It could push private student loan rates down but still won’t offer the important consumer protections of federal student loans
Update: Amazon and Wells Fargo ended their student loan partnership on Aug. 31, about a month after the agreement was announced. Here are the details.
The news that Amazon, in partnership with Wells Fargo, has begun offering private student loans is a provocative development for the captive American student loan market now roughly 42 million strong and $1.3 trillion in debt. Amazon Student Prime members will be able to borrow at slightly lower interest rates than what the bank currently offers.
As the cost of college continues to rise, borrowers are more likely to max out on the more favorable federal loan program and turn to the more expensive and often exploitive private market. Student debt is the nation’s single largest consumer debt category after home mortgages.
“Private lenders see a market there and they’re trying to make money off of it,” says Reid Setzer, the deputy director of policy and legislative affairs for Young Invincibles, a millennial research and advocacy organization that focuses on financial issues for young adults. “The bottom line is that college needs to be more affordable so students don’t need to take out so much in loans.”
This certainly looks like a sazon and Wells Fargo as every year there are fresh batches of freshmen and graduate students and their families struggling to pay for an education. Average student loan debt for students graduating this year is about $37,000.
Consumer Advocates Wary
Reaction from industry experts and education debt advocates about what this means ranged from suspicious and wary to slightly optimistic. Some said this new collaboration could spur competition among private lenders to offer lower rates that compare more favorably with federal fixed rate loans. Already, parent borrowers who have good credit could be eligible for Wells Fargo’s lowest fixed student loan rate of 5.94 percent. That’s below the 6.31 percent that federally backed Parent PLUS loans, which can be used to pay for a dependent child’s expenses after other financial aid is exhausted, currently go for. But that doesn’t necessarily mean they’re a better choice. A PLUS has consumer protections, www.tennesseepaydayloans.net/ such as more flexible payment plans, that a private loan doesn’t.
Many experts we spoke with worried this rate reduction in the market would confuse students and make it harder for them to sort through their options and make smart decisions.
Reaction from The Institute for College Access & Success, or TICAS, was swift and negative, characterizing this new play as a bald attempt to directly compete with the more consumer-friendly government program.
“This is the kind of misleading private loan pant before the financial crisis,” said Pauline Abernathy, executive vice president of TICAS, in a statement after the deal was announced. “It is a cynical attempt to dupe current students who are eligible for federal students loans with a record low 3.76 percent fixed interest rate into taking out costly private loans with variable interest rates currently as high as percent.” (Wells Fargo’s website shows their variable rates on student loans currently top out at 9.03 percent and fixed rates are as high as percent.)
All agree with what Consumer Reports suggests: that borrowers need to understand all the options and loan terms and proceed with caution. Consumers should know that with private loans, you often give up many of the protections of federal loans, including reducing payments to a percentage of your income or deferring payment if you have trouble repaying.
More Competitive Pricing
With the discount, Wells Fargo is positioning its student loan interest rates slightly below the going rate for many competitors’ private education loans. Amazon is the marketing power, Wells Fargo is the seller. In announcing the deal, Wells Fargo explained that offering the loan via Amazon helps them target customers “where they are-and increasingly that is in the digital space,” according to John Rasmussen, Wells Fargo’s head of Personal Lending Group. The bank announced the deal Thursday but Amazon has not made an official comment.
College students who buy a $49-a-year Amazon Prime Student membership are being offered a 0.50 percent interest rate discount on new private loans sold through Wells Fargo. It can be combined with other rate breaks, such as a 0.25 percent discount for automating payments (federal loans also offer this break). The Wells Fargo-Amazon offer is also available to borrowers who want to refinance existing private loans.
Low rates aren’t always the best indicators of a smart loan however, and low rates private lenders offer can be misleading because some are variable and some fixed. “That’s comparing apples to oranges,” says Mark Kantrowitz, the publisher and vice president of strategy for Cappex, a website that helps students compare colleges and find scholarships.
He sees lower rate private loans as both potentially misleading and at the same time, potentially promising. “Federal loans are still cheaper even with the discounts, but in the long run, this can give students who need to use the private market more attractive offerings than private lenders do today,” he says.