Another prominent lender, Discover Financial Services, is fleshing out the terms of its own modification program, with plans to launch early next year. The company, which holds $8.3 billion in private student loans, is considering lowering interest rates and forgiving some debt of borrowers in dire straits.
Private lenders — banks, credit unions and other financial firms that provide education loans — hold only 8 percent of the $1.18 trillion student loan market, but they get more flack than the federal government for being unwilling to work with struggling borrowers. The slate of federal plans that cap borrowers’ loan payments to a percentage of their income do not extend to private loans. Instead, borrowers have been at the mercy of private lenders, who, up until now, have mostly resisted restructuring debt.
Lenders have claimed that because student loans are packaged into securities and sold to investors there are restrictions on those contracts that make it hard to adjust the terms for individual borrowers. Bank lenders, specifically, have said that accounting rules would require them to set aside more capital to offset any changes to student loans.
Wells Fargo’s head of education financial services, John Rasmussen, said the bank worked with regulators to hash out its program and was mindful of some of the challenges. In the end, he said, there were no major hurdles or barriers to rolling out the program.
“We’ve been hearing over the years that our students needed and wanted more options in those situations when they were having financial hardship,” Rasmussen said.
Wells Fargo will consider lowering the interest rate of any borrower who can demonstrate hardship. You don’t have to be delinquent on your loans to qualify. Rasmussen said the bank wants to hear from people who may be current on their payments, but foresee a rough patch due to a recent job loss or any other threat to their ability to pay.
He anticipates the program will help 600 to 1,000 borrowers by the end of this year. The company has been working on the program for the past 18 months and launched a test pilot in May with a few dozen borrowers. A majority of the people who participated had their monthly payment lowered by as much as 31 percent, according to the bank.
Rasmussen said the bank will reduce interest rates to as little as 1 percent for a few months or the life of the loan, depending on the borrower’s circumstances. Next year, Wells Fargo will also begin offering extended repayment plans of up to five years for people who need more help than an interest rate reduction can provide.
Other private lenders have made forays into loan modifications. PNC Financial Services Group began lowering some borrowers’ interest rates earlier this year, while Sallie Mae, the biggest player in the market, has provided modifications since 2009.
Interest rates on private student loans can climb to as high as 18 percent, according to the Department of Education. And while federal loans have fixed interest rates, private loans often come with variable rates, meaning they are subject to change. Still, private loan delinquencies, hovering below 3 percent, are at their lowest levels since the 2008 economic crisis, according to research firm MeasureOne.
Although the private student loan market shrunk dramatically after the federal government began directly lending to students in 2010, the industry is experiencing some growth. In its last earnings call, Discover said its portfolio grew 23 percent over the last year. Wells Fargo, meanwhile, has tracked 6 percent to 7 percent growth in its pool of loans. Some of that increase may be due to larger balances in the face of sky-high colleges costs, but there is also strong demand for private loans to fill gaps in financial aid.