Parents considering whether to borrow to pay for their children’s college are about to have more options, as Citizens Bank rolls out a loan with a lower interest than the government offers.
On Thursday, the private lender said that starting this month it will offer parents loans with a fixed interest rate as low as 6.6 percent to pay for college. The bank is promoting its new product as an alternative to the federal Parent Plus loans, which have an interest rate of 7.21 percent for the 2014-2015 academic year.
The government lets parents borrow up to the full cost of college attendance minus scholarships and grants. Citizens, however, will lend as much as $90,000 for an undergraduate degree and $110,000 for a graduate degree.
Still, the bank is not charging any fees for originating or dispersing the loan, which it estimates could save families an average $627 on fees compared to federal loans.
“Both of these programs should live together and they meet different needs, but for the credit-qualified families we believe this is a significantly more compelling option,” said Brendan Coughlin, the head of education finance at Citizens.
Given the high cost of tuition at public and private universities, chances are most families will have to borrow some money to pay for school. Federal loans generally have better consumer protections and lower interest rates than private loans.
But more private lenders — banks, credit unions and other financial firms that provide education loans — are starting to offer competitive terms. For its part, Citizens will let parents repay their loans in five or 10 years, compared to 15 years at Wells Fargo.
Private lenders hold only 8 percent of the $1.18 trillion student loan market. The financial crisis created turmoil in the market that led many actors to exit. Others struggled when Congress in 2010 eliminated a $60 billion program to support private lenders with federal subsidies. Eventually, the government captured a majority of the market by choosing to lend directly to students.
Since then, private lenders have played a limited role in the market, which is what makes Citizens’ expansion into student loans so striking. The bank entered the market a year before the government overhaul crippled private lenders, but decided to stay as many of its competitors were selling off their portfolios.
“The fact that a lot of the third-party lenders disappeared created a void in the market with less options. As a bank that did just fine during the financial crisis, so we saw that as an opportunity,” Coughlin said. “We’re trying to rebuild the industry in a way that is responsible and beneficial to families.”
Six months ago, Citizens became one of the few financial institutions to refinance student loans. Borrowers can get a lower rate on a single loan or consolidate private and federal loans into one new private loan at a lower rate.
Unlike other lenders that charge a fee that’s added to the loan balance, Citizens is only making money off the interest on the refinanced loan. Coughlin said the bank took in $1.5 billion in applications in the fourth quarter alone and refinanced $230 million.
At least a dozen other lenders, including Wells Fargo, offer refinance programs. Besides the money that can be made off of these sorts of deals, lenders are banking on deepening their relationship with young, employed borrowers who may someday need a mortgage or a car loan.
Private lenders have become the only game in town for refinancing student loans. Sen. Elizabeth Warren (D-Mass.) has twice introduced legislation to let borrowers refinance their federal student loans only to have Senate Republicans shelve the bill.