Strapped for college cash? New ways to borrow

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Covering college tuition bills often requires leaving no stone unturned—and now there are more lending start-ups offering help both during and after college. Provided you've picked the right major, that is.

Academic history, grades and earnings potential factor in to the rates borrowers get with lenders such as Upstart and Pave. Both introduced new short-term loans this year, with fixed rates starting at 5.7 percent and 6.8 percent, respectively. "That employability speaks to how easily you'll pay back a loan," said Dave Girouard, founder and chief executive of Upstart. Another lender, CommonBond, offers fixed loan rates as low as 3.89 percent for graduates and 6.24 percent for incoming students. It restricts borrowing to four graduate degrees—J.D., M.D., M.B.A. and engineeringacross more than 100 programs.

The companies are edging in amid mounting student loan debts, which have swelled to more than $1.2 trillion. Graduate students are on the hook for as much as 40 percent of that tab, estimates think tank The New America Foundation, while The Project on Student Debt puts the average college senior's loan burden at $28,400. "The problem is large and the need for solutions is equally large," said David Klein, co-founder and chief executive of lender CommonBond.

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More personalized lending could offer substantial savings for some borrowers. A 2013 report from the Center for American Progress estimated 70 percent of outstanding federal student loans have rates of more than 5 percent. Rates on Direct PLUS loans for parents and graduate students are currently 7.21 percent, and direct unsubsidized loans for graduate students: 6.21 percent. "It doesn't make sense to get such high rates, especially for creditworthy borrowers," said Klein.

Private loans are often even higher. Many of the new products also target coding boot camps and other trade schools that aren't accredited, and so not eligible for federal loans.

But nontraditional student loan models have been slow to catch on. "I remember easily half a dozen to a dozen companies that no longer exist because they weren't able to make a go of it," said Mark Kantrowitz, senior vice president at Edvisors.com. "Companies successful at this are no longer doing it." For example, he said, peer-to-peer student lender Fynanz rebranded as LendKey last year, focusing on loans from the local and nonprofit financial institutions who were often investors under the old model.

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Part of the difficulty is on the funding side. It's not easy to gauge a student's future earnings potential, let alone sell investors on that opportunity, said Jack Vonder Heide, president of Technology Briefing Centers. Pave's new loans are a reimagining of its original income-share model, which let backers fund students in exchange for a portion of their post-graduation income rather than a set repayment amount. "We stopped issuing that product in April of this year because of the difficulty in scaling it from the investor side," said co-founder Oren Bass.

Borrowers also tend to be less aware of the new offerings and more focused on established aid options. Often, rightly so. Current rates on federal subsidized and unsubsidized loans are 4.66 percent for all students, lower than the starting rates for start-ups' best applicants. "It's the rare student that is not able to get some aid from their college or the government," said Vonder Heide. "They don't really have to dig that deeply to find the money they need to make it work."

Although Upstart offers loans for uses including paying for tuition and paying off outstanding student loans, since the company's launch in May, much of the $20 million loaned out has been for other purposes, said Girouard. "The majority, frankly, is paying off credit card debt," he said.

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Students should exercise caution before signing on for loans from a start-up, said Kantrowitz. In most cases, it's an avenue to explore only after traditional routes have been exhausted. "They are not a main way of paying for college," he said. Fees can easily eat into savings, and some loans are variable rate—not a smart bet with interest rates expected to rise. Federal loans tend to be more flexible on repayment terms, especially if you run into financial trouble.

Sorry, borrowers, but even if the lending start-up goes under, you'll still owe that outstanding balance. The start-ups have backup servicing companies in place. "There's no way to make that debt magically disappear," said Kantrowitz.