College borrowers are about to bring an estimated $10 billion of annual new business to private lenders. Banks have mostly yawned at the prospect.
Among the many changes included in President Donald Trump’s extensive federal student loans overhaul are limits on the amount graduate students and parents can borrow from the government. No longer can these borrowers take out loans for any amount up to the full cost of their college. Instead, they now face annual and lifetime caps that in many cases won’t cover all of their education expenses.
That means a significant number of borrowers will need private loans to fill the leftover gaps after their federal loans hit the new caps.
So where should you look for a private student loan? Probably not your neighborhood bank branch. While major U.S. banks and their regional peers offer a wide variety of loan products, very few of them will lend you a cent for college.
Most private student lending is provided by about a dozen online lenders who specialize in student loans. Those outfits are rolling out new products to meet the impending onslaught of demand, but don’t expect many banks to jump back into the student loan game. Here’s why.
[Read: Best Private Student Loans.]
Most Major Banks Don’t Offer Student Loans Anymore
Two decades ago, most of America’s big banks provided student loans.
Many of these loans were part of the Federal Family Education Loan program, a bank-friendly arrangement in which the banks issued the loans and profited from the interest while the government guaranteed them against default. In addition to reliable profits, banks also benefited from a much larger market where they weren’t competing with the government.
The tide turned in 2010, when Congress eliminated the FFEL program and the Education Department began directly lending to most students. With the government offering borrowers better terms and more protections, the market share for private lenders shriveled to less than 10% of all student loans.
The exodus soon followed, with behemoths such as JPMorgan Chase and Wells Fargo halting new loan originations and then selling off their existing portfolios.
“We just don’t see this as a market that we can significantly grow,” Thasunda Duckett, then Chase’s chief executive for auto and student loans, told Reuters in 2013 when the bank stopped accepting new applications.
Increased scrutiny and regulations imposed on them by federal and state governments further discouraged banks from continuing their student loan offerings, says Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade association whose members service the majority of federal and private student loans.
“For a lot of them, just the cost of being in the business did not make it worthwhile,” he says.
After most banks exited, what remained was a mix largely consisting of online student lenders along with some credit unions and regional banks serving a market of roughly 8% of all student loans. The total annual volume of private student loans is now around $10 billion.
Buchanan says the smaller institutions that continue to provide student loans generally do so to attract new customers and satisfy existing ones rather than seeing it as a big direct moneymaker.
“For many people, the first major financial transaction is probably a student loan,” says Buchanan. “So it’s an opportunity to not only have a customer for the student loan product itself but also to think about in the future when they are looking at getting a credit card or looking at getting a mortgage. Having that existing relationship with a customer can be really beneficial both to them as well as the customer.”
[Read: Best Student Loan Refinance Lenders.]
More Money, but More Problems
As the private student loan volume is set to balloon, it would make sense that some banks might be eyeing a potential return to the business.
“Generally yes, a larger market tends to attract more participants,” says Dan Kennedy, chief marketing officer at College Ave, one of the largest private student lenders. “But there are a couple of moats around student lending.”
Student lenders must adhere to stricter federal and state regulatory requirements than most other types of loans. For example, lenders must follow certain disclosure standards that aren’t required on personal loans or mortgages.
Default risk is also higher. Student loans are unsecured, whereas a mortgage is tied to physical property that a bank can foreclose on. The ability of a student to repay is often dependent on a future salary that the student may not end up getting. Studies suggest 40% of the new borrowers wouldn’t qualify for private loans in the first place due to their credit profile.
Then you have the seasonality of the business. There are two busy seasons, with the first and biggest peak starting in summer ahead of the new school year, and a smaller surge coming in winter between semesters, says Kennedy. In between are long, slow stretches propped up slightly by refinances. The result is increased volatility and perhaps idle time for the team of specialists a bank might have to build to serve student borrowers.
But the biggest deterrent is likely the unpredictability of the government. Why scale up a team and invest in a new product in response to one administration’s actions when a new White House and Congress might reverse it all before you know it?
[Read: Best Parent Student Loans: Parent PLUS and Private.]
“What the lenders don’t want to do is jump back in and then have it change in a couple years,” says Mark Kantrowitz, a student loan expert and author of “How to Appeal for More College Financial Aid.”
Even some banks that are interested in offering student loans are content to remain on the sidelines for now.
LendingClub CEO Scott Sanborn says student loans are the type of product that fits well with the digital bank’s target customers, motivated individuals who invest in their future and want to grow their financial footprint. He says the bank is watching the market and may eventually enter it, but there’s simply too much uncertainty right now to dive in.
“It is definitely a place that will make sense for us,” says Sanborn. “Until we get a bit of a sense of how that all shakes out and there’s some stability there, I don’t see us moving.”
PNC Bank, one of the largest institutions that was still offering student loans, shuttered its program in December despite the anticipated increase in demand.
Ultimately, the extra loan volume may not be enough to entice larger players into the market, says Kantrowitz.
“Right now, it’s 7% to 8% of total loan volume,” he says. “This might increase it to 15%, but it’s not as large as say, mortgages, and it’s more complicated than mortgages.”
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Why Banks Aren’t Lining Up to Give You a Student Loan originally appeared on usnews.com
