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Chase Exit from Student Loans Could Mean Leaving Some Borrowers Behind

Chase may have created an opportunity for other bank lenders by abandoning the market at a time when loan demand and the cost of college is rising and federal loans have become more expensive. Non-bank lenders, who lacked working capital, were among the 40 or so lenders who have abandoned student lending while some well-capitalized banks such as Wells Fargo and PNC have hung in. The lenders also wield a hammer that providers of other unsecured debt don't have: private student loans can't be discharged in a bankruptcy filing unless the debt creates undue hardship on the borrower, providing the lender with a backstop against defaults.

Wexler mentioned auto loans as an example of a market that Chase hopes to expand to. Along with capturing more auto loans, will Chase be able to recapture its student loan customers when and if they are ready to buy a car?

Chase's Wexler did not comment on whether it was counting on old student loan customers to be new auto loan customers or, by the same token, whether the burden of student loans might bar a significant number from the auto loan market in the near or long term. "All loan applications are decided upon based on credit risk and other risk factors," she said.

This borrower cohort has already been voting with its feet, however, as the New York Fed pointed out in its April survey, "Young Student Loan Borrowers Retreat From Housing and Auto Markets," which found that people with student loans had abandoned the auto market and all other non-student debt since the beginning of the recession over five years ago. Meanwhile, credit bureau Experian finds that auto lenders have ramped up lending to people with subprime credit scores. Subprime loans now make up 10.38% of new auto financing and prime loans 14.46%. No distinction was made between those with student loans and those without them.

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