Private Student Loans at Banks Rise with Stricter Underwriting
Healthy Loan and Deposit Growth in May: A Good Sign for Banks
Total student credit continues to surge
Student credit rose to $1.4 trillion at the end of 1Q15, according to the latest data that the Federal Reserve released on May 7, 2015. The US student loan market is mainly dominated by public loans. Private student loans account for less than 8% of the total student loan market.
Total student credit increased from $509 billion at the end of 1Q06 to $1.4 trillion at the end of 1Q15. It grew at a CAGR (compound annual growth rate) of 11.5%. The above graph shows the quarterly student credit growth.
Private student loan origination
Several large US banks exited the student loan market after the government decided to grant loans directly to students. JPMorgan Chase, Bank of America (BAC), and Citigroup have exited from private student lending.
Wells Fargo (WFC) is the only one of the “big four” banks that’s still active in this market. Discover Financial (DFS) and PNC Financial (PNC) are the other key players in this segment. Together, these three banks form 11.2% of the Financial Select Sector SPDR ETF (XLF).
Loan levels rise
According to MeasureOne, a data analysis firm that tracks the student loan market, private student loan originations increased by 6% to $7 billion in 2014. It’s the highest figure for an academic year since the financial crisis. According to the data from MeasureOne, the charge-off rates on the loans were low at 2.4% for 3Q14.
Stringent standards
Most big private student lenders, including banks, now require nearly every undergraduate student loan borrower to have a co-signer. This helps reduce defaults. Lenders are also checking with the schools to make sure that the applicant is genuine and needs the full amount borrowed to support academic studies.
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