Wells Fargo is offering Amazon.com customers discounted interest rates on private student loans, creating a partnership with the online retail giant at a time when private lenders are fighting for market share.
"We are focused on innovation and meeting our customers where they are - and increasingly that is in the digital space," Wells Fargo's head of education financial services, John Rasmussen, said in a statement. "This is a tremendous opportunity to bring together two great brands."
Amazon Prime Student subscribers who apply for any of the bank's education loan products are eligible to have their interest rate lowered by half a percentage point. Wells will take off an additional quarter of a percentage point for borrowers who enroll in an automatic monthly loan repayment plan. Interest rates on Wells undergraduate loans range from 5.94 percent to nearly 11 percent on a fixed-rate loan and 3.39 percent to 9.03 percent on a variable-rate loan. Students who enlist a parent or grandparent on the loan can get lower rates because co-signers are obligated to repay the debt if the borrower does not.
Let's say a student borrows $10,000 at a 6.5 percent fixed rate, with a standard 10-year repayment term. With the Prime discount, she could save $303 over the lifetime of the loan. Throw in the automatic payment discount, and she could save $453 over 10 years. Amazon charges $49 a year for its student subscription service, but company officials say members are under no obligation to remain subscribers throughout their time in school or over the lifetime of the loan to receive the discount. (Amazon chief executive Jeffrey Bezos also owns The Washington Post.) Amazon's Prime subscription for college students provides unlimited free two-day shipping on more than 30 million items.
"Of course, Amazon is probably hoping that students will continue with Amazon Prime after they graduate, and Wells Fargo is probably hoping this will increase their loan volume," said Mark Kantrowitz, publisher of Cappex.com, a college and scholarship search site. "It seems like a win-win."
While it's not uncommon for banks to partner with retailers to offer credit-card customers discounts on shopping or travel, price reductions on loans is a bit unusual, but not completely surprising given the state of the private student loan market. Private lenders - banks, credit unions and other financial firms that provide education loans - hold only 7.5 percent of the $1.3 trillion student loan market, a fraction of their market share before the federal government decided in 2010 to lend directly to students, rather than work through banks to issue loans.
Competition among private lenders is fierce, especially with the entrance of start-ups such as Social Finance and CommonBond that refinance private and federal loans. Lenders like Sallie Mae and Citizens Bank are expanding their reach by promoting alternatives to the federal Parent Plus loan as well as offering flexible repayment periods, refinancing and loan modifications. These efforts are producing results as the largest private lenders, including Wells Fargo and Sallie Mae, recorded $6.4 billion in loans at the end of March, up 7 percent from the prior year, according to MeasureOne, a firm that tracks the market. Still, the government continues to dominate the marketplace.
Kantrowitz said the government's student loan program remains the most affordable and flexible option for families needing to borrow for college. Because the government caps the amount of money students can borrow each year, parents often take on debt to help out or co-sign private loans for their children. Needing to take that route, however, may be a sign of too much borrowing, Kantrowitz said. He cautions students to borrow no more than they expect to earn their first year out of college.
As it stands, interest rates on federal student loans are at an all-time low. Undergraduate students can expect to pay 3.76 percent in interest on new Stafford loans for the 2016-2017 academic year, while graduate students will be charged 5.31 percent interest. Government loans are only offered at fixed rates and students don't need co-signers with stellar credit to qualify for the lowest rate. What's more, federal student loan borrowers can take advantage of the government's income-driven repayment plans that cap monthly payments to a percentage of their earnings. There is nothing comparable in the private market.
"Amazon and Wells Fargo are trumpeting a discount while burying the sky-high rates on these private loans and without noting that they lack the consumer protections and flexible repayment options that come with federal student loans," said Pauline Abernathy, vice president of the Institute for College Access & Success (TICAS). "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 13.74 percent."
Abernathy points out that buried in the fine print of the Wells advertisement is a notice that the bank "reserves the right to modify or discontinue the discount program for future loans or to discontinue loan programs at any time without notice."
Private student loans have drawn criticism for having inflexible repayment terms and weaker consumer protections than federal loans. But in recent years, more banks, credit unions and other financial firms that provide education loans have been offering competitive terms.
Still, Abernathy said, "Private loans are one of the riskiest ways to finance a college education. Like credit cards, they have the highest rates for those who can least afford them, but they are much more difficult to discharge in bankruptcy than credit cards and other consumer debts."