Amazon gets in on the student loan business

Federal loans still offer the most flexibility and protections

Wells Fargo is offering Amazon Prime Student subscribers the chance to lower the interest rates on their private student loans, Danielle Douglas-Gabriel reports for the Washington Post's "Grade Point." 

Subscribers who apply for any of Wells Fargo's education loan products can have their interest rate reduced by half of a percentage point. The bank will lower interest rates by another quarter of a percentage point for borrowers enrolled in an automatic monthly loan repayment plan. Students whose parents or grandparents co-sign a loan are eligible for even lower rates.

The interest rates on Wells Fargo's undergraduate loans for four-year institutions range from 5.94% to about 11% on a fixed rate loan, compared with 3.39% to 9.03% on a variable rate loan. 

Student loan services: Organizational structure, delivery, and assessment

A student who borrows $10,000 at a 6.5% fixed rate with a standard 10-year repayment term could save $303 over the lifetime of the loan with a Prime discount. With an automatic payment discount, the student could save $453 over 10 years.

Government loans remain most accessible

Private lenders hold just 7.5% of the $1.3 trillion student loan market, driving intense competition among individual lenders. When it comes to student loans, the government leads the pack. According to Mark Kantrowitz, publisher of college and scholarship search website, the federal student loan program is still one of the most affordable and flexible for families that borrow money for college.

Unlike loans offered by private lenders, federal loans are set at fixed rates and do not require co-signers with good credit to receive the lowest rate. Borrowers can also take advantage of repayment plans that are determined by income.

The interest rates on federal student loans are currently at a historic low, with undergraduate students expecting to pay 3.76% in interest on new Stafford loans for the 2016-2017 academic year. Graduate students will pay 5.31% interest.

Private loans criticized

While private lenders have attempted to become more consumer-friendly in recent years, private loans have gained a reputation for having inflexible repayment terms and fewer protections than loans offered by the government. The latest partnership between Amazon and Wells Fargo highlights some of those concerns. 

Reducing undergraduate indebtedness

"Amazon and Wells Fargo are trumpeting a discount while burying the sky-high rates on these private loans and without noting that they lack the consumer protections and flexible repayment options that come with federal student loans," especially when rates are currently so low, says Pauline Abernathy, vice president of the Institute for College Access and Success.

Abernathy notes that Wells Fargo states in the fine print of its advertisement that the bank "reserves the right to modify or discontinue the discount program for future loans or to discontinue loan programs at any time without notice" (Douglas-Gabriel, "Grade Point," Washington Post, 7/21). 

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