DeFi Lending: Why Students Are Risking It All to Skip Banks

Sick of earning basically nothing on your savings account? Some students are ditching banks entirely for DeFi lending—basically letting computers handle their money instead of humans. Sounds futuristic, but it's riskier than it looks.

Here's what's actually happening: instead of banks taking a cut of everything, you lend directly to other people through blockchain apps. Sometimes it pays more than traditional savings. Sometimes you lose everything.

Key takeaways

• DeFi lending lets you earn interest or borrow using crypto, but your money can vanish fast if prices crash or hacks hit
• Students are drawn to it for higher returns and no credit checks, but fees, volatility, and zero protections make it risky
• Only try it with extra cash you can afford to lose, never with tuition or essentials

What is DeFi lending?

DeFi cuts out the middleman; no more Wells Fargo taking their slice. You put your cryptocurrency into shared pools, other people borrow from those pools, they pay interest, and you get paid.

The whole thing runs on "smart contracts", which are basically robot agreements that work automatically. No loan officers, no approval processes, just code doing its thing 24/7.

Popular platforms include Compound, Aave, and MakerDAO. Each has its quirks, but they all promise the same thing: better returns than your pathetic 0.01% savings account.

The catch: Everything's in cryptocurrency, which means your "stable" investment can swing 30% in a day. Fun times.

Why students are trying this

Simple: regular banks are basically paying you nothing right now. Your savings account earns less than inflation, which means you're technically losing money just by being responsible.

DeFi interest rates can be as high as 80% if there's an imbalance between borrowers and lenders, though that's usually during market chaos. More realistic rates have been anywhere from 3-15% depending on the platform and what you're lending.

Plus, no credit checks. Got terrible credit from that one time you forgot to pay your phone bill? DeFi doesn't care. You just need some crypto to get started.

Everything happens instantly too. No "we'll get back to you in 3-5 business days" nonsense.

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How this actually works (when it works)

To lend your money:

1. Buy some cryptocurrency (Ethereum, stablecoins, whatever)
2. Get a crypto wallet like MetaMask
3. Connect to a DeFi platform
4. Deposit your crypto into their lending pool
5. Watch the interest roll in (or watch your money evaporate)

To borrow money:

1. Put up collateral, usually way more than what you want to borrow
2. Pick what you want to borrow
3. Confirm the transaction
4. Get your loan instantly

Here's where it gets scary: If your collateral loses value, the system automatically sells it to pay back the loan. No warnings, no grace period. Crypto crashes, your collateral gets liquidated, game over.

I know someone who put up $1,000 in Ethereum to borrow $600, then ETH dropped 40% overnight. The system sold his ETH, paid back the loan, and he was left with basically nothing. Brutal lesson in volatility.

TuitionHero Tip

Even “stablecoin” investments can lose value or break their peg, triggering cascading losses or liquidations.

The risks nobody talks about enough

• Code bugs can wipe you out completely: Hackers stole $1.48 billion from the crypto industry in 2024, and cryptocurrency hacks and scams hit $2.1 billion total. When smart contracts break, there's no customer service number to call.
• Crypto prices are insane: I've watched stablecoins (supposedly "stable" cryptocurrencies) lose their peg and drop 20% in hours. Your "safe" investment can become worthless while you're in class.
• Transaction fees will eat you alive: On busy days, it can cost $50+ just to move your money around. That 8% interest rate looks pretty dumb when you're paying $100 in fees to deposit $500.
• The government might shut it all down: Regulators are still figuring out how to handle this stuff. One bad headline and platforms start restricting U.S. users.

TuitionHero Tip

Start small if you're curious about DeFi. The technology is powerful but complex, and there's a learning curve involved.

Should you actually try this?

Honestly? Probably not if you're living on ramen and struggling with tuition.

Maybe consider if:

• You've got extra cash earning nothing in savings
• You understand crypto and aren't scared of volatility
• You're studying finance/tech and want to learn
• You can afford to lose whatever you put in

Definitely don't if:

• You need this money for school expenses
• The word "liquidation" gives you anxiety
• You're hoping to make quick money for tuition
• You don't understand how any of this works

Start small if you're curious. Throw $100 at it, see what happens, learn from the experience. Treat it like an expensive education, not an investment strategy.

Get your basic financial stuff sorted first: emergency fund, decent credit card, scholarship applications. DeFi should be play money, not survival money.

TuitionHero Tip

Prefer protocols that have undergone third-party code audits and have a good track record.

Advantages and disadvantages of DeFi lending

Advantages of DeFi lending

• Way better interest rates than banks
• No credit checks or paperwork
• Works 24/7, globally
• You actually own your money (until you don't)

Disadvantages of DeFi lending

• Can lose everything to hacks or bugs
• Crypto prices are completely insane
• Transaction fees eat small deposits
• Zero consumer protection
• Regulatory uncertainty
• Learning curve is steep

Why trust TuitionHero

At TuitionHero, we help you find the best private student loans by comparing top lenders and breaking down eligibility, interest rates, and repayment options. Whether you need additional funding beyond federal aid or a loan without a cosigner, we simplify the process. We also provide expert insights on refinancing, FAFSA assistance, scholarships, and student credit cards to support your financial success.

Frequently asked questions (FAQ)

Do I need to pay taxes on this?

Yes. IRS treats crypto gains as income. Keep detailed records of everything, or you'll hate yourself at tax time.

What happens if the platform gets hacked?

You're screwed. There's no FDIC insurance in crypto land. Billions get stolen every year, and users just lose their money.

Can I use this to pay for college?

Technically, yes, but that's like using a slot machine as your college fund. Federal student loans are way more stable and predictable.

How much do I need to start?

There’s no official minimum, but fees make it pointless unless you're putting in at least $1,000+. Smaller amounts just get eaten by transaction costs.

Is this even legal?

For now, yes, but regulations change fast. Some platforms already block U.S. users because of regulatory pressure.

Final thoughts

DeFi lending is like cryptocurrency itself: full of potential, accompanied by significant hype, and it also carries considerable risk of loss.

The tech is genuinely interesting and might be the future of finance. However, it’s currently just speculation wrapped in financial jargon.

Focus on boring stuff first: scholarships, student loans, part-time jobs, building credit. If you have leftover money burning a hole in your pocket, then maybe throw some at DeFi to see what happens.

Just don't bet your education on computer programs that nobody fully understands yet. The traditional banking system might suck, but at least it won't liquidate your lunch money because Bitcoin had a bad day.

TuitionHero helps you build smart money habits for college and beyond. We can't predict DeFi's future, but we can help you create a solid financial foundation.

Source

• Decentralized finance - Wikipedia
• What Is DeFi Lending?
• Decoding DeFi lending: Motivations, risks, and investor behaviours | CEPR