Student loan debt is not just a financial problem for consumers. It’s an emotional problem too.
When Mike Crawford and his team at Fifth Third Bank in Cincinnati were looking for new ways to meet the needs of millennial customers a few years ago, they came to the conclusion at a focus group where discussions about student loan debt brought up a 30-year-old Borrower to tears.
“The best innovations don’t usually focus on new functional needs, but how do you fill the gaps in emotional needs?” Said Crawford, vice president and senior manager of digital-first product development at Fifth Third, $ 185 billion in assets. Dollar. “One problem with this generation is feeling that the debt of a student loan is different from that of a mortgage or a car loan, that they can’t get out of it and have no control over it.”
In 2017, the bank launched Fifth Third Momentum, an app that automatically rounds up customer debit card purchases to the nearest dollar and assigns those amounts to their student loan balance. To date, the app has been downloaded almost 100,000 times; around two thirds of the users are millennials and one third are from the older generations.
“The idea of how to create that accountability, but not in a shameful way, was the root of our attempt,” Crawford said.
Momentum isn’t the only tool that helps consumers manage their debt burden, but it’s one of the few that is offered directly by a bank. Some banks, including Citizens Financial Group, Discover, and Wells Fargo, Manage or refinance private student loans. But few have developed specific products to help customers relieve student debt.
A number of fintechs, including FutureFuel.io, Savi, and Summer, are stepping in to fill that void: helping students figure out what state and state lending or repayment programs they are eligible for, and how to sign up for what what is due to them is best suited to their situation. These services can also assist students with strategic personal loan refinancing and other advice.
You see yourself as a complementary partner to banks and are slowly pushing for bank partnerships.
Their argument: banks can benefit from helping their customers lower their student loan payments because borrowers who potentially shed hundreds of dollars a month can keep their bills under control, make the leap into their home or other major purchases, and ultimately more Loyalty to your financial institution.
Some of these startups also say the matter is urgent. Direct federal loan payments will be on hold until September under the Coronavirus Relief Act, but borrowers will have to resume payments in October. At the same time, some older federal loans and private loans were not covered by this relief measure.
John Thompson, chief program officer at the Financial Health Network, acknowledged that student loan payments are one of several challenges people are currently facing, and not a top priority for everyone.
But “for many people, dealing with student debt is early in their financial lives,” Thompson said. “When actionable advice comes from a bank on how to deal with student debt, it is critical to building loyalty and trust.”
Solve the problem with the student loan
In its latest report on the economic well-being of the U.S. household, the Federal Reserve found that by the end of 2019, 43% of college students, or 31% of all adults, were in debt (mostly student loans, but the debt comes in the form of credit cards , Home equity lines of credit, and other loans) for their education.
Currently, borrowers owe a total of $ 1.6 trillion in student loans, according to the Federal Reserve Bank of St. Louis.
The effects of student loan debt can also be measured in terms of financial health. The Financial Health Network’s US Financial Health Pulse poll in May found that only 18% of those with college debt are financially healthy, compared with 36% of those with no college debt. The Financial Health Network takes several factors into account, such as the ability to pay bills on time and have sufficient cash.
Savi is a startup that is addressing this problem by combing national and state repayment and forgiveness programs for its users and assigning them the best option – say, a forgiveness program based on the borrower’s profession. Users can enter their credit information manually or sync it with Plaid, and Savi will pre-fill out the application forms to enroll in the appropriate program.
Savi is available to customers or members of partner organizations. The financial services provider TIAA, which owns the TIAA Bank, is such a partner.
Savi is offering those financially harmed by the pandemic a lightweight version of the software for free over the next several months.
Tobin Van Ostern, co-founder of Savi, sees his tool as suitable for banks in two ways: to free up the cash flow of their customers and to support those who are in financial need.
“If we can improve the financial health of their end users, it will have a broad, positive ripple effect,” he said. “If we save $ 150 a month, that’s instant cash flow that people could put aside for retirement or to buy a house or car.”
On the flip side, customers who have lost their jobs or are in financial need will have more trouble paying off their other debts. Getting a temporary hold on their student loan payments with an income-oriented amortization plan increases their chances of staying on top of other bills.
Consumers can use the basic version of Summer, a similar service, for free. You can organize your loans in a dashboard, check eligibility for 100 support and repayment programs, compare options, submit your applications and much more. A premium version includes financial advice and other perks.
Will Sealy, co-founder and CEO of Summer, said the startup is in talks with 40 banks and credit unions to integrate it into its service and collections unit.
He agrees with Van Easter when he sees the benefits of summer for financial institutions as twofold: an opportunity to add value and avoid defaults and to reduce defaults. The latter is particularly relevant during the pandemic.
“Financial institutions see value in improving the cash flow of existing customers who are at risk of already owing the institution,” said Sealy. “With the CARES bill of $ 600 per week unemployment benefits expiring in July and government support for most customers expiring in the fall, they are realizing that there are potentially millions of people with mortgages and Car loans defaulted and credit card payments fail. “
Institutions can also use this tool to be proactive. For example, if a customer’s checking account balance drops significantly, the bank could potentially target that customer for an income-driven repayment plan. Customers who are unemployed may be eligible for a monthly payment of $ 0.
A third service for student loan borrowers is FutureFuel.io. Not only does this tool walk users through the options of the repayment plan and help them apply for loan waiver, but it also has features that provide change on loan balances and allow users to reclaim money for purchases from specific merchants.
FutureFuel.io’s service is available to customers of the challenger banks Chime and MoneyLion. The company has also partnered with credit unions, most of which offer their services as employee benefits, but rollouts for members of the credit unions are planned.
“Not only does this give banks the ability to effectively grow their deposits, it also gives banks the ability to help these consumers put that money into wealth creation and a nest egg,” said Laurel Taylor, founder and CEO of FutureFuel .io.
Depending on the company, these tools can use an application programming interface, a hybrid approach of API and embedded framed widgets launched from the institute’s own website, to label a web link to a co-branded version or as a white product.
“The way to build more profitable customers,” Thompson said, “is to invest in their financial health.”