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With a market that’s approaching $1.5 trillion and growing, it’s no wonder that the student loan business is attracting the attention of Fintech lenders. There is massive opportunity in student lending.

As college remains an imperative for success in today’s job market and tuition continues to increase, students (and their parents) are continually re-evaluating their options to both pay for higher education in the first place and to refinance their loans once they’re out. Student lending is now the second-largest consumer debt market after mortgages.

Many banks and credit unions have hesitated to get into the student lending business, partly because there historically had been a smaller market for private student loans. That market has exploded in recent years, leaving a gap that the Fintech lenders have pounced on.

Fintech lenders like SoFi, Common Bond, and Earnest have swarmed in offering not only competitive pricing on loans, but also an experience that’s often superior to what a consumer might find at a traditional bank, both for primary student loans and for refinancing.

The Fintech lenders make the process both faster and easier for consumers. While it might take a week to get a response from a traditional lender, the Fintechs can let a consumer know whether they’re approved for a student loan within minutes. That’s allowed them to gain traction very quickly among borrowers.

A bigger market
The potential borrower pool is also larger for Fintech lenders than traditional banks, since they’re more likely to extend loans to consumers who might not have qualified for loans from traditional banks. They’re going further down on the credit scale, and taking into account other factors such as future earning potential and the value of the degree and school attended. The ability to incorporate such nontraditional factors into their approval algorithms gives Fintech lenders an advantage over traditional banks, which have more restrictions due to concerns about fair lending risk.

However, traditional banks still have some advantages that they can use when it comes to competing with the Fintechs for student loan business. Playing up their long-term reputation and their existing relationship with either the students or their parents may give them an edge with some clients.

Still, traditional banks and credit unions will need to improve their application process in order to remain competitive going forward. As younger, digital native borrowers continue coming into the market, they’ll expect a sleek, user-friendly interface from their lenders.

Another area in which traditional banks can learn from the Fintechs is in the customization of loans, which allows for management of both pricing and risk. The startups offer borrowers more options in choosing their monthly payment and loan term, and have products customized for specific degrees. The loan for a law student, for example, might be different than what’s offered to a doctor.

The student loan market appears poised to continue growing. If traditional lenders don’t improve their approach, they run the risk losing out on an opportunity to start a relationship not only with student borrowers of today but also with the future homeowners and deposit clients they’ll become once they’ve graduated.

 

For more information on Informa Research Services, contact us at 800.848.0218 or email info@informars.com.

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