A small Boston bank is betting it can attract tens of thousands of millennials by giving them a chance to pay off their student loans a few months early, rather than offering more common incentives such as interest on their deposits or airline miles for their purchases.
Radius Bank, a one-branch lender with $655 million in deposits, announced on Tuesday that it has partnered with Gradifi, the student debt-repayment platform known for its work with employers, to relaunch what they described as the nation's only debit card dedicated to paying down account holders' student loans. Radius and Gradifi are pitching debt reduction, rather than rewards points or small reimbursements, to young Americans as part of a plan to capitalize on the nation's nearly $1.4 trillion student loan tab.
There's no shortage of student debt-driven fear. Nearly 42 million borrowers with government-backed student loans owe $30,100 on average, up more than 42 percent since 2007, after adjusting for inflation, federal data show. Government loans make up more than 90 percent of the market. The federal Consumer Financial Protection Bureau said in September that one in four borrowers, or about 10 million Americans, was either delinquent or in default on student debt. The growing size of this burden has led federal financial regulators and the Treasury Department (PDF) to worry that households may cut back spending or eschew other forms of credit as a result. The National Association of Realtors is so concerned that it is now lobbying Congress on student debt relief.
Gradifi and Radius are wagering that Americans in their twenties and thirties will favor paying down their debt over incurring more of it or increasing their consumption.
"What millennials really want is for someone to create a rewards program for them and put all that money in their student loan accounts," said Tim DeMello, Gradifi founder and chief executive officer. He said the idea was the most popular of about eight choices presented to focus group participants last autumn. Gradifi chose debit cards, rather than credit cards, because the company's goal is to reduce Americans' debt loads, DeMello said.
The checking account-linked debit card would apply 1 percent of account holders' monthly purchases to their student loan balances. There's no limit on how much households can receive, but the benefit doesn't apply to purchases in which customers use a PIN instead of signing for a charge. It will be offered alongside checking accounts that promise no monthly service charges and rebates of ATM fees, and it's aimed squarely at high-income, debt-laden millennials with higher credit scores than the typical twentysomething or thirtysomething, said Mike Butler, Radius chief executive officer. The card should be available this autumn, the two companies said. Butler said he hopes that as many as 25,000 people will sign up for the card in the first year. About 50 percent of those who apply for Radius checking accounts online end up with an account. Butler said he's expecting conversions on the student loan account to run as high as 95 percent.
Heavy users of the card could shave several months of expected payments off their student loans. For example, borrowers who owe $30,000 on student loans that collectively carry a 5 percent interest rate could shorten the standard 10-year repayment term by four months if they make $1,000 in eligible monthly purchases for the life of the debt, according to an online Gradifi calculator. Spending $2,500 every month would yield $25 in extra monthly payments toward the loans, reducing their repayment period by 11 months. Gradifi works with about 85 student lenders and loan servicers to apply borrowers' rewards payments to their loan balances, DeMello said. The federal government in 2008 prohibited prepayment penalties on new student loans.
If he's right, account holders would provide Radius with a cheap source of funds that the bank would use to make loans in the Boston area. Meanwhile, Gradifi would generate revenue off account holders' debit card purchases. The company is set to receive $1.10 from every $100 purchased on the debit card, DeMello said. Gradifi keeps 10 cents of that while routing the dollar to account holders' student loan balances.
"Our job is to knock off as much of that as we can," DeMello said.