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Alternative Lenders Could Offer New Options for Foreign Students at U.S. Business Schools

Private student lending shrank sharply during the financial crisis, and though traditional lenders have cautiously returned to making loans to U.S. citizens, non-Americans looking to attend business school in the United States often are hard-pressed to find financing options that don’t require a U.S. co-signer. But according to a recent article in the Financial Times, peer-to-peer lenders and crowdfunding start-ups could present new opportunities for foreign students.

One peer-to-peer lender, SoFi, which hopes to lend $1 billion this year, has been in discussions with several U.S. business schools about extending loans to foreign students that would be funded by alumni from their home country, the FT reports. Meanwhile, Pave, a crowdfunding start-up that lets students raise money from backers in exchange for a share of future income, is also considering expanding to other countries, the FT adds.

Most existing loan programs for overseas students are funded by banks or credit unions but guaranteed by business schools themselves, which leaves schools exposed to the risk of default and has made some schools reluctant to lend to foreign students. Columbia Business School, for example, will only lend to foreign students who have a U.S. co-signer, directing other students to seek scholarships and loans from institutions in their home countries.

“The default rate is higher for international students,” Mark Kantrowitz, publisher of student finance website, told the FT. “It is very difficult for any lender to collect from someone who’s overseas. In the U.S. you could sue and get their wages garnished [deducted], but you can’t do that overseas.”

Alternative lenders like SoFi and Pave rely on social components to address default risk. Sofi, for its part, exerts social pressure on borrowers who feel an affinity with alumni investors, Mike Cagney, SoFi chief executive, told the FT.

Pave and other crowdsourcing start-ups, meanwhile, tie payments to the borrower’s own financial success, giving investors cause to mentor borrowers and help with networking and job referrals. “I have an incentive to help him succeed,” explains Pave co-founder Sal Lahoud about a potential borrower. If a borrower does well, the backing investor receives the initial investment and more, but borrowers don’t have to repay during years when their income falls below a certain level.

Read the complete Financial Times article, “Overseas Students Are Lent a Financial Helping Hand,” for more on alternative lenders.