Wells Fargo Taps Amazon To Deliver Student Loan Business
Posted By Donna Fuscaldo on August 1, 2016 at 9:13 am
Private student loans are becoming a big business for banks clamoring to get a piece of what a handful of startup fintechs have been enjoying. In an effort to stand out from the crowd, Wells Fargo has turned to an unlikely partner: Amazon.com.
Wells Fargo and the ecommerce giant recently announced a partnership in which the San Francisco-based bank will offer Amazon Prime Student customers a new interest rate discount when applying for any of its student loan products. The discount amounts to 0.50 percent. Borrowers can get another 0.25 percent rate break for enrolling in an automatic monthly loan repayment plan. Wells Fargo offers undergraduate, graduate, parent, medical loans and well as refinancing and consolidation options.
Wells Fargo said it teamed up with Amazon.com because it’s trying to reach potential customers online. It’s hoping Amazon’s brand name and reach will pique the interest of college-bound students or those with existing loans who will then check out its loan products. “We are focused on innovation and meeting our customers where they are—and increasingly that is in the digital space,” says John Rasmussen, head of the bank’s Personal Lending Group.
Big banks are eyeing the student loan market again
The move on the part of Wells Fargo comes at a time when traditional banks are re-entering the student loan lending space. For years, the big banks shied away from the student loan market, opening the door for a handful of startup fintechs to enter. They are focused on the student loan refinancing market, betting they can save borrowers money, even those with federal student loans. SoFi, the pioneer in the student loan refinancing market, has funded $10 billion in loans since its inception in 2011, while CommonBond, its fintech competitor that also began that year, claims it can save student loan borrowers an average of $14,000 on their loans by refinancing with it.
The market for private student loans isn’t huge, since most of the lending for college is done by the federal government, but it is sizable with room for growth. According to MeasureOne Private Student Loan Consortium, a data cooperative between lenders and holders of private student loans, private student loans accounted for 7.5 percent or roughly $102 billion, of total student loans in the U.S. during the first quarter of 2016. The remaining 92.5 percent are federal loans.
In the past, banks could run advertisements and reach potential borrowers, but in this digital era where all of their customers are online and using social media, they have to find unique ways to reach them. For Amazon, the partnership with Wells Fargo gives it the potential to reach more customers for its subscription service. Under the terms of the deal, students can sign up for a six month trial of Amazon Prime Student and then hopefully once they are hooked are willing to pay the $49 a year fee.
“Coming into 2016, we expected to see more activity among pure tech firms getting into finance,” says David Klein, chief executive and co-founder of student loan lender CommonBond. “I think more of this will happen going forward as pure tech companies decide to get into finance through partnership.”
Private loans often a last resort
Wells Fargo may gain new customers or at the very least mindshare from its partnership with Amazon, but for most borrowers, private loans aren’t going to be the best option, says Reid Setzer, deputy director of policy & legislative Affairs at Young Invincibles, a think tank focused on 18- to 34-year-olds. He says borrowers should first exhaust all their federal options before turning to a private student loan lenders.
For starters, he says the interest rate on federal loans, which is at 3.76 percent is the lowest it has been in years, which many private lenders aren’t going to beat. Another factor: Federal loan borrowers have options if they can’t pay back the loan—forbearance, deferment and income based repayment plans, to name a few. “If you walk away from federal protections, you risk putting yourself in financial hardship if you can’t make the payment,” Setzer says. For borrowers who have exhausted all their options, including grants, scholarships and savings, they need to shop on interest rate when going the private lender route, being cognizant of fees and the fine print and not whether or not Amazon is part of the deal.
“Amazon Prime Student still costs $49 a year. It’s a high profile move that’s gotten a lot of attention,” says Setzer of the deal with Wells Fargo. “But at the end of the day it comes down to the individual’s financial circumstances and what rate they can get.”