With student loan debt in the U.S. now well beyond $1 trillion, everyone seems eager to get into the debt-reduction business. Some cities will pay down your debt if you move there, while a growing number of employers are making loan payment contributions part of the benefits package. Now some financial institutions are dangling the debt-reduction carrot in front of potential customers — but should you bite?
MarketWatch reports that startup Gradifi, which has previously worked with companies to help payday employees’ student loan debts, has partnered with online bank Radius to create a debit card with the intention of attracting recent graduates, while Fidelity’s in-house lab has created an online tool that allows borrowers to compare and manage their debts.
The card from Gradifi/Radius, which is expected to hit the market in the fall, appears to be a sign of the times when it comes to the latest in student loan payment assistance.
“There’s definitely a market for trying to help people manage their student debt,” Mark Huelsman, a senior policy analyst at think tank Demos, tells MarketWatch. “As long as we don’t deal with this on a policy level you’re bound to see more financial institutions and other companies use student debt as a hook to get customers.”
That seems to be the motivation behind Radius, whose executives tell MarketWatch they hope to use the partnership with Gradifi to double the number of accounts opened by millennials and other student loan borrowers.
Analysts say rewards such as those being offered by Radius and Gratifi are becoming more popular.
In fact, Matt Schultz, a senior industry analyst at CreditCards.com, tells MarketWatch that card issuers are “falling all over themselves” to offer the best rewards and it only makes sense that companies would combine the popularity of cash-back rewards with the something most consumers have: student loan debt.
It’s a “reasonable, understandable thing to do,” he says.
But that doesn’t mean it’s the right decision for everyone, according to some consumer advocates who tell Consumerist that you could be switching out one type of debt for another that could carry more expensive interest rates.
While the terms of Gradifi and Radius’ debit card aren’t currently available, because the card is classified as debit it would be connected to the user’s bank account. This means that any purchases made with the card would automatically be deducted from the account and a balance would not be created as with a traditional credit card.
Suzanne Martindale, staff attorney for Consumers Union, tells Consumerist that it would be important to look at the fee schedule for the Gradifi/Radius card to see if it’s worth using for the cash back function of the card.
“If you already have a bank account that works for you, doesn’t charge high fees etc., then this may or may not be worth using,” she says.
If companies create similar rewards programs for credit cards, the potential issues increase depending on how the cards are used. For example, borrowers could feel the need to pay their student loan payments with the credit card, although that is strongly discouraged.
Additionally, if a user carries a revolving balance, they would need to take into consideration the interest rate attached to the credit card account.
“Furthermore, if you’re repaying federal loans and putting high loan payments on your card because you can’t pay them on time otherwise there may be a better solution for managing your monthly bills,” Martindale says, noting that the federal government offers several free repayment plans for struggling borrowers.
It’s not just credit card and debit card companies that are dipping their toes into the student loan arena. MarketWatch reports that Fidelity recently unveiled a pilot tool to help borrowers.
The tool allows users to view and sort through their loans and different payment options, including free federal government plans for federal student loans. This, Fidelity says, will assist borrowers in better understanding their payments, interest rates, and overall costs.
Additionally, the company is hoping the tool translates into borrowers using Fidelity for their retirement planning.
“We can’t be in the business of helping people plan for the future without helping people figure out the present,” Asha Srikantiah, the director of design, thinking and innovation at Fidelity, tells MarketWatch.
Still, Martindale warns that providing third-party companies shouldn’t be necessary when it comes to managing student loan repayment.
“Borrowers should not need third-party repayment services – and we certainly don’t want to see people pay fees for something they should be able to do with Dept. of Ed for free,” she says. “Even with private loans, this shouldn’t be necessary – but the problem is that we lack clear education loan servicing standards. This is why we urge the CFPB to write industry-wide rules.”
Martindale also notes that the Dept. of Education is poised to overhaul its system to eliminate direct contact with servicers, which should simplify the repayment process in general.