Two of the nation's largest private student lenders, Wells Fargo and Discover Financial Services, will start granting leniency to certain distressed borrowers.
Beginning this month, Wells plans to reduce eligible borrowers' interest rates to as low as 1%, at least for a temporary period. To qualify, borrowers will need to show that they can no longer keep up with their monthly payments as a result of lost income or unexpected expenses.
Wells Fargo's loan modification program will be open to borrowers who have not yet missed any payments, in addition to those who are already delinquent, according to John Rasmussen, head of education financial services at the San Francisco-based bank. "We customize the modification to the specific customer situation," he said.
Riverwoods, Ill.-based Discover did not release any details about its loan modification program, but a spokesman said in an email that the company plans to introduce it early next year. "Our programs are flexible and we want to do what is best for the borrower to help them stay on track and continue making payments," the email read.
The moves by Wells Fargo and Discover come at a time when private student lenders are facing pressure from their regulators to do more to help delinquent borrowers.
In a report issued last month, the Consumer Financial Protection Bureau found that borrowers frequently complain about lenders being unwilling to work with them on a loan modification.
The report cited complexities stemming from the securitization of student loans, as well as the fact that student loans are rarely discharged in bankruptcy, as factors that may be contributing to the small number of private student-loan modifications.
Rasmussen said that Wells Fargo has shared details of its new offering with both the CFPB and the Office of the Comptroller of the Currency. "We've gotten good feedback. And I believe both are going to be pleased with the program," he added.
Over the last six months, Wells has been piloting the student loan modification program with a limited pool of borrowers. So far, about 50 customers have received an interest rate reduction, and their monthly payments have been reduced by an average of about 30%, according to Rasmussen.
Each distressed Wells customer who is seeking a modification will get assigned to a bank employee who will serve as a single point of contact. That system may prevent the type of headaches encountered by homeowners in recent years, who have often become frustrated by the maze of employees they have encountered when seeking a mortgage modification.
Rasmussen acknowledged that Wells Fargo's student loan modifications will have a limited impact, helping between 600 and 1,000 borrowers over the next year. Rasmussen said that is because 98% of the 1.3 million customers in Wells Fargo's private student loan portfolio are making their payments on time.
"The 600 people we're going to help, we know are going to be ecstatic," he said.
Still, Wells' numbers suggest that less than 4% of its private student borrowers who are behind on their loan payments will receive a modification in the next 12 months.
The interest rate reduction by Wells Fargo will be tailored to the individual borrower's circumstances. So if a particular borrower expects a drop in income for 24 months, that borrower might get a two-year reduction in interest, according to Rasmussen.
Over the life of the loan, that should mean that the borrower's total obligation is lower, assuming no other changes are made in the loan terms.
Starting in February, Wells plans to begin stretching out loan terms on modified loans by as much five years, in cases where an interest rate reduction alone does not bring the loan payments to an affordable level. But the first option will be an interest rate reduction, Rasmussen said.