Risks of Private Student Loans for Consumers
Are any private student loans less risky for consumers than others? Many Chicago residents know that it is extremely difficult to discharge student loans by filing for personal bankruptcy, and private student loans are not eligible for the federal income-based repayment programs. According to an article in Inside Higher Ed, a couple of months ago Amazon.com announced a partnership with Wells Fargo to become a new lender of private student loans through which Amazon Prime Students members would “be eligible for a 0.5 percentage point reduction on their interest rate for private student loans taken out through Wells Fargo Education Financial Services.”
But does such a reduction really amount to much in the long run? And what are the continuing limitations of private student loans as the national student loan debt continues to rise? As we will explain, concerns about the partnership ultimately resulted in Amazon.com and Wells Fargo deciding against the private student loans initially offered.
Amazon and Wells Fargo Partnership for Private Student Loans
As the article explains, the announcement about the pairing up of Amazon.com and Wells Fargo was not received particularly well by consumer advocates. According to Pauline Abernathy, the vice president of the Institute for College Access & Success (Ticas), “private loans are one of the riskiest ways to finance a college education.” As she went on to declare, “like credit cards, they have the highest rates for those who can least afford them, but they are much more difficult to discharge in bankruptcy than credit cards and other consumer debts.” As such, Abernathy intimated that the Amazon.com and Wells Fargo partnership was “designed to dupe students who qualify for low-interest federal student loans into taking out more costly private loans with fewer protections.”
What is the interest-rate difference between typical federal loans and private student loans? On average, undergraduate students who borrow federal Stafford loans this year will have an interest rate of 3.76%. For Wells Fargo private student loans, the interest rates are much higher. For loans with a variable interest rate, the number may be as high as 9.03%. And for Wells Fargo fixed-rate private student loans, the interest rate can be as high as 10.93%. As the article explains, the “fine print” on the Wells Fargo website indicated at the time that “the bank reserved the right to modify or discontinue interest rate discounts at any time.”
Backlash Against Private Student Loan Partnership
The Amazon.com partnership with Wells Fargo was announced earlier in the summer, and Inside Higher Ed reported on it in July. Just this month, an article in the Wall Street Journal reported on the backlash against the private student loan partnership and the stark limitations of private student loans in general. Indeed, Ticas took its concerns about private student loans to Capitol Hill, the article explained.
Ticas contacted numerous senators, which helped to raise concerns with the Consumer Financial Protection Bureau (CFPB). Among other issues, Senator Sherrod Brown’s office “questioned marketing of the rate discount, expressing concerns about whether it disclosed that the underlying rate may be much higher than the cost of loans under federal programs, or that the discount was subject to change or cancellation.” As a result of this backlash, as well as continued question from Senator Elizabeth Warren’s office and the office of Illinois’s Senator Dick Durbin, “Amazon and Wells Fargo scrapped their arrangement.”
In the meantime, if you have questions about managing student loan debt or discharging private student loans in bankruptcy, an experienced Oak Park bankruptcy lawyer can help. Contact the Emerson Law Firm to learn more about our services.
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