VentureBeat

Social networks aren’t just for fun. A new company leverages existing networks to help students do something really useful — obtain low-cost college loans from friends, family and other benefactors in the same social circle that the students may not even know about.

GreenNote is debuting a site Wednesday that lets a student do just that. The Redwood City, Calif. company is opening up a new micro-finance alternative for students who may have trouble getting loans because they can’t pass a credit check, find a co-signer or show proof of citizenship. GreenNote matches the students with lenders who may not be aware of the student’s need; the lenders can bear just part of the cost and get the satisfaction of sending someone in their social circle to college.

Ideas like this make me realize how social networks are really useful. This idea is the latest twist on how the Internet — and social networks in particular — can make it much more efficient to gather small amounts of money for those who need it. It’s akin to Kiva.org, which we wrote about a few weeks back, as well as the original micro-finance company Grameen Bank, which both make small loans to the poor.

“All of those things have been inspirations to me in trying to build something that can scale,” said Akash Agarwal, founder and chief executive of GreenNote.

Originally from India, Agarwal had a tough time getting loans when he migrated from the United Kingdom to the U.S. in 1994 at the age of 27. He had no credit history and so he couldn’t get loans for college or even a car.

“I took out all the loans that I could get,” he said. “GreenNote is better than relying on just friends and family alone because you might find a person affiliated with your network who will support your cause. You can find someone who is proud to send someone else to college.”

Students know there is often a big gap between a family’s expected contribution and federal educational support. To fill that gap, private lenders have stepped in, proving $25 billion in loans every year. But they’re charging students with interest rates as much as 20 percent.

At the moment, the credit crisis is hurting students’ ability to get college loans. Homes are also no longer ATM machines via home equity loans. Tuition is going up and this year is one of the peak demographic years for college applications because the children of the baby boomers are hitting college. That’s why Agarwal believes there’s a need for GreenNote.

GreenNote itself isn’t a new social network; it leverages existing networks to find lenders. Among those it will support include Facebook and Open Social-based networks.

The student’s closest friends don’t have to be the source of the most money. The friends’ big purpose is to pass the request on to their own network of friends. Eventually, the request can reach someone who really doesn’t mind parting with some part of the money or all of the money for the loan.

The current GreenNote interest rate is fixed at 6.8 percent. To get a loan, a student fills out a profile and loan request. GreenNote formalizes the agreement into a legally binding loan and handles all details from loan documentation through repayment. Payment can be deferred for up to five years and repayment terms can be as much as 10 years with no prepayment penalties. But the loan isn’t a donation (unless the lender specifically designates it as such). If the student fails to pay off the signed promissory note, his or her credit history gets a black mark.

The company raised $4.2 million in its first round in October, 2007, from Menlo Ventures and Glenbrook Partners. Its board includes the former CEO of both Intuit and PayPal, Bill Harris. The company has 15 employees. Agarwal says he is likely to look for more money in the future.

GreenNote plans on marketing its services through financial aid officers in post-secondary schools across the country. Richard Toomey, associate vice provost at Santa Clara University, said that the GreenNote service is a powerful new way to finance college through people you know.

You know, I’ve got some kids who are going to hit college age eventually. I guess I better befriend Bill Gates and all of the other billionaires I can find on Facebook, so I can be ready to use GreenNote when those bills start rolling in.

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Tags: co:greennote, inv:glenbrook-partners, inv:Menlo-Ventures