Defaulting on loans of any type can be devastating. Unfortunately, it is a reality many borrowers face, particularly for those who share in the $1.2 trillion student debt crisis. Time constraints, extenuating circumstances and mismanagement of financial assets can all lead to default on loans. However, lenders and borrowers may have a reason to sigh in relief: Alternative lending has seen a trend of less-frequent defaults when compared to traditional student loans. The probability of default on personal “IOU” loans – informal loans shared between friends with no intermediary – is close to 50 percent. Federal student loans, meanwhile, have an approximate 14 percent default rate. On the other hand, two P2P platforms in particular have stellar records of little to no loan defaults. Let’s dig a bit deeper.

Case Studies: CommonBond And SoFi

CommonBond, a P2P platform tackling the student debt crisis, had an unprecedented zero delinquencies and zero defaults as of June 2015. That came all while issuing more than $300 million in loans. CommonBond launched in 2011 and has raised nearly $200 million from August Capital, Tribeca Venture Partners and former Citigroup chief executive Vikram Pandit. SoFi, arguably the market leader in the P2P student loan refinancing space, also boasted zero defaults as of December 2014. The company has issued over $4 billion in loans to date and made CNBC’s annual Disruptor 50 list earlier this year. In contrast, the startling reality is this: 14 percent of federal student loan borrowers default within three years of starting repayment.

How Is This Advantage Possible?

For one, alternative models -- at least in limited cases -- have been more flexible than federal student loan repayment programs. However, eligibility requirements are often more stringent. SoFi, for instance, looks at salary and credit scores and will suspend payments in extenuating circumstances. Repayments naturally hinge on employment, and SoFi understands this contingency. “If you lose your job, we’ll temporarily pause your payments and help you find a new job,” the company promises. CommonBond has similar flexibility assistance by eliminating fees and penalties for refinanced loans and provides temporary forbearance for economic hardships. “We’re not here to place short term bets – we’re invested for the long haul,” CommonBond CEO and co-founder David Klein has said publicly.

Another Reason: Eligibility

Another reason default rates have remained so low within the P2P student loan lending space is that the platforms are restrictive to whom they lend. CommonBond equity investor, Tom Glocer, commented on CommonBond’s selectivity and its reputation for not “lend[ing] beyond the academic elite.” “Not to be glib about it, but if you’re coming to me for a loan and you’re a dentistry student at the University of Pennsylvania, I’ll be more willing to make a loan than if you tell me you’re an art history major at Texas Christian.” In looking at the average borrower, CommonBond’s Klein, threw out a few statistics: 

• Average Age: 31
• Average FICO score: 750+
• Average Annual Income: $130,000 +
• Average DTI ratio: 32%
• Average Degree: MBA, followed by law, medical and engineering degrees

Similarly, SoFi restricts those who qualify to participate on their platform. “Today, we’re able to offer significant savings and flexibility to US citizens or permanent residents who have graduated from a selection of Title IV accredited university or graduate programs, are employed or hold a job offer with a start date within 90 days, have a responsible financial history, and a strong monthly cash flow,” the company states.

The Bottom Line

Above all, it is essential to look at all available options before making financial decisions of any size. By increasing your financial literacy, you can insure that your decisions are well informed and cater toward your personal situation. When considering student loan options, consolidating and refinancing, the P2P space is booming with possibilities. Tackle debt by taking action.