Citizens Financial Group announced Tuesday that it will
begin telling some private student loan applicants who get approved for the
coming academic year that they can also get loan preapprovals for the remaining
years of their college education. For example, some incoming freshmen who get
approved for a $10,000 loan for the 2015-16 academic year will be offered
preapproval for the same amount for the remaining years of their undergraduate
education.
But there’s a catch: The preapproval offer applies only to
borrowers who opt for a variable-rate loan—and Citizens preapproves them for
variable-rate loans for the future years as well. The bank says the preapproval, offered to
selected borrowers with strong credit, will make the application process less
time-consuming and onerous for repeat customers. Less paperwork will be
required when these applicants return for their subsequent loans, though their
credit score and credit reports will be checked each time.
It is the latest attempt by the bank to compete in a growing
sector. Private student lenders have been increasing loan originations and
have been seeking out the most desirable applicants by lowering interest rates.
Many lenders, including Citizens, have also been ramping up refinancing by
courting other lenders’ borrowers with the possibility of refinancing their
current loans into new loans with lower interest rates.
As competition intensifies, this multiyear approval
strategy, which appears to be a first in the private loan industry, is intended
to capture more borrowers for the long run. Private student lenders have been
increasingly discussing ways to turn student-loan borrowers into lifelong
customers by selling them mortgages, investment services and other products as
they get older and build up more wealth.
Variable interest rates are generally lower. At Citizens,
they range between 2.68% and 9.43%, while fixed rates range between 5.75% and
11.75% for undergraduates. But borrowers should keep in mind the risks they’re
taking by signing up for a variable-rate loan. Should the Federal Reserve raise
interest rates, it’s likely that the interest rate on such a loan will
increase, pushing up the monthly payments. The loan’s interest rate is pegged
to the one-month London interbank offered rate and can change as often as each
month.
Citizens says that borrowers who are approved for its
multiyear option will be shown the interest rate they could get with a
fixed-rate loan, outside of this program, as well. In addition, borrowers who
chose the multiyear option aren’t required to stick with it. If they want their
next loan to have a fixed rate, they can submit a separate application to the
bank for the next academic year.
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