As more U.S. companies help their employees pay off student loans, some lenders are sensing an opportunity to reel in new, potentially high-net-worth customers.
Student loan assistance is emerging as today's hot new employee benefit, in the same way the 401(k) did a few decades ago. These payments, of up to $2,000 annually, are increasingly seen as a way for firms to attract and retain employees who are straining under the weight of education debt.
Some lenders that specialize in refinancing student loans are hoping to profit from this corporate perk. The basic premise is that borrowers who are excited to get a helping hand from their employers will also be amenable to refinancing at a lower interest rate.
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Cordia Bancorp recently sold its student lending platform due to concerns about loan concentrations. In doing so, the Virginia company provided another example of why it is difficult for smaller institutions to gain traction in marketplace lending.
March 4 -
Darien Rowayton Bank used funds from a 2010 recapitalization to start refinancing student loans in a move that, so far, has been lucrative for the institution.
November 30
In the coming weeks, Citizens Financial Group in Providence, R.I., plans to announce a new partnership with Gradifi, a Boston-based startup that administers student loan assistance benefits on behalf of employers.
Under the deal, the $143 billion-asset Citizens will have the exclusive right to make loan refinancing offers to borrowers who use its partner's platform. Citizens has been looking to grow its student-lending business; its balances increased by 93% last year.
Meanwhile, Social Finance Inc., a rapidly growing online lender that got its start in student loans, recently built its own benefits platform for employers.
SoFi is using its platform to administer employers' student loan contributions, even in cases where the loans are backed by the federal government or another private lender. The company is betting that once borrowers open SoFi accounts, they will be more apt to refinance into a SoFi loan.
There could be cross-selling opportunities as well. Down the road, it's not hard to imagine borrowers — many with advanced degrees and good-paying jobs — turning to lenders that refinanced their student debt for mortgages, car loans or other financial products. SoFi is already offering mortgage loans to many of its student-loan customers.
Citizens and San Francisco-based SoFi are both responding to a surge in interest in student loan assistance at large U.S corporations.
PwC, the accounting and consulting firm with more than 200,000 employees globally, announced in September that it will contribute $1,200 annually toward reducing an employee's student debt.
Fidelity Investments, which has 45,000 employees, said last month that it will offer them $2,000 per year to help pay back their student loans. Fidelity launched the new benefit following a broad effort to gauge the mood of its workforce.
"What we heard was that student loan debt was a significant challenge," said Jennifer Hanson, head of benefits at Fidelity, referring to feedback provided by the firm's employees. "They were putting off things like buying a home, getting married, having children, until they paid off this debt."
Across the country, total student debt increased from $481 billion in the first quarter of 2006 to $1.32 trillion in the fourth quarter of last year, according to data from the Federal Reserve Board.
Young adults carry the biggest debt burdens, which means loan assistance can be a particularly attractive perk for recent graduates. Nearly 70% of members of the class of 2014 had student debt, and those who did owed an average of $28,950, according to a report last year by the Institute for College Access & Success.
"This is a custom benefit made for the millennials," said Bruce Elliott, manager of compensation and benefits at the Society for Human Resource Management in Alexandria, Va.
His organization found last year in a survey that 3% of participating companies were providing student loan repayment assistance to their employees. Elliott expects that number to rise over time, in part because it has become much easier for employers to offer the benefit.
Within the past 18 months, Gradifi, SoFi and Santa Monica, Calif.-based Tuition.io have all launched programs to administer student loan repayment assistance on behalf of employers. This is a complicated business — in large part because borrowers often have several different loans, and payments have to be carefully allocated between them.
"For the employer to try to administer this," Elliott warned, "I would wave them off from it six ways from Sunday."
Gradifi Chief Executive Tim DeMello said that his firm is currently working with just over 100 companies, and has been approached by another 180 or so that are interested in offering loan repayment assistance. Employers pay Gradifi $36 to $60 annually for each employee in the program.
"There's been a lot more interest than even I expected there to be," DeMello said.
One obstacle to more widespread adoption by corporations involves the tax treatment of student loan assistance. Unlike contributions to a 401(k), loan assistance dollars are currently treated as pretax income. That status makes them less attractive as a benefit.
Legislation has recently been introduced in both the House and Senate to change the tax treatment. "I think when that happens, the demand will go up tenfold," DeMello said.
In the meantime, firms that refinance education loans are exploring how they can benefit from the fledgling efforts of employers to help their workforce pay down its debt.
SoFi said that it developed its benefit administration platform for an unnamed company that is in the top 10 of the Fortune 500. The San Francisco-based company is now looking to administer the loan assistance benefit for other smaller firms.
"It really is a differentiating benefit," said Catesby Perrin, SoFi's head of business development. "I know I should be saving for my retirement, but that benefit is pretty attenuated for me. I don't expect to see that money for 40 years, or 30 years."
Citizens Financial hopes that its new partnership with Gradifi will help win the attention of more borrowers. As part of the deal, Citizens may seek to encourage borrowers to refinance by offering them a one-time cash payment.
Brendan Coughlin, the head of consumer banking at Citizens, said the program offers borrowers the chance to win twice — first by getting cash assistance, and second by refinancing into a loan with a lower interest rate.
"This is obviously an emerging need for Americans, in terms of managing their student loan debt down," he said.
Many borrowers are unable to refinance at a lower interest rate, and even those who do qualify should be aware that they will lose certain protections by switching from a federal student loan to one that is privately backed.
Often the best candidates for student loan refinancing are folks with graduate or professional degrees, since the government loan program that many of them use to finance their education carries comparatively high interest rates.
In recent years, some private student lenders have partnered with professional organizations and alumni groups in an effort to make more borrowers aware that refinancing may be an option. The new wave of marketing toward borrowers who are getting a valuable employee benefit is another step down the same path.
"I do see this as an opportunity for lenders," said Stephen Dash, CEO of the student loan comparison site Credible.
