#college loans for parents
A December view of graduates at University of Texas of the Permian Basin. Associated Press
A new private student loan is aimed at parents who want to limit the debt their offspring take on.
Citizens Financial Group this month launched a loan for parents on which the interest rate can be lower than that of the federal loan used by many parents to pay for college. And unlike the federal loan, the new loan doesn’t charge an origination fee, thereby allowing parents to save hundreds or more dollars upfront.
Applicants must have good credit, generally a FICO score above 700, to get approved. (FICO scores range from 300 to 850.) Borrowers will have to show that they have the income to pay back the loan and that their monthly debt payments aren’t high compared with their income.
With the new Citizens loan, unlike most bank loans, everyone who gets approved will be offered the same rates. The basic rate on the loan with a 10-year repayment is 7.2% and it can decline to 6.7% if borrowers arrange for their loan to be paid automatically each month and if they open a Citizens bank account. Borrowers who opt for a five-year repayment period are looking at rates of 7.1% and 6.6%, respectively.
Most parents who sign up for college loans to pay for their children’s education opt for the federal Plus loan. The Plus loans given out during the current 2014-15 academic year charge a 7.21% fixed interest rate in addition to a nearly 4.3% origination fee.
This is the latest attempt by Citizens—which up until a couple of years ago was a small player in the private student-loan industry—to expand its presence in the market. The Providence, R.I.-based bank began refinancing private student loans early last year and began replacing federal student loans with private ones in September—both transactions that offer borrowers the opportunity to lower their interest rate. The latest rollout marks another attempt by the bank to compete against the federal government.
The new loan is also aimed at parents who don’t want their children to sign up for college debt. “What we found in our research is…some families want [their] kids to have skin in the game whereas some parents want to insulate [their] kids from debt and can afford to do so,” says Brendan Coughlin, president of education and auto finance at Citizens. The loan is also available to grandparents and other adults who want to pay for a student’s college education.
This marks a departure from the traditional private student-loan agreement in which the student is the primary borrower. Private lenders in most cases require student-loan applicants to have a creditworthy parent or other adult to cosign the loan in order to get approved—which leaves both borrowers on the hook for the loan. Missing payments will impact both borrowers’ credit reports and scores, making them less likely to get approved or more likely to get charged high interest rates on other loans they apply for.
Just over 94% of the undergraduate private student-loan dollars given out for the 2014-15 year had a cosigner, according to MeasureOne, a San Francisco-based firm that tracks student loans.
At Citizens, parents taking out the new loan could face a higher interest rate than on the bank’s traditional student loans, on which the lowest interest rate is currently 5.75%.
The new Citizens loan eliminating the student from the equation joins a similar offering from Wells Fargo. the second largest private student-loan lender by volume. Wells Fargo’s lowest fixed rate on this loan is 6.24%, taking into account a discount of a quarter of a percentage point when borrowers set up autopay, another discount of the same size for borrowers who have certain other Wells Fargo accounts, and another quarter-point promotional discount that runs through June.
Wells also doesn’t charge an origination fee on its loan, which the bank says it rolled out in 2010.