Discover Financial Joins the Student Loan Refinance Trend
NEW YORK (MainStreet) Discover Financial Services (DFS), best known for its branded credit cards, is expected to enter the student loan refinance market.
RBS Citizens Financial Group rolled out its refi product last month. In a January 23 interview with American Banker, Discover chief executive officer David Nelms stated his company is planning to follow suit. "I do think it's likely that we'll be launching a consolidation product later this year," he said.
Student loans comprised 13% of the firm's total outstanding loans during 2013, when Discover originated more than $1 billion in private student loans. Some 80% of Discovers loans are in the credit card market.
Until now, a relative handful of lenders have been refinancing student loans. Among them are San Francisco-based Social Finance and Darien Rowayton Bank in Darien, Connecticut. Of the seven largest banks that make private student loans, only Wells Fargo and Sun Trust are in the re-fi market.
Federal policy makers have been more focused on the problems struggling borrowers face when they try to renegotiate more affordable repayment plans--people who wouldn't normally qualify for a re-finance deal. Now the limited options for refinancing have become a concern as well. Lenders generally will only consider college graduates who have steady incomes and are current on their loans. Above all, the ROI on a re-fi of an existing loans into lower-cost ones is limited, a concern for lenders.
The low rates on variable interest rates have inspired caution on the part of lenders. Nelms told American Banker, "In a lot of cases, there's not a huge incentive to refinance." By the same token, private loans are often burdensome to the borrower and carry rates significantly above the cost of Stafford and PLUS loans made by the federal government.
However, firms that sit on the sidelines could risk having other lenders chip away at their customer base with refinancing offers--especially if the student loan refinancing trend catches fire.
Discover has not decided whether to stick to the private student loan market or refinance federal and private loans. The federal student loan market is much larger. Those who roll their federal debt into private loans lose important consumer protections--a turn-off for most borrowers.
--Written by John Sandman for MainStreet