By Liz Weston
LOS ANGELES Feb 3 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
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
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
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,"
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
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.