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And Another Student Lender Pulls Out of Private Loans

Wednesday, August 13, 2008

Last week, Wachovia pulled out of the private student loan market, no longer accepting new applications for undergraduate private loans. It's still participating in the government loan programs (Stafford and PLUS). Wachovia has now joined the ranks of Bank of America and Comerica as lenders who have stopped offering undergraduate private student loans.

What Does This Mean for You

Less Choice

You probably won't have quite as many options when it comes to picking a student lender for your private loans. Check your school's lender list or try our Student Loan Marketplace to find and compare loan options.

Tougher Standards for Loan Approval

There are still a number of lenders who continue to offer student loans including Discover, Sallie Mae, and Citibank. For many lenders, the criteria for approval have tightened up. You are more likely to need a co-signer, especially one with a good credit score.

Higher Interest Rates and Fewer Benefits

In addition to tougher standards, many students may find that loan terms this year are not quite as generous as in previous years. Many borrower benefits have disappeared, especially with federal loans like Stafford loans.

Federal Loans First

As always, make sure that you take advantage of the federal loan programs before you turn to private loans. Anyone can take out unsubsidized Stafford loans. There is no requirement of financial need for these loans. And the government just increased the amount you can borrow through the Stafford loan program.

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Student Lender Options Dwindling... Especially at 2-year Colleges

Monday, June 2, 2008

The New York Times recently ran a piece about a number of student lenders closing their doors to students at 2-year colleges. Several major lenders are paring down the list of colleges to which they offer loans. The lenders cited in the article are household names, including Citibank, JPMorgan Chase, PNC, and SunTrust.

In its simplest form, lending money is all about risks and returns. When banks evaluate loans, they are basically determining an expected return on the money borrowed, which factors in the interest rate, fees, costs of customer acquisition, and an assessment of the risk of default.

Risk and Student Loans

Determining the risk of a borrower is the main unknown for the bank and a key to profitability. In many cases, a borrower's credit history is the primary indicator of this risk. A better credit score indicates a lower risk. This is why you often need a parent to co-sign on a private student loan. They will usually have a better credit score than you.

Cost of Customer Acquisition

However, that's not the only factor that drives profitability for lenders. The cost of customer acquisition is key as well. That is, how much does it cost to get a borrower to select your bank as their student lender. This is basically advertising and marketing that a student lender spends to attract your attention and get you to their application form.

Why Student Lenders Might Choose Not to Loan to Students at 2-year Colleges

The combination of risk and cost of acquisition are probably two of the main drivers behind these banks' decisions. Graduates of 2-year colleges will typically earn less money than graduates of 4-year colleges. A lower income likely translates into a higher default rate.

On top of that, 2-year colleges also cost less than 4-year colleges. That means that these students will be taking out smaller loans. Let's assume that a lender's cost of customer acquisition is $100. If a 2-year college student typically takes out $2,000 in loans, the acquisition cost is 5 percent of the loan ($100 acquisition cost / $2000 loan). If a 4-year college student typically takes out $10,000 in loans, the acquisition cost is 1 percent of the loan ($100 / $10,000). This means that a 4-year college student is likely going to be more profitable, assuming the same cost of customer acquisition.

For those of you attending 2-year colleges, you may notice that you and your parents have fewer options this fall for your Stafford, PLUS, and Private loans.

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