The news that Amazon, in partnership with Wells Fargo, has begun offering private student loans is a provocative development for the captive American student loan market now roughly 42 million strong and $1.3 trillion in debt. Amazon Student Prime members will be able to borrow at slightly lower interest rates than what the bank currently offers.
As the cost of college continues to rise, borrowers are more likely to max out on the more favorable federal loan program and turn to the more expensive and often exploitive private market. Student debt is the nation’s single largest consumer debt category after home mortgages.
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“Private lenders see a market there and they’re trying to make money off of it,” says Reid Setzer, the deputy director of policy and legislative affairs for Young Invincibles, a millennial research and advocacy organization that focuses on financial issues for young adults. “The bottom line is that college needs to be more affordable so students don’t need to take out so much in loans.”
This certainly looks like a smart business move for Amazon and Wells Fargo as every year there are fresh batches of freshmen and graduate students and their families struggling to pay for an education. Average student loan debt for students graduating this year is about $37,000.
But will this new and powerful collaboration make a real difference in the marketplace—positive or negative—for consumers?
Consumer Advocates Wary
Reaction from industry experts and education debt advocates about what this means ranged from suspicious and wary to slightly optimistic. Some said this new collaboration could spur competition among private lenders to offer lower rates that compare more favorably with federal fixed rate loans. Already, parent borrowers who have good credit could be eligible for Wells Fargo's lowest fixed student loan rate of 5.94 percent. That's below the 6.31 percent that federally backed Parent PLUS loans currently go for. But that doesn’t necessarily mean they’re a better choice.
Many experts we spoke with worried this rate reduction in the market would confuse students and make it harder for them to sort through their options and make smart decisions.
Reaction from The Institute for College Access & Success, or TICAS, was swift and negative, characterizing this new play as a bald attempt to directly compete with the more consumer-friendly government program.
“This is the kind of misleading private loan marketing that was rampant before the financial crisis,” said Pauline Abernathy, executive vice president of TICAS, in a statement after the deal was announced. “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.” (Wells Fargo’s website shows their variable rates on student loans currently top out at 9.03 percent and fixed rates are as high as 10.93 percent.)
All agree with what Consumer Reports suggests: that borrowers need to understand all the options and loan terms and proceed with caution. Consumers should know that with private loans, you often give up many of the protections of federal loans, including reducing payments to a percentage of your income or deferring payment if you have trouble repaying.
More Competitive Pricing
With the discount, Wells Fargo is positioning its student loan interest rates slightly below the going rate for many competitors’ private education loans. Amazon is the marketing power, Wells Fargo is the seller. In announcing the deal, Wells Fargo explained that offering the loan via Amazon helps them target customers “where they are—and increasingly that is in the digital space,” according to John Rasmussen, Wells Fargo’s head of Personal Lending Group. The bank announced the deal Thursday but Amazon has not made an official comment.
College students who buy a $49-a-year Amazon Prime Student membership are being offered a 0.50 percent interest rate discount on new private loans sold through Wells Fargo. It can be combined with other rate breaks, such as a 0.25 percent discount for automating payments (federal loans also offer this break). The Wells Fargo-Amazon offer is also available to borrowers who want to refinance existing private loans.
Low rates aren’t always the best indicators of a smart loan however, and low rates private lenders offer can be misleading because some are variable and some fixed. “That’s comparing apples to oranges,” says Mark Kantrowitz, the publisher and vice president of strategy for Cappex.com, a website that helps students compare colleges and find scholarships.
He sees lower rate private loans as both potentially misleading and at the same time, potentially promising. “Federal loans are still cheaper even with the discounts, but in the long run, this can give students who need to use the private market more attractive offerings than private lenders do today,” he says.
A First For Amazon
This is the first time Amazon Prime members are being offered a student loan product, widely seen as a bid to increase the number of young people using Prime level of services on the mammoth ecommerce website. It gives Wells Fargo, one of the largest private student lenders, a very targeted audience and an edge in what is an increasingly competitive market for student loan business.
The student loan market, along with other private loans, dried up after the subprime mortgage crisis in 2008. Now, as the lending market thaws and the price of college continues to increase, private lenders have been stepping in to fill the gap at the point when students max out on the amount of federal loans they’re allowed to secure from the government. Or in some cases, trying to attract their business before they max out their federal options.
The federal government is the chief lender of student loans with more than 90 percent of the market currently. Private loans make up about just 7.5 percent of the $1.3 trillion student loan market, according to MeasureOne, a data analytics company that specializes in student loan information. But undergraduates can’t borrow more than $31,000 in total federal loans, a limit that hasn’t changed since 2008, according to Kantrowitz.
Federal and state grants also haven’t kept pace with the rising cost of tuition. “College costs are going up and family incomes have been flat,” he says. “Once you hit the federal loan limits, the only options are parent PLUS loans or the private market.” Increasingly, borrowers are turning to the private market, which has less favorable terms and higher interest rates.
Federal Loans Trump Private Borrowing
When you're trying to figure out how to pay for college, Consumer Reports and other advocates for student borrowers advise that students first maximize all federal and state grant aid, apply for scholarships and federal work study. Then students should favor federal loans over private loans. At current rates, the federal government has significantly lower fixed rates on student loans and more significant consumer protections than you’d get from a private lender.
Federal student loans currently offer undergraduate loans as low as 3.76 percent that’s fixed for the life of the loan. The lowest fixed rate Wells Fargo currently offers on student loans is 5.94 percent, according to the bank’s website. So even with the Amazon discount of up to 0.75 percent (including the autopay rate break), borrowers are far better off borrowing from the government.
Wells Fargo’s current lowest variable rate loan is 3.39 percent, which drops to 2.89 percent with the Prime Student Discount but, because it is a variable rate product, there is no guarantee the rate won’t go up.
Although how much you save depends on the interest rate you start with and how much you borrow, the savings are small overall. If you borrow $10,000 and have a 6.5 percent rate, a 0.50 percent reduction will save you about $300 over the standard 10-year repayment term, according to an analysis by Cappex's Kantrowitz.
You also need to factor in the cost of the Prime membership. It’s currently $49 a year after the first six months, which are free, for students, then reverts to $99 when the student is no longer in college.
Kantrowitz cautions that turning to private loans may well be a sign that you’re overborrowing.
While the Wells Fargo loans from Amazon might be a competitive option among private lenders, consider first whether there are other ways you can cover your costs or reduce the amount you need for school.
When A Private Loan Makes Sense
Still, the Wells Fargo Amazon loan can make sense in certain circumstances. If you plan to pay off the loan within just a few years of graduation, the low variable rate of 2.89 percent could save you some money, if it stays that low.
More important than interest rates are the flexibility and safety nets that government loans offer. Federal student loans come with consumer protections like flexible repayment plans and deferment or loan forgiveness options if you meet certain conditions. Private lenders may offer lower rates but have stricter terms and fewer if any flexibility if you have trouble making payments.
“I'd be very skeptical of these loans if I were a student,” says Suzanne Martindale, a lawyer and education debt advocate with Consumers Union, the policy and advocacy arm of Consumer Reports. “This partnership exists for a reason. They both want customers and think this perk will maximize the potential to bring in revenue.” Private lenders, historically, don’t have a great record when it comes to private education loans, she says.
In the last decade, Martindale says, banks have increasingly partnered directly with colleges to market private loans and banking products to students, with the schools getting a cut when students sign up. Those revenue sharing agreements between schools and lenders are now banned but to Martindale, this partnership between Wells Fargo and Amazon is simply “a new twist on” old practices.
The growing market for private loans is just a symptom of the bigger problem says Setzer, of Young Invincibles. “You have to go back to why college is so expensive,” says Setzer. College costs are being driven up in large part by state disinvestment in public universities during the recession. States are spending on average 21 percent less per student today than they did in 2008, according to a report earlier this year by Young Invincibles.
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