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Tess Vigeland: The credit crunch is forcing more and more banks to get choosy about borrowers. College students are getting caught in the squeeze as banks drop their student loan programs. A few have decided not to lend at all to the community college crowd.
What to do? Well, some students are turning to the familiar world of social networking. Websites are popping up that connect students to strangers and family members willing to loan them money.
Marketplace's Nancy Marshall Genzer explains.
Nancy Marshall Genzer: The Facebook generation has gone surfing for cash.
That's what Amy McGowan did when she needed money for law school. The 24-year-old says she learned all about socializing on Facebook but felt shy about raising money at sites like that.
Amy McGowan: The kind of personal information that's on the social networking sites is social. It's who you're dating or making plans for the weekend. It's not that sort of delicate "Hey, I'm broke."
So McGowan went to other websites that welcome that message. She found plenty of lending sites marketing directly to students.
[Prosper.com Ad]: I'm in college and I needed some extra cash, so I went to the bank, right? Wrong. I went to Prosper.com.
Prosper.com gave McGowan two loans. Here's how it worked: Prosper, which lends to anyone, pulled her credit report. McGowan typed in the interest rate she was willing to pay. Average Joes with a little extra cash then bid on her loan. They got a better interest rate than the typical savings account or CD pays. McGowan got a loan below bank rates. Prosper got paid for being the middleman.
C.C. Chaman: So it's like eBay for student loans.
C.C. Chaman heads up one of Prosper's competitors. Chaman's site, called Fynanz.com, caters strictly to students. It just launched in March.
Chaman says it was excellent timing. His site has already loaned out close to $50,000 and loan requests are rolling in.
Chaman: I call this the perfect opportunity storm. Banks have stepped out, borrowing is on the rise, rates are low...
Other sites also see rainmaking opportunities. Loan requests on these sites range from $8,000 to $20,000. Multiple lenders put up anywhere from $25 to $200 to fund the loans and the sites service them.
A new site called GreenNote launched this month. It helps students pass the hat for college money among their family and friends. The site also offers tips for student borrowers, like holding a pledge drive. You may be familiar with those...
[Pledge Drive]: The phone number to call is 414-1234.
Instead of a coffee mug or tote bag, lenders get the satisfaction of helping someone they love -- and some interest on a loan. These loan drives can be something of a guilt trip. I'm thinking of my nieces, who sold me girl scout cookies.
Cookie Monster: Ho, ho, cookies!
If I can't turn down Thin Mints, how on earth can I resist giving a monster loan? And what if my nieces don't pay up?
Penn State Education Professor Donald Heller says that's where GreenNote comes in.
Donald Heller: They will be the heavy-handed intermediary telling me I have to pay up rather than Aunt June and Uncle Bud making the phone call and saying, "Hey, you didn't make your payment this month."
And the peer-to-peer lending sites are new so there's little information on how often students miss payments, nagging or not.
Mark Kantrowitz: Caveat emptor.
Buyer beware. That advice comes from Mark Kantrowitz. He runs the Web site finaid.org. He says don't bet all your money on one student.
Kantrowitz: You should spread it across multiple borrowers so that if any one borrower defaults, you still have the possibility of having the rest of your investment make out OK.
And if it doesn't make out OK? GreenNote doesn't guarantee its loans. Other companies like Fynanz do, but Kantrowitz says there's no guarantee any of these companies will be around in a few years when the loans are due.
I'm Nancy Marshall Genzer for Marketplace Money.