Banks mobilized to help college kids manage student loans
Amid an explosion of student-loan debt, private lenders, credit-rating agencies, and nonprofits have begun offering consumer-friendly opportunities for students to take the financial anxiety out of borrowing for college.
Financing a college education in America has long been a catch-22. To get the income-enhancing benefits of a college degree, many undergrads saddle themselves with student loans that promptly eat into their earnings after they graduate.That dilemma has only worsened in the past 15 years, as the average college tuition has increased by nearly 500 percent.
In that time, student debt has passed mortgages and car loans as the largest category of outstanding debt. According to student lender Sallie Mae, the average student borrower now owes $23,300, with 10 percent of the country's undergraduates on the hook for over $54,000.To make matters worse, a tight credit market which has made lenders less ready to grant loans and more prone to pounce when new graduates fumble their early payments.
One frequent obstacle to getting a college loan is the student's lack of credit history. In 2006, the credit-rating agency Experian (EXPGY) devised VantageScore that emphasizes borrowers' recent financial activity. By looking at VantageScore, which can tease out a track record out of as little as a month's worth of behavior data, lenders can get a better idea of what to expect from "thin file" consumers like students. But for many students, getting the loan is only half the battle. Managing their debt is where the trouble begins. "We're teaching students how to dissect frogs, but not how to balance their checkbooks," says Maxine Sweet, Experian's vice president for public education.
To help student borrowers learn the rudiments of personal finance, Experian has partnered with Consumer Action, the Jump$tart Coalition and other nonprofits to help students manage their loans. Wells Fargo (WFC), a major private holder of student debt, also offers basic financial education as a kind of insurance policy on the loans they grant.
"We want our customers to be successful financially across the board," says Wells Fargo's Bonnie Wallace. "We're protecting our shareholders and underwriters, but we're protecting our customers as well."
The bank's counseling extends to urging families to pursue low-cost, federal options, like Stafford loans, before filling the need gap with pricy private loans. (Read More: Report Details Woes of Student Loan Debt)
Wells also offers incentives that trim students' debt while teaching good fiscal habits. Students get basis-point reductions for graduating, and for making their payments consistently. The bank encourages its borrowers to open a Wells checking account and set up automatic payments on the loan, which, says Wallace, "significantly increases your success with your loans."
Sallie Mae offers similar in-school payment programs on the Smart Option student loan, under which paying at least $25 per month can reduce the interest rate by between 0.5 and 1.0 percent. In May, the company estimated that 63 percent of its Smart Loan customers take advantage of this policy, saving anywhere from $3,700 to $5,300 per $10,000 of debt.