People Capital: how microfinance makes college possible

Microfinance is gaining increasing steam. With the founder of Grameen bank's 2009 Nobel Peace Price win, it's officially arrived. It has been interesting to see the variety of new applications microfinance models has been applied to. One excellent example is People Capital, a U.S. microfinance organization set up to offer peer-to-peer student loans. With higher education at an all time cost high, an organization like this cannot be more timely.

People Capital is not the first organization to attempt student loan microfinance; previous organizations such as Prosper, Greennote, Vittana and intra-university funds have all attempted similar versions, with varying success. However, People Capital hopes to learn from the setbacks of previous organizations. It has launched with complete awareness of their regulatory compliance obligations under the SEC, a stumbling block for earlier organizations.

People Capital offers a charming Ebay-styled system for lenders. Lenders may choose to bid to provide loans at a variety of risk levels and rates of return. Lenders also get to tailor their lending by state, university and student based on a short profile and proprietary algorthimic score that People Capital assigns to borrowers' creditworthiness. The borrowers benefit also; students get more flexible, less expensive terms than loans through private banks. It also gives a way for students, with little or no credit history, to find financing for their education.

People Capital's peer-to-peer lending network is an example of a creative, workable solution for the problem of higher education's exponentially increasing price. Higher education has increased at twice the rate of inflation at the undergraduate level, and is even worse at the graduate level. By the time they graduate, as many as 85% of graduates carry debt, either in loans or on credit cards. This burden creates a series of problems over time; it limits career choices, drives students into cashable careers, drives indebted talent out of the public and nonprofit sectors, and makes larger, economy stoking investments like home and car purchases our of reach for decades.

While student debt has historically been considered risk-free, this stereotype has fallen apart in the wake of the recession, with widespread defaults on both private and government held educational debt. In 2009, the Wall Street Journal reported default rates at 8%, with projections approaching 9%. Student debt is generally impossible to discharge through bankruptcy, resulting in draconian collection options for defaulters.

In this context, students need opportunities like those offered by People Capital. They are also increasingly important to the economy at large, who needs students to grow into fiscally productive professionals and dutiful consumers. Microfinance has demonstrated its efficacy on an international scale; now it is time to put it to work domestically for the working poor, the educated poor and the middle class the recession has been driven below the poverty line.