Two of the biggest banks in America announced they’re pulling out of the student loan market, leaving students searching for private loans with fewer options.
But the move is a result of tougher industry standards for lenders, which is actually good news for students, said student loan expert Heather Jarvis.
After nearly 40 years in the student-loan business, Minneapolis-based U.S. Bancorp, the parent company of U.S. Bank, is no longer providing student loans, spokeswoman Amy Frantti said in an email.
JPMorgan Chase, the largest bank in the country, is sharply cutting back on its lending as well. Starting in July, Chase will only lend to students who are existing customers, spokesman Thomas Kelly told American Banker.
Both banks have said the student lending business was too small to be profitable.
Frantti said U.S. Bank was a “very small player” in the student-lending industry, holding less than 1.5 percent of the market share.
“We’ve decided to make a strategic shift and move resources,” Frantti said.
Kelly said the current market conditions make it difficult for JPMorgan Chase to offer loans to all students.
“The private student-loan market is continuing to decline, so we decided to focus on Chase customers,” he told American Banker.
But Jarvis said loaning money to students has never really been an easy way for banks to make money when students may not complete their degrees or repay the loan.
“The loans tend to be really risky,” Jarvis said.
Jarvis said the market is recovering, and it’s the stricter lending criteria causing banks to leave the market.
Without strict lending criteria, many profitable student lenders issued loans to students without considering if recipients could pay them back. When the recession hit, these loans started to fail at an “alarming rate,” Jarvis said.
Increased regulation from the government has changed the way the student loan industry operates. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Barack Obama in 2010, established the Consumer Financial Protection Bureau as the federal agency responsible for making sure private student loan providers comply with federal laws.
The bureau has recently launched several initiatives aimed at better oversight, like encouraging students to report complaints about private lenders on their website.
“It’s not as attractive a business as it used to be. If you’re going to do private lending now, you have to do it differently than you used to,” Jarvis said.
Tougher regulations are good news for students because it makes the industry safer, Jarvis said.
But students should take out federal loans over private loans, Jarvis said. Federal loans use fixed low interest rates and have flexible repayment options such as income-based repayment, loan forgiveness and the option to defer payments.
According to FinAid.org, a student loan information website, indebtedness is approaching $1 trillion.
Ultimately, an industry with stricter regulations is good news for students depending on private lenders to pay tuition. It can lead to fairer and easier to understand loan terms, Jarvis said.
While Jarvis acknowledged that some are worried that the exit of JPMorgan Chase and U.S. Bank from the market will result in a loss of competition and could drive up the prices of private loans, she doesn’t think pulling out of the industry will become a trend among banks.
“I actually think that the trend is kind of going the other way,” she said. “There was a huge exodus from the market during the recession. Now it’s over, and it’s starting to rebuild.”