A new start-up is offering an alternative to student loans that works more like a crowdfunding investment model and less like a traditional loan. The company is called Pave, and it matches students with investors who will pay a portion of their tuition in exchange for a percentage of their earnings after graduation.

The loans end up looking more like a traditional investment model, where the lender provides money upfront in hopes of increasing the student’s earning potential over time, and then sharing in a portion of the profits in the form of their eventual income. This lending model raises some significant questions for interested borrowers and lenders, including whether or not the debt that they incur would be dischargeable in a bankruptcy filing or if the obligation itself would be modifiable given significantly changed circumstances.

Another interesting aspect of the lending program is that borrowers will not have late fees and will have flexibility in establishing a payment plan if they fall behind or underpay. This arrangement will certainly be helpful for freshly minted college graduates facing high costs associated with moving and starting a new career.

As many Florida students know, there can be many unexpected costs that arise along with a job search, including travel expenses and proper attire for interviews, and that can add up along with daily living expenses and may result in significant credit card debt or an inability to keep up with other financial obligations.

What do you think – is this idea a good alternative to student loans? Or does it have too much uncertainty for both borrowers and lenders?

Source: USA Today. “Pave: alternative to costly college loans,” Hadley Malcolm, March 5, 2013.

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