The Wall Street Journal, May 16, 2012
by Mattias Rieker
Even as the growth of student debt stirs debate on everything from whether the government should move to ease borrowers' burden to the ability to discharge obligations through bankruptcy, some banks are jockeying for position to lend to students.
The latest salvo in the fast-moving field: RBS Citizens Financial Group, the U.S. banking subsidiary of Royal Bank of Scotland Group PLC, this week said it would expand its student-lending business beyond the 12 states where it has bank branches.
While the expansion coincides with some banks pulling back from the business, RBS Citizens is putting its stake in the ground in a competitive field. Wells Fargo & Co. and Discover Financial Services, which are among the nation's largest student lenders, have also said they want to expand rather than shrink in student lending.
The cost of college continues to rise and private student loans provide financial flexibility beyond government student loans, said Brendan Coughlin, the president of RBS Citizens' education finance business. "I don't believe" student lending "is the next bubble," he said. "There is no doubt that the cost of education is outpacing inflation, and it's an issue for America."
The bank started to make student loans in 2009, and the retrenching of some banks made the decision to expand easier, Mr. Coughlin said.
"Some of the students who banked with us were able to get a loan to one school but not the other" because RBS Citizens would lend only in the states where it had branches, he said. Now students can apply to schools in all 48 contiguous states and apply from states where RBS Citizens has no branches.
RBS Citizens, which is branded Charter One in Midwestern markets, was a rapidly expanding bank before the financial crisis, moving from its New England roots into the Midwest. But the mortgage-related trouble of its parent has raised speculation over whether the Edinburgh-based bank might sell rather than expand its U.S. banking operations. RBS had to be bailed out and is majority-owned by the British government.
But that speculation has died down, and the bank has been expanding its commercial banking business lately. Student lending is another business where RBS Citizens believes it can gain market share.
The bank will lend only to students at not-for-profit universities, about 90% of loans are co-signed, usually by a parent, and those who don't have a co-signer have to show income. RBS Citizens doesn't disclose its default rate, but Mr. Coughlin said it is "very significantly below" the 8% for U.S. government student loans.
Still, RBS's expansion comes at a pivot point in student lending. College affordability has become a campaign issue and some lenders are retreating from the business as college costs rise and federal scrutiny increases.
J.P. Morgan Chase & Co. recently decided to restrict student loans to customers who do other business with the bank. "The private student loan market has continued to decline and government programs have expanded to help more students," the bank had previously said in a statement.
U.S. Bancorp stopped making student loans altogether last year. The bank had said it was "relatively small" in private student lending and "decided to ... move resources to other areas."
Citigroup Inc. sold its Student Lending Corp. as part of its decision during the financial crisis to slim down. Discover Financial Services bought it, and wants to expand.
"As some look to exit the business, we'll capitalize on these opportunities to strengthen our market position," said Mark Graf, chief financial officer of Discover. "College students are upwardly mobile and mostly new to Discover, allowing us to establish an early relationship and to subsequently build on it."
Wells Fargo's Chief Financial Officer Timothy Sloan recently said: "The last time I checked, a third of the people in this country go to college and a good portion of those need to borrow some money to do that." Like RBS Citizens now, Wells Fargo lends to bank customers as well as with students who, at least initially, only need a loan.
To be sure, private student loans should be taken only as a funding source of last resort, the National Association of Student Financial Aid Administrators argues. "Private student loans are a risky way to finance higher education," said Haley Chitty, the director of communications at the advocacy group. "They lack the consumer protections and benefits of federal student loans."
Nevertheless, he said, "these loans are a vital resource for some students looking to cover the growing gap between rising college costs and what they can get in student aid and federal student loans."
RBS's Mr. Coughlin said he makes students and parents aware of the risks, and in some cases discourages them from borrowing because a government loan fits better. But for other borrowers, the terms "are very competitive with the government program. For some families, this is actually the more affordable option."