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Many students looking for a college loan have a new choice: RBS Citizens Financial Group.

The U.S. banking subsidiary of Royal Bank of Scotland Group PLC (RBS, RBS.LN) is expanding its student lending business beyond the 12 states where it has bank branches--an expansion that coincides with some banks pulling back from a business that has raised concerns about the level of debt young people have to shoulder.

But RBS Citizens is putting a stake in the ground--right next to banks like Wells Fargo & Co. (WFC) and Discover Financial Services (DFS), which have also said they wants to grow rather than shrink student lending.

The cost of college continues to rise and private student loans provide financial flexibility beyond government student loans, said Brendan Coughlin, the president of RBS Citizens' education finance business. "I don't believe" student lending "is the next bubble," he said. "There is no doubt that the cost of education is outpacing inflation, and it's an issue for America."

The bank started to make student loans in 2009, and the retrenching of some banks made the decision to expand easier, Coughlin said.

"Some of the students who banked with us were able to get a loan to one school but not the other" because RBS Citizens would lend only in the states where it had branches, he said. Now students can apply to schools in all 48 contiguous states and apply from states where RBS Citizens has no branches.

RBS Citizens, which is branded Charter One in Midwestern markets, was a rapidly expanding bank before the financial crisis, growing from its New England roots into the Midwest. But the mortgage-related trouble of its parent has raised speculation over whether the Edinburgh, U.K., bank might sell rather than expand its U.S. banking operations. RBS had to be bailed out and is majority owned by the British government.

But those speculations have died down, and the bank has been growing its commercial banking business lately. Student lending another business where RBS Citizens believes it can gain market share.

The bank will only lend to students at not-for-profit universities, about 90% of loans are co-signed, usually by a parent, and those who don't have a co-signer have to show income. RBS Citizens doesn't disclose its default rate, but Coughlin said it is "very significantly below" the 8% for U.S. government student loans.

J.P. Morgan Chase & Co. (JPM) recently decided to restrict student loans to customers who do other business with the bank. "The private student loan market has continued to decline and government programs have expanded to help more students," the bank had previously said in a statement.

U.S. Bancorp (USB) stopped making student loans all together last year. The Minneapolis bank had said it was "relatively small" in private student lending and "decided to ... move resources to other areas."

Citigroup Inc. (C) sold its Student Lending Corp. as part of its decision during the financial crisis to slim down. Discover Financial Services (DFS) bought it, and wants to expand.

"As some look to exit the business, we'll capitalize on these opportunities to strengthen our market position," Mark Graf, chief financial officer of Discover, said at an investor conference Tuesday. "College students are upwardly mobile and mostly new to Discover, allowing us to establish an early relationship and to subsequently build on it," Graf said.

Wells Fargo's Chief Financial Officer Timothy Sloan told Dow Jones last month, "The last time I checked, a third of the people in this country go to college and a good portion of those need to borrow some money to do that." Like RBS Citizens now, it too lends to customers who do their banking with Wells Fargo as well as with students who, at least initially, only need a loan.

"Private student loans are a risky way to finance higher education," said Haley Chitty, the director of communications at the National Association of Student Financial Aid Administrators, an advocacy group. "They lack the consumer protections and benefits of federal student loans." But "these loans are a vital resource for some students looking to cover the growing gap between rising college costs and what they can get in student aid and federal student loans."

Coughlin said he makes students and parents aware of the risk, and in some cases discourage them from borrowing because a government loan fits better. But for other borrowers, the terms "are very competitive with the government program. For some families, this is actually the more affordable option."

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

--Andrew R. Johnson contributed to this article.

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