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Updated on Thursday, April 2, 2015
This week, Citizens Bank has announced a new student loan product targeting parents. Citizens Bank is competing with the much maligned PLUS federal loan for parents. Citizens plans to offer loans with interest rates as low as 6.6%. They will loan up to $90,000 for undergraduates, and $110,000 for a graduate degree. In addition, there will be no origination fee for the loan.
Citizens Bankwants to compete on price for parents with good credit scores and a demonstrated ability to repay. The bank said that it is targeting “credit-qualified families” with “more compelling options.” Citizens wants to lend to parents who can afford to repay, which is very different from the federal Parent Plus program.
Serious Problems With Parent Plus
The Parent Plus loan has received a lot of criticism, including from MagnifyMoney. The government makes the loan to parents without considering their ability to repay the loan. Instead, their underwriting is completely focused on “adverse credit history.” In order to qualify for a Parent PLUS loan, you cannot have:
- Bankruptcy in the last five years
- Repossession or Foreclosure in the last five years
- Accounts currently 90 days or more delinquent
- Unpaid collection accounts
- Wage garnishment in the last five years
However, the government does not perform a basic debt burden calculation. They do not check to see if the parent has a job, income, or any other debt. This is a recipe for disaster, as parents can end up borrowing much more than they can ever afford to repay.
Citizens Bank understands that the current Parent PLUS program is saddling people with far too much debt. They are hoping to cherry pick the best consumers, luring them away from Federal loans with the promise of lower interest rates and no fees.
Citizens Bank Is Rapidly Expanding
Citizens Bankwas formerly owned by Royal Bank of Scotland (RBS). When RBS collapsed during the crisis of 2008, it became majority owned by the British government. RBS has spent the last seven years unwinding is business interests around the world. It has shrunk its investment bank, and it just recently listed Citizens Bank on the New York Stock Exchange.
Citizens Bank is now focused on growing rapidly in the US market. And they know that they cannot target areas like prime credit cards or mortgages for growth, because they are too small and too late to the party.
One of their key areas of focus is the student loan market. After the federal government stopped providing a guaranty to private student loan lenders, most large banks exited the business completely. However, total student loan debt is now more than $1 trillion. And businesses like SoFi have started growing rapidly in an effort to provide affordable options for borrowers to refinance student loan debt.
Citizens Bank has decided that it wants to be a player in this space, and it is aggressively building out its product set. They are active in both new issuance and refinancing.
Although student loans no longer receive principal protection from the federal government, they can still be attractive asset classes for private lenders. Student loans cannot be discharged in bankruptcy. They are large, bulky assets that tend to stick around for 10 or more years. If lenders are able to get the underwriting done properly, they should be able to make a good business, particularly in refinancing.
Citizens is looking to grow aggressively where it feels it can underwrite better. For parents, they want to do basic underwriting and compete on price. This makes a lot of sense, especially when compared to the way the government is administering this business.
With students, Citizens loves the refinance business. At that point, Citizens is able to see that the student graduated, has an income and has the ability and responsibility to repay.
Long Term Danger For The Government
Private companies sense opportunity. As soon as you can identify the truly low risk customers, you can encourage people to refinance from the federal loans and get a lower rate. If this trend accelerates, the federal government could be left with the loss risk from the highest risk loans, without the income from the lower risk graduates. This will give more risk to taxpayers.
Meanwhile, people like Citizens and SoFi will continue to find profitable corners of the student loan market. We can expect even more product announcements over time as Citizens continues to grow it balance sheet, and creditworthy graduates and parents get tired of paying such high interest rates on student loan debt.