Back in spring 2012, President Barack Obama shocked conservative critics (maybe not for the first time) when he appeared on The Tonight Show to “slow jam” the news. The subject of his musical monologue: the rising cost of student loans. That was an early appearance for this topic on a national stage, and it hasn’t let up since. For example, Democratic nominee regularly touts her aggressive plan to make debt-free college available widely available.
No one doubts the importance of this issue—in a dynamic economy that’s increasingly globalized and digital, higher education is vital for success. However, as the political debate suggests, this also involves taking on mountains of debt. In fact, student debt for undergraduates in the class of 2014 reached an average of $28,950, up 2% from the previous year, and the number is undoubtedly higher for the majority of students in fields such as law and medicine. Bottom line: Student debt is a $1.2 trillion market, and in dire need of enhancement and change.
Federal student loans are the primary factor in this equation, and with good reason. Among other benefits, the interest rate is typically fixed, repayment rates are generally based on income, and in particular cases the government actually subsidizes the loan by paying off the interest while the student is attending school.
However, the private market is growing as well, in part because the two types are not mutually exclusive. In many cases private assistance offers supplemental funding that is vital for getting a good education. And here’s perhaps the most important part: According to the Consumer Bankers Association, less than 3% of private student loans are “seriously delinquent, and performance continues to improve.” In sum, there’s a serious business opportunity for more banks to play in this market.
And there’s one additional point to consider. While mega-corporations such as Sallie Mae and Wells Fargo dominate the market, there’s now a variety of fintech competitors and their technologies available to help smaller and community banks compete with conglomerates.
Consider the case of First Dakota National Bank in Yankton, S.D. American Banker reports that this community bank, with a history that goes back to 1872, is looking to grow its student loan portfolio is part by signing on with ReliaMax, which bills itself as the only provider with a “complete private student loan program for lenders.” In particular, its Connext private student loan program features competitive fixed and variable APR loans, and has been the financial support system for 100,000 students.
Another player is Lendkey, with technology that “matches consumers with community banks and credit unions to create the most transparent, accessible and low-cost borrowing options in online lending.” Student loans naturally play a prominent role in this operation, with a promise of low rates from community lenders. (On an intriguing note, the company hints that the right academic credentials might lead to a better rate—perhaps the best reason to shoot for good grades in every course.) Then there’s Credible, which enables potential customers to compare personalized loan offers from multiple vetted lenders.
To be clear, the competition isn’t only between multinationals and technology-enabled community banks. A new breed of fintech competitors is also in hot pursuit of this demographic, and they offer serious alternatives. For example, San Francisco-based SoFi (for Social Finance) touts a ‘radical approach’ that incorporates every feature from innovative technologies to open conversations.
Looking ahead, it’s easy to visualize a scenario in which a new generation of budding freshmen and their parents access multiple technologies and digital channels to put together the best mix of government and private loans. As in so many other areas, brand equity and loyalty will matter less than convenience and value. For small banks with cool tools and nimble practices, that represents a huge growth market.