Online Lenders Get Burned Betting on Ivy Leaguers

According to a Wall Street Journal article, online lenders' business model of targeting Ivy League student borrowers is starting to backfire. The lenders initially targeted borrowers from elite schools because of their anticipated low default rates, focusing on those with graduate degrees, high credit scores and high incomes. Some loans were offered at a lower interest rate than the federal government or large private lenders charged to attract those student customers. But these borrowers are proving especially keen to pay off their debt faster than the lenders expect. Darien Rowayton Bank in Darien, Conn., has a national online lending platform where it says student-debt borrowers are paying 15% to 17% more than they are obligated each month. Gary Lieberman, chairman of the Bank, said “the nature of these borrowers is that they really want to pay off their debt.”

As marketplace lenders sell most of their loans to investors instead of holding them like traditional banks, the thinking is that investors will perceive these loans to be more reliable. But the seemingly anti-debt attitude of student borrowers could make business difficult for lenders and leave some investors at risk of collecting less in interest payments. “Prepayment risk,” said David Varano, an analyst at Interactive Data, a firm that provides fixed-income valuations, “is likely one of the factors making its way into the market.”

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