Where federally guaranteed student loans were once reasonable profit-makers for private lenders like banks and credit unions, that situation changed in 2010 when the federal government began making direct loans to college students. In the 2014 to 2015 academic year, private lenders issued $9 billion in new student loans, about 9% of all loans in that period, according to a June 2016 report from the American Enterprise Institute.

Private-lender profits were further eroded by low interest rates, and although low rates continue to be problematic, interest income is interest income and private lenders are trying to boost their share of the student loan pie. Wells Fargo & Co. (NYSE: WFC) and Amazon.com Inc. (NASDAQ: AMZN) have joined forces in a unique way that stands to benefit both companies.

Students who are members of Amazon Prime may have the interest rate on student loans from Wells Fargo reduced by 0.5% and the bank will reduce the rate by a further 0.25% for borrowers who enroll in an automatic monthly repayment plan. Students pay just half the regular $99 annual membership to join Amazon Prime and get to enjoy the other benefits that are included in the program.

What’s in it for Wells Fargo, of course, is more interest income on increased lending volume. And Amazon wants to get students accustomed to the value of Prime and keep them paying the membership fees for years after they graduate.

For private lenders, it’s an uphill battle. The direct federal loans are offered at fixed rates (3.76% for 2016-2017 Stafford loan) and students don’t need a co-signer to qualify for the lowest rate. The federal loans also include an income-driven repayment plan that caps monthly payments at a percentage of the borrower’s earnings.

Not everyone is impressed. Pauline Abernathy, vice-president of the Institute for College Access and Success, told The Washington Post (which is owned by Amazon CEO Jeff Bezos):

It [the Wells Fargo/Amazon Prime program] is a cynical attempt to dupe current students who are eligible for federal students loans with a record-low 3.76 percent fixed interest rate into taking out costly private loans with variable interest rates currently as high as 13.74 percent.

The average debt of graduates nearly doubled between 1994 and 2015, and the percentage of college graduates who held student loan debt rose from 53.7% to 70.9%.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.