Student Loan Modifications Begin with Two Private Lenders
December 12, 2014

For long, many private student loan lenders haven’t exactly covered themselves with glory. They have been synonymous with steep interest rates and a lack of flexibility in offering repayment options to struggling borrowers. However, Discover and Wells Fargo – two of the biggest private student loan lenders in the country, are setting about changing this perception.

Last month, Wells Fargo announced that it would begin student loan modifications by reducing interest rates for eligible borrowers. In addition, the lender also declared that starting February 2015, it would start extending repayment periods by up to five years for people requiring more assistance than an interest rate reduction could offer. Wells Fargo has indicated that it expects to help around 600 – 1,000 borrowers by the end of 2015.

The Wells Fargo Private Student Loan Modification (PSLM) program aims at assisting borrowers experiencing financial hardships or distress. Under the program, the lender will review the financial status of borrowers experiencing financial hardship on a case-by-case basis.

During the review, the lender would determine the borrower’s eligibility for a short-term or a long-term loan modification – depending on whichever of the two is the best solution. Wells Fargo will also work with the borrower to gather supporting financial documents for verifying the borrower’s financial status. The documents they will typically go through include:

  • Paystubs
  • Any other categories of income documentation e.g. a W2 etc. and,
  • Any other information that gives a true picture of the borrower’s financial status e.g. the borrower’s credit report etc.

If the borrower is eligible for a loan modification, Wells Fargo will reduce the customer’s interest rate. This reduction would typically be commensurate with the borrower’s income. Wells Fargo estimates that it would lower the borrower’s payments to an amount that is between 10 to 15 percent of their income. However, the relief that borrowers get depends solely on their individual circumstances.

This will help make student loan payments more affordable for the borrower facing financial hardships. Wells Fargo will also send a loan modification agreement to the borrower by overnight mail delivery. The borrower would need to sign and return the agreement.

Similarly, Discover Financial Services also announced its own student loan modification program that it plans to launch early next year. The details of the program are sparse at present. However, Joe Cahill reports that Discover is considering reducing interest rates as well as loan balances for borrowers struggling with debt. Discover has already taken certain steps for providing relief to hard-pressed borrowers by:

  • Ending late-payment penalties and,
  • Giving borrowers the option of making only interest payments for a year (subject to a minimum of $50)

Annamaria Andriotis writes that Wells Fargo had introduced its PSLM program as a pilot for a select group of borrowers earlier this year, before expanding it to all eligible borrowers. Under the program, Wells Fargo will reduce interest rates for eligible borrowers to as low as one percent. In the pilot phase, Wells Fargo reduced payments for some borrowers by as much as 31 percent. The minimum duration of the reduced interest rate will be for 12 months. However, in exceptional circumstances, it could even apply for the remaining life of the loan.

The program is suitable for borrowers who are up to 120 – 130 days behind on payments on their private student loans. It is also open to borrowers who have been on time with payments, but are susceptible to the risk of falling behind on their payments because of situations like a pay cut, a job loss, medical concerns etc. However, borrowers who are more than 130 days behind on payments (or in default) will not be eligible for this program.

Moreover, most private student loans typically have two borrowers i.e. the student and the parent. Therefore, Wells Fargo requires both borrowers to demonstrate financial hardship to become eligible for this program.

Discover’s program, Andriotis writes, is open to borrowers who are less than 60 days late on payments and who were previously not in a similar repayment option. Borrowers do not need to submit any documents for availing of Discover’s interest-only payments program.

Wells Fargo currently has about $11.9 billion worth of private student loans. Similarly, Discover Financial Services has about $8.3 billion in private student loans. Both lenders believe that these loan modification programs will save distressed borrowers thousands of dollars in interest payments over the course of the loan.

Danielle Douglas-Gabriel mentions that private student loan lenders only have an eight percent share of the $1.18 trillion student loan market. Yet, their inflexibility in providing convenient loan repayment options to struggling borrowers often results in their receiving a higher amount of criticism than the federal government.

Douglas-Gabriel writes that the private student loan market had begun shrinking once the federal government began lending directly to students in 2010. However, it is witnessing a growth at present. Discover had revealed that its portfolio had grown by 23 percent over the previous year in its last earnings call. Similarly, Wells Fargo had mentioned that its pool of loans had grown by six to seven percent.

By rolling out these programs, Wells Fargo and Discover will undoubtedly be helping several borrowers who are experiencing financial hardships. As a result, the benefits they are offering will certainly have a short-term impact on their profits. However, they could well stand to gain in the long-term.

Cahill writes that for many people, a student loan is their first experience of building credit. Therefore, the student loan lender is the first lender for many borrowers. Not many borrowers forget their first lender – especially if the lender has treated the borrower well at the first time of asking. Therefore, both Discover and Wells Fargo could find themselves winning many customers for life with these student loan modification programs.