By Andrew R. Johnson
Discover Financial Services (DFS) is no longer charging
student-loan borrowers a penalty fee when they pay their bills
late.
The move, which applies to all new loans made as of March 29,
comes as Discover is aiming to bulk up its student-loan business in
order to diversify beyond credit cards, and as the country's top
consumer-banking watchdog scrutinizes the affordability of such
loans.
In addition to charging no late fees, Discover also eliminated
fees assessed when a student borrower's payment is returned, often
for lacking sufficient funds in their bank account.
"This is one way we can make our loans more affordable to
students," PK Parekh, vice president of student loans for Discover,
said in an interview Tuesday. "They don't have to worry about any
kind of unexpected fees."
Discover's late fees varied depending on the size of a
borrower's monthly payment and other factors, but often cost about
5% of the missed payment amount, Mr. Parekh said. Discover
typically charged $10 for a returned payment, he said.
"It was something that we could afford to do in order to make
the loans more affordable and make the terms easier for the
borrower to understand," Mr. Parekh said.
He declined to discuss how much revenue Discover expects to
forfeit from the move.
Concerns over student-loan defaults have risen as outstanding
student debt has surged, though much of the concern has centered on
federal loans, which are made to students by the government.
Discover, on the other hand, is one of a handful of banks making
private loans, which analysts say have higher underwriting
standards and, therefore, are less prone to losses than federal
loans.
But the Consumer Financial Protection Bureau, which monitors
lenders' activities related to mortgages, credit cards and other
loans, in February said it was gathering information to determine
how to make private-student loans more affordable for
borrowers.
The agency noted that one of the top complaints it has received
from private student-loan borrowers was the inability to negotiate
better loan terms.
Discover has grown its student-loan business as it looks to
generate revenue outside of its mainstay credit-card business. The
Riverwoods, Ill.-based company purchased a student-loan business
and a separate loan portfolio from Citigroup Inc. (C) in late 2010
and in 2011, respectively.
The company's student-loan portfolio totaled $7.8 billion as of
Dec. 31, up from $4.1 billion in 2010.
Discover, the third-largest private student lender, faces
headwinds this year, though, following the expiration of a
marketing agreement it had with Citi at the end of 2012. Under the
agreement, Discover acquired loans that Citi originated and
marketed under its own brand.
The deal accounted for about half of Discover's newly disbursed
loans last year, the company said in a regulatory filing in
January.
Discover has used the lack of late fees as a marketing tool in
other lines of business. Earlier this year it began marketing the
Discover "it" card, which carries no late fee the first time a
customer is delinquent.
-Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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