Citizens Bank is carving out a name for itself in the private student loan market, and this month it dove further into that line of business when it announced the latest addition to its suite of student loan products.
The bank’s Student Loan for Parents is just what the name implies – a student loan for parents who want to take on the debt burden of higher education for their children.
Until now, the bank had offered a student loan that required the student borrower to sign onto the debt, but Brendan Coughlin, the bank’s president of auto and education finance, said the new product was created for those customers who want to take on that cost for their children.
Citizens got into the private student loan market in 2009, when many other lenders were either exiting the business or failing altogether.
“We still had thousands of customers coming into our branches and saying one of their biggest pressing needs was paying for school, and how can you help?” said Coughlin. “And we didn’t have an answer.”
Citizens does not break out the student loan figures from its other unsecured retail lending, but Coughlin said the business has grown at a rate of 50 percent every year since its launch in 2009.
Since then, the Providence, R.I.-based bank has expanded its product suite for student borrowers. Last year, it began to offer refinancing for student loans and in the fourth quarter alone, took in $1.5 billion in applications just for that product, Coughlin said.
Citizens Bank isn’t the only player in the private student loan market, but it’s certainly one of the biggest.
Still, the private student loan market is a drop in the bucket compared with the entire market. According to MeasureOne, a research firm devoted exclusively to analyzing the student loan market, the private student loan market totaled around $91.8 billion in the third quarter last year. That’s only about 7.55 percent of the entire $1.22 trillion in student loan balances held nationwide, and just six participants capture about 70 percent of that private market. Those other players include Discover Bank, Navient, PNC, Sallie Mae and Wells Fargo.
Not All Unsecured Debt
It’s hard to pick up a newspaper without tripping over a story about the precipitously steep debt welcoming college graduates once commencement exercises are over. Add to that the fact that student debt is unsecured, and it’s hard not to wonder why banks that have largely tightened up underwriting standards would want to get into the game, though admittedly they are few and far between.
But Dan Macklin, a co-founder and vice president of business development for the student loan refinancing outfit SoFi, said that not all unsecured debt is necessarily a bad deal for the lender.
“With any form of unsecured lending, whether that’s credit card lending or personal lending, there isn’t a physical piece of collateral there to back that up,” he said. “That generally means you won’t get rates as low as mortgage rates, but that there are many, many creditworthy people in the country who take out credit cards and spend on them and there’s a risk to that provider, but … that’s still a good business to be in.”
Consumer advocates naturally have their reservations about private entrants into the student lending game – chiefly, that private student loans do not offer the same protections that federal student loans do. While many lenders do say they offer protections and help for borrowers who fall on hard times, consumer advocates worry because they are not actually required to do so.
Macklin touts SoFi’s career services team and unemployment protection and said his company has helped 72 borrowers get back into work after losing their jobs. Out of the entire $2 billion in student loans SoFi has refinanced, he said only three borrowers have actually defaulted on their loans, and in each one of those cases, the borrowers died.
MeasureOne’s data also paint a surprisingly not-so-bad picture of the private student loan market. According to its Q3 2014 report, the latest one available, charge-offs of private student loans peaked five years ago at 9.4 percent, but they’ve since fallen to just 2.4 percent. Similarly, early-stage delinquencies fell to 3.2 percent and late stage delinquencies fell to 2.4 percent from 5.5 percent and 5 percent, respectively, over that same period. Furthermore, the balance of loans in repayment increased 69 percent since the third quarter of 2009, compared with the 27 percent increase in the overall balance of student loans.
As Macklin, who launched his company in 2011 amid a barrage of negative headlines about student debt, remarked, “It’s a huge, huge industry and you can’t categorize the whole industry with the same words.”
