GreenNote Introduces P2P Student Loan Hybrid: Virgin Money Meets Facebook with a Dash of Prosper

This week two Finovate Startup alums launched the
services they demo'd a month ago at our conference:

• June 2: CheckingFinder from FirstROI/BancVue
• June 4: Friends & family student loan facilitator,GreenNote

We'll start with GreenNote and look at CheckingFinder tomorrow. Although I'd seen the GreenNote demo, since it was in closed beta, I hadn't had a chance to use it until earlier this week.

My first impressions are favorable. The site helps students reach out to family and friends to put together a "personal loan consortium" to finance educational expenses (also called a "pledge drive"). While GreenNote does not currently provide access to funds from outside the student's own network of friends and family, the service does offer tools to solicit loan pledges via email. It also collects the resulting loan pledges from interested parties, then sets up and services the resulting loan.

The process:

• Students solicit loan pledges from their network, and hopefully the networks of their network
• Interested friends, family, or anyone else who's received a loan request from the student (either directly, or through forwarding) create a GreenNote account and make loan pledges (minimum $100)
• Once the loan is funded (minimum $1,000, no maximum), GreenNote verifies enrollment, collects the money, and packages it into a single loan agreement with the student
• When it comes time to repay the loan, lenders can choose to forego the principal and/or interest and gift it to the student; lenders will also be able to lower the rate

The terms:

• Loans are deferred for up to five years while the borrower is in school, then initiate a six-month grace period before repayment begins
• Interest accrues during the deferment period
• Repayment is over a 10-year period, meaning that lenders must commit their money for 15 years
• The rate is currently 6.8% fixed, but GreenNote takes 100 basis points of that, so lenders receive a 5.8% return (which they can elect to lower at repayment time)
• GreenNote charges a 2% loan fee at funding, with a minimum of $49

Coming soon:

• Allow third parties to browse loans they might want to fund (e.g., alumni)
• Facebook integration

Analysis
At first glance, it looks like an expensive way to put a nice wrapper around funds that have already been made available by the student's family. And certainly, if moms and dads are providing the bulk of the cash, it's not necessary to pay 2% for a promissory note. For most loans, you can do that for less at online paperwork specialists such asVirgin Money or LoanBack.

However, the power of GreenNote's model is tapping into the friends of friends, and the friends of those friends, and so on. As a student puts together an email pledge drive, recipients are encouraged to pass the request on to appropriate parties who might be willing to participate. For example, Pat who is headed to Michigan State, knows Jon whose uncle is a successful alum of the school. Jon's uncle, who'd be highly unlikely to simply write Pat a check, might be very interested in putting a few thousand dollars into a long-term 5.8% deposit that earns him a fair rate of return and helps someone go to Michigan State.

GreenNote is well thought out and well implemented. The main problem though, is finding enough deep pockets willing to put thousands of dollars on deposit for up to 15 years with no guarantee of repayment.

Financial institution opportunities
Lenders have taken some heat recently as they've cut back on student lending during the credit market turmoil. A bank or credit union could gain some positive PR by facilitating this type of lending among their own customer base and community. It could be built from scratch or potentially in partnership with GreenNote.

Background
GreenNote is backed by Menlo Ventures, among others, and has an impressive board and advisors including prolific blogger and partner at Glenbrook Partners, Scott Loftesness. Bill Harris of Intuit, X.com (now PayPal), and Passmark (now RSA) fame is on the board. The launch was covered this week by TechCrunch, VentureBeat, and C|Netamong others.link...

GreenNote homepage (5 June 2008)