FinTech‌ ‌and‌ ‌Student‌ ‌Loans‌ ‌in‌ ‌the‌ ‌US

September 8, 2021

What if your $50,000 student loan debts are waived-off, federal loan repayment suspended until December 2021, or student loans become eligible to be dischargeable in bankruptcy? Beyond the ‘what ifs,’ in this article, we look at the student loan problems they are trying to solve and see the market ‘as is’ in terms of challenges, opportunities, and interesting FinTech names in the segment.

The US student debt stands at over $ 1.6 trillion, second only to mortgages but more than credit card loans and auto loans. However, student loans are a special kind: firstly, there is very little—if any—credit check involved, especially on loans offered by the federal government. Secondly, the federal bankruptcy law treats private education loans and federal student loans even more stringently than other forms of consumer debt, excluding both from discharge except for very rare ‘unique hardship’ conditions—this is evidenced by the fact that about 45 million Americans carry this debt, with 8 million already past their retirement age.

This means that one can go through several bankruptcies during their working life. However, the student debt will not go away, making it the most collectible kind of debt with stiff enforcement measures, including garnishing wages. However, despite all this, student loans have the highest default rate at 11%, more than any other loan category. This rate is high partly because there are hardly any write-offs under this loan category. 

The student loan category has spawned off an entire financial services industry by its sheer size, offering all manner of services, including loan management, loan consolidation, advisory services, rate comparison services, refinancing services, and payment channels.

In this space, several FinTech and other financial services companies have found their niche to offer solutions that make student loans more accessible by leveraging technology in this era of big data and make loan repayment and management seamless and less bureaucratic. While the federal student loans form the bulk of student lending at 92%, private education loans still account for 7.76 % or $124.65 billion, a sizable amount by any measure. This creates room for many players in the market.

One of the major players in the private student loan market is Sallie Mae, which, as of Q1 2020, held $ 23.5 billion in its books as outstanding loans. It offers graduate and undergraduate loans and finances more pricey career paths like medical school, law school, dental school, medical residencies, among other specific targeted offers. Besides financing the students directly, it has the option of a parental application where a parent can apply on behalf of a student provided they pass the credit check. Collegeave is another provider with a flexible repayment plan, including deferring payment until completion of college, but encourages repayments while still at school. However, this is best for learners with incomes that are continuing their education; otherwise, it requires a co-signer. 

Other traditional banks have also dabbled in the student loan segment through subsidiaries. The Citizens Bank has a fully-fledged lending arm catering for student loans and other consumer loans outside its mainstream banking business dubbed ‘Citizens One.’ One of its unique aspects is the availability of lending to international students through a co-signer arrangement. Even neobanks like Discover also have a student loan lending arm with no origination or late fees proposition that is especially popular with borrowers. Due to their long experience in consumer lending, especially through credit cards, Discover has managed to apply this know-how well in the student loans category by providing flexible payment options for borrowers experiencing financial hardships.

Other FinTech companies also offer these loans in partnership with regular banks. Ascent, for example, offers student loans underwritten by Richland State Bank (RSB). Its 24-month forbearance period is longer than many lenders in the market. Multiple in-school repayment alternatives are available for co-signed options, including interest-only, flat-fee, and deferred options.

But there are new FinTech companies that have taken on the student loan business all on their own without direct legacy bank backing. Services like Commonbond have revolutionized student loans by applying data analysis and AI to provide superior services. Founded in 2012, it has advanced loans of over $ 3 billion, which is not an amount to sneer at, considering it is still technically a startup. It was also able to add to its services the capacity to refinance loans through the acquisition of Gradible in 2016.

One of Commobond’s biggest competitors is SoFi, which started as a personal finance company but is now a fully-fledged consumer lending company with everything from mortgages to student loans and an investment company giving investment advice, managing retirement accounts, and interestingly, even cryptocurrencies. But its great strength lies in student loan refinancing, a business it has been in since 2013.

Other FinTech companies specialize in helping users arrive at a better decision by providing them with research tools. Credible has created a marketplace that brings together multiple lending providers enabling the borrower to receive competitive, personalized offers from vetted lenders in real-time. Gradifi is another solution that, besides helping users refinance their loans, enables employers to incorporate loan repayment as a benefit, which is a powerful tool for employee retention and motivation. Perhaps one of the most interesting in this category is FutureFuel, a powerful financial management tool that makes small, everyday financial actions count towards student debt repayment. With an easy-to-use platform, one can add their existing loans and commit to several interesting actions, including using spare change to pay down student loans, recruiting friends & family to join in the action towards paying down the loan, and assessing various options for refinancing and even debt forgiveness.

We have barely scratched the student loan industry’s surface here—we will go deeper into this segment in future articles. For now, we can conclude that barring any drastic political actions, such as blanket student debt forgiveness that has been mooted in various political circles, the student debt market is here to stay and continue to grow. The massive student loan segment, with $1.6 trillion outstanding debt (second only to the mortgage debt segment), provides an interesting and exciting area of innovation and growth for FinTech companies.

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