Banks, fintechs help borrowers navigate student loan changes

A tangle of student loan policy changes can confuse borrowers but is an opportunity for banks and fintechs.

The pause on repaying federal student loans is set to expire on August 31, but repeated extensions in the past suggest that is no sure thing — and private loan relief is still at the discretion of lenders. When federal loan payments do resume, they will be at a higher rate than last year. President Biden’s proposed cancellation of $10,000 in student debt per borrower has yet to come to fruition.On the positive end, the Public Service Loan Forgiveness program is expanding access until October. The government’s “Fresh Start” program will let borrowers who defaulted on their federal student loans resume payments in good standing. 

There is approximately $1.7 trillion in outstanding student loan debt in the U.S., a number that has steadily risen over time, according to data from the Federal Reserve Bank of St. Louis. Reducing an individual’s balance would free up money they could use for other purposes, such as resolving other forms of debt, or help them feel stabilized enough to take on new obligations such as mortgages or auto loans. People may want to direct their spare cash to retirement savings, wealth management or investments. Banks can benefit from some or all of these changes in behavior, especially among younger customers who are mired in debt and those worried about inflation and a possible recession. 

“Banks are looking more actively at how they can get ahead of this,” said Will Sealy, co-founder and CEO of Summer, a company that partners with financial institutions to help their customers navigate student debt. “A lot of people think student loan payments are paused, so people are not paying attention, but we’re seeing extraordinarily high engagement because borrowers know repayments will come due soon.”

KeyCorp in Cleveland bought the fintech GradFin, an online advisory company that helps borrowers understand their repayment, refinancing and forgiveness options, in May, to deepen its financial wellness offerings. Fintechs focusing on student loan management, such as Summer, Candidly (previously FutureFuel.io) and Savi, largely partner with financial institutions — for instance, by integrating their services via application programming interface — or are open to that possibility. The companies typically charge their bank partners fees for their services.

“The confusion when people who have not made student loan payments for well over two years are suddenly told, ‘You have to start making those payments again’ is going to be unprecedented,” said Aaron Smith, cofounder of Savi, which partners with organizations to help its users reduce student debt and enroll in suitable programs.

While borrowers are getting a breather from payments, that is a prime time to help them navigate the complexities of forgiveness. Smith said Savi has been focusing on programs like Public Student Loan Forgiveness, or PSLF, which dissolves remaining balances for government and nonprofit employees once they meet a set of conditions, because people can take advantage of those right now while payments are paused.

Helping borrowers navigate the nuances is particularly important because those eligible may not realize they have been receiving credit toward forgiveness during the pandemic even while pausing their payments. The PSLF program is also letting borrowers receive credit for payments who previously didn’t qualify under a limited waiver that expires at the end of October. In addition, the Department of Education said in April that borrowers could submit a request for reconsideration, or a government review of whether their account was handled appropriately under various laws and requirements.

One example of a bank entering this space is the $181.2 billion-asset Key, which now owns GradFin.

Jamie Warder, head of digital banking at KeyBank, was drawn to GradFin’s personalized service that helps clients figure out the best solution for their loan situation, including forgiveness. At the heart of this service is a free phone call with a GradFin student loan consultant. KeyBank will make this available to all customers, including those of Laurel Road, its digital bank for medical professionals — who typically carry particularly heavy burdens of debt.

Although the phone consultation is free, GradFin could be a source of revenue for Key. It charges a fee to navigate customers through various repayment, refinancing or forgiveness applications beyond the initial phone call, and collects placement fees from financial institutions and lenders that refinance a loan that was referred to them by GradFin. “There are also opportunities to create great trust that we are taking care of our members’ financial needs, and because of that, they will want to do more business with us,” said Warder. “There is value-add in there that we think will lead to more loyalty and business over time.”

Even as the government makes it easier for people to qualify for breaks on their student loan debt, Warder still foresees demand for a service that breaks down these options for borrowers. As there are changes to student loans and forgiveness programs, “it’s confusing,” Warder said. “If you’re a borrower, getting good quality information and someone to help you make the right choices is an area that will see more demand over time, not less.”

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Fifth Third Bancorp in Cincinnati once had a standalone app called Momentum that helped borrowers pay down their student debt through roundups. That functionality will be added to the Fifth Third mobile app at some point in the future, said a spokesperson.

Summer is behind the student loan assistance features in Credit Karma’s app, which were announced in March. Borrowers can weigh monthly payment estimates and potential trade-offs if they went with a government income-driven repayment (IDR) plan and start the application from the app. Summer is also in talks with an application programming interface company that works with small and midsize financial institutions to support their websites and apps.

Candidly, which rebranded from FutureFuel.io in June after the company acquired a marketplace for education financing, works directly with Chime and MoneyLion, among others, helping customers strategize their student loan payments and forgiveness options. It launched a co-branded portal with community institution The Milford Bank in Milford, Connecticut, at the end of 2021 through a program with Fiserv. 

Chipper, a direct-to-consumer app that helps people reduce student debt, currently guides users to the optimal repayment plan, helps them figure out eligibility for loan forgiveness and lets them round up transactions to the nearest dollar, with the difference going toward debt payment.

Tony Aguilar, CEO of Chipper, says the company is starting to explore the possibility of working with banks. At the same time, he is embellishing Chipper with more features. A credit monitoring tool is in the works — capitalizing on the idea that people who benefit from Fresh Start once payments resume will see their credit scores rise — as is cash-back rewards, which will make additional dents in loan balances.

The pauses in loan repayments have not tamped down demand. 

Recent announcements about changes to student loan policies or extensions “have been great for us,” said Aguilar. “We get a lot of traffic because people are more interested to see if they qualify.”