Wells Fargo is hoping to make its student loans more attractive to families.
The San Francisco-based bank says it is now offering fixed-rate student loans, which is a departure from the industry practice. Unlike federal student loans, the private student loans issued by banks typically come with variable interest rates that are tied to a benchmark rate.
Wells Fargo says its fixed rates will range from 7.75 percent to 14.25 percent, depending on the credit background of the applicant or co-signer, who is often a parent.
Even on the low end, however, Wells Fargo's fixed rates are higher than the 6.8 percent fixed rate on most federal student loans. Federal loans also offer safeguards that do not come with private student loans. For example, students who earn very modest salaries can enroll in programs that cap their monthly federal loan payments to a percentage of their income. Remaining balances are forgiven after 25 years of payments.
Federal loans also give borrowers the option to defer payments for set periods if they run into financial hardships, such as unemployment. With private loans, it's up to the lender to decide whether to grant deferment. And the deferment periods granted are typically shorter than the time permitted under federal student loans.
As a result, private student loans are widely regarded as a last resort after federal aid has been exhausted. Still, private lenders note that their loans can help bridge the gap in covering college costs after other resources have been tapped out.
Wells Fargo also said this week that it will give existing customers who take out new student loans a 1 percent discount on interest rates. If approved, all loan applicants will now be offered the option of either a fixed or variable rate. Variable rates range from 3.5 percent to 9.99 percent.
The announcement from Wells Fargo & Co. comes ahead of the peak season for private student lenders, when families are looking to bridge financing gaps leading into the fall semester.
The private student loan industry has nevertheless been shrinking in the past few years. After peaking at 25 percent of total loan volume between 2006 and 2008, private student loans declined to 8 percent of total loan volume in the 2009-2010 academic year, according to The College Board. Several factors, including higher federal loan limits and tightened liquidity in the private loan market, contributed to the decline.