Wells Fargo & Company (NYSE:WFC) remains committed in offering student loans despite the exit of other major banks in the business and a stringent scrutiny from regulators concentrating on the private student lending market.
Since the 2008 financial crisis, Wells Fargo increased its exposure in the private student lending market. Based on data provided by the banks to investors, its student loan portfolio rose by 6% over the past year. Wells Fargo is currently the second largest financial institution offering student loans behind Sallie Mae Corporation (NASDAQ:SLM) with 25 million clients and it is primarily engaged in offering products and services on education including 529 college savings plans.
John Rasmussen, head of education finance at Wells Fargo explained that offering student loans is a part of the banks’ strategy when asked about its reason in continuing the business. He said, “I get that question asked fairly commonly,” especially when another bank exits from the business. Rasmussen added, “We sort of hold ourselves out in the industry as America’s community bank. We look at this and say, geez, our communities need us, our customers need it.”
The risk in offering student loans is likely small for Wells Fargo because it only accounts a small portion of its total loan portfolio. According to Rasmussen, the bank is working with the Consumer Financial Protection Bureau (CFPB) in developing new programs to modify delinquent student loans.
Rasmussen also said Wells Fargo’s private student loan origination is stable and the bank plans to continue to expand the business. Data from College Board Statistics showed that Wells Fargo held 16% market share in the market in 2009. The following year, its market share in the student lending market climbed to 25%.
Wells Fargo previously stated that its student loan origination increased by 50% after acquiring Wachovia. Last year, the bank reported that its revenue from Educational Financial Services went to 2%.
According to Rasmussen, Wells Fargo is looking forward to grow its student loan business unlike its peers in the industry that recently cut back or exited from the student lending market. “We have a long track history of lending to families and students. We look to grow,” said Rasmussen.
Last week, JP Morgan Chase & Co. (NYSE:JPM) decided to completely discontinue offering student loans while U.S. Bancorp (NYSE:USB) exited last year. Citigroup (NYSE:C) and Bank of America Corporation (NYSE:BAC) stopped offering students loans in 2010 and 2008, respectively.
Last August, President Barack Obama signed a bipartisan bill to reform the student loan system in the country. The bill mandated the reductions of interest rate for the academic year 2013 to 2014 for under graduates from 6.8% to 3.86% and the interest rate for graduate student rates declined to 5.41%. In addition, the bill established an interest rate cap to prevent financial institutions from imposing very high interest rates and ensure that student loans will remain affordable. The interest rate ceiling for undergraduate students is 8.25%, graduate students 9.5%, and Plus loans 10.5%.