10/21/2014 02:24 pm ET Updated Dec 21, 2014

Breaking the Debt Cycle: How Peer-to-Peer Lending Is Changing the Student Loan Rules

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When we think of getting a loan, we all tend to picture it through a filter of decades of pop culture: you go into an imposing brick-and-mortar bank or other large financial institution, with your hat held in trembling hand, and meekly ask for a loan, thrilled to accept whatever exorbitant rates they were willing to offer. It was a traditional top-down power structure, in which one side held all the cards, and the other had to accept whatever they were offered, which was often nothing at all. This might not have always been the exact case, but it was certainly cemented in popular imagination.

It is these kind of old-fashioned, hierarchical, and inherently one-sided relationships that the internet seems designed for busting apart. For whatever ills exist on the online world, the democratization of process is an unalloyed good. And when it comes to getting a loan, the information revolution has opened up thousands of new avenues, allowing borrowers to pick and choose what works best for them. It has even forced banks to change their attitudes on refinancing and loans, though not thoroughly enough.

Peer-to-peer lending is one of the hottest trends in this new world of loans, and can change the way we look at debt -- particularly the crushing burdens of student loans and the growing expectations of post-graduate degrees in a competitive job market.

The need for post-graduate degrees

Even 25 years ago, it would have seemed unthinkable that nearly every job, no matter how entry-level or seemingly-menial, would require some sort of college degree. But an associates degree is the minimum barrier for almost any job that pays well enough to live. Even that is changing, though. A recent report by shows that nearly one out of every five employers are looking for Masters' degrees where once they only wanted an undergrad degree.

This is putting increasing pressure on recent grads, or even young professionals who want to advance. Many of them are already buried under student debt, which is a national crisis. This is true even for graduates with decent-paying jobs. The cost of college has gone up, but wages have remained largely stagnant, making debt alleviation even more difficult. In order to pay for post-graduate studies, they have to take on more loans, which seems daunting in the future, but, more immediately, can be impossible in the present.

The problem with having debt, even if you are paying it off regularly, is that traditional lending institutions find it too risky to give you even more at reasonable rates, and refinancing is rarely an option with banks, who have become much tighter about their policies in the wake of the 2008 collapse. So here's the dilemma:
● Graduates and professionals need more education to advance
● They are already drowning in debt
● They can't refinance or take on new loans while paying off old ones
● They can't advance in work enough to make enough money to pay off these loans so that they can advance even further

It's not quite a Catch-22, but it would make Heller sit up and take some notes.

The Advantage of Peer-to-Peer Lending

We're in a different world now, though, even if it is taking longer for people to realize it. Most people don't even own hats, much less hold them in their hands on the way to the bank. They assume that banks are going to reject them outright, and so don't know how to refinance or otherwise extend their loan.

Peer-to-peer lending can change all that. Leveraging a remarkable amount of information technology, P2P lenders can assess potential borrowers in a completely different way, and treat them in a far more personal manner than most large institutions can allow. Many P2P lending operations specialize in helping specific borrowers, like people going for an MBA, and can tailor their operations around refinancing student loans. They understand what recent graduates and young professionals are going through, and can find the best ways to help them remove debt.

Traditional lenders tend to be very backwards-looking, using large frameworks and fitting everyone into those. If you already have debt, it is hard to get a reasonable loan rate, no matter what your specific situation (good job, lots of potential) is. P2P lenders are more nimble, more flexible, and have the dexterity to be more creative for your unique situation. They are data-driven, not framework oriented.

Using Data to Understand What Works

A helpful metaphor would be two baseball managers, one doing things "by the book," and the other more interested in data. The first manager sees a righty coming out of the bullpen, so he sends a lefty up to bat, because that traditionally is more successful. The problem is he's got a right-handed hitter who is better in every situation. The data-oriented manager would send him to bat, because he knows the righty is better, even if tradition dictates otherwise. In this situation, you're the righty, and P2P lending is the innovative manager. Who would you rather play for?

With smaller operations, they can enhance the user experience in the same way that we've seen other internet-based, insurgent, new-model businesses do across a wide spectrum of fields. There has been a failure on the behalf of traditional institutions and political leaders to address the student debt crisis and the way it affects earning potential moving forward. There have always been times of crisis. The exciting thing about today is that the marketplace is in constant flux, as new ideas compete with each other to solve the problems. P2P lending has been around for a long time, but the accessibility it offers -- and the ability for borrowers to shop around -- can change how debt is thought about. For once, the debtor has some power. That's enough to keep a hat firmly on your head.

States With Highest Average Student Debt - TICAS - Class Of 2012