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.
"We've come to the conclusion that it's a very attractive space to be a participant in," Coughlin said.
Private student loans make up just a fraction of the $1.1 trillion in U.S. education debt, with the seven largest private lenders holding about $63 billion, according to MeasureOne, a San Francisco-based student loan data company.
While delinquency rates for federal student loans have soared, just over 3 percent of private student loans were 90 days or more overdue at the end of last year's third quarter. That was down from 6 percent in early 2009, according to MeasureOne, and compares with a 21 percent delinquency rate for student loans overall, according to the Federal Reserve.
Citizens' experience with private student loans has been even better, Coughlin said.
"We've made $1 billion in student loans since 2009," Coughlin said. "Only 28 of our borrowers are 90 days or more overdue."
Coughlin credits careful underwriting for the low delinquency rate. The bank wants to make sure students and families don't borrow more than they can afford to pay back, he said.
That's quite different from federal student loans, which do not require credit checks or an analysis of debt-to-income ratios, as well as many private loans before the financial crisis.
Also, 90 percent of the bank's loan originations have co-signers - which means another adult, usually a parent, is equally responsible for the loan. Overall, 87 percent of private loans made for the 2012-2013 school year had co-signers, compared with 75 percent in the 2008-2009 year.
Some of the bank's applicants have been able to qualify for refinancing based on their own strong credit histories, Coughlin said. But many need help to get approved and to qualify for the best rates, which are currently 4.74 percent for the fixed-rate option and 2.4 percent for variable-rate loans.
"For the recent graduates, we do often need a co-signer," Coughlin said.
Borrowers without co-signers are not the only ones who may be shut out of refinancing, consumer advocates say. Those who are unemployed, in default or who did not finish their educations typically have few options to resolve their debt.
If interest rates rise, more private loan borrowers may have trouble repaying, since most such loans carry variable rates. Borrowers typically cannot find relief in bankruptcy court, since private student loans, like federal student loans, are rarely erased.
These hazards are why many college consultants urge students and parents to exhaust federal student loan options first and to apply for private loans only if they have excellent credit - to get the best rates - and can pay off the debt quickly.