfinance to close that college funding gap. “Up until now, students had to turn to expensive private loans to meet their needs,” he says.

The idea is that everyone has a social network. Students can take advantage of that by asking friends and relatives (and even complete strangers) to help them pay for college — and earn a return while doing it. Using the principles of microfinance, GreenNote allows students to borrow money for college from several people. And those people get a return, since interest is paid.

Here are the basics of the GreenNote microfinance college loan program:

• Students create a profile and share their funding needs.
• Visitors to the site (encouraged by students) can choose to help by contributing any amount — but it must be at least $100.
• The interest rate for the student is the same rate charged on Stafford federal student loans (currently 6.8%).
• Lenders earn a return on the loan.
• GreenNote facilitates the loan, from collecting the money and sending it to the college, to collecting payment from the borrower, to distributing payments to lenders. Fees are subtracted from the total the borrower gets (one time — 2% of principal) and 1% from the lender’s return.
• If they choose, lenders can waive interest payments or forgive the principal.

At first glance, this looks like an interesting way to close the college funding gap. Students get the money they need, and lenders can feel good about helping (and make a little money as well — although it won’t be much).

image credit: sxc.hu