LOS ANGELES (Reuters) - Student loan borrowers who feel trapped by high-rate private loans finally have more options to refinance their debt, but not everyone will be able to find relief.
In January, Citizens Bank became the latest to offer private consolidation loans that provide lower and sometimes fixed rates to borrowers with good credit or creditworthy co-signers. It joins a handful of banks, credit unions and a few online crowdfunding experiments like SoFi and Commonbond attracted by low default rates and relatively little big-bank competition.
The Consumer Financial Protection Bureau last year bemoaned the lack of refinancing options for private student loans, which typically have higher, variable rates than fixed-rate federal student loans. The bureau complained that private lenders have been slow to modify repayment plans for troubled borrowers, in sharp contrast to federal student loan programs that offer flexible repayment options, including income-based plans.
Many lenders have curtailed or shut down their private student loan operations in recent years. JPMorgan Chase and Co and Wells Fargo & Co were among the few major banks offering private student loan consolidation, and Chase exited the private student loan market late last year.
Smaller lenders and start-ups saw the unmet need. SoFi and CommonBond raised money from individual and institutional investors to offer refinancing to students at top graduate school programs and have since expanded their programs to include more borrowers. A network of credit unions called cuStudentLoans and a group of community banks known as iHELP have also been expanding.
Since launching its consolidation program two years ago, cuStudentLoans has refinanced about $250 million in private student loans, lowering rates to an average of 5.54 percent, said Ken O'Connor, director of student advocacy for Lendkey, which provides the network's technology platform.
Many credit unions see the loans as a way to connect to younger people who could then turn to the member-owned organizations for other financial needs, O'Connor said, much in the way cheap auto loans provided an entry to credit union membership for previous generations.
Similar motives prompted Providence, Rhode Island-based Citizens Bank, which started originating private student loans in 2009 just as other lenders were fleeing the market, to expand into refinancing. The bank, owned by Royal Bank of Scotland, could build more relationships with borrowers who may later need a mortgage or a car loan, and the loans have been profitable, said Brendan Coughlin, director of auto and education finance.