Amazon.com (NASDAQ:AMZN) has entered into a partnership with Wells Fargo (NYSE:WFC) in which the bank will offer a 0.5% interest rate discount on student loans for Amazon Prime Student members. Both prospective students seeking loans to attend college as well as graduates who wish to refinance existing loans will be eligible for the discount. While we do see some potential benefits from the deal, there are risks as well.
Student lending is a growing market, and partnering with WFC should help AMZN add members to its Amazon Prime Student platform. Prime Student is basically the beta version of Amazon Prime. For $49 a year (half the cost of Prime), students get access to free two-day shipping and can stream thousands of TV shows and movies for free. Membership growth on Prime Student would likely translate to membership growth on Prime and higher revenues for AMZN, given how Prime fosters customer loyalty and incentivizes shoppers to spend more. AMZN does not disclose the number of Prime Student members it has, but experts put the number in the millions. Assuming these students would spend more than twice as much per year on Amazon as non-members, the conversion of even 25% Student Prime members to full Prime membership would likely add a few percentage points of growth to the top line.
But associating its name with the highly scrutinized private student loan market could cause damage to Amazon's brand if borrowers run into trouble with their debts, something that we think is more likely to happen in the private student loan market. Unlike with federal loans, interest rates on private loans adjust for credit risk, and private loans have fewer interest rate protection provisions and less flexibility when it comes to repayment plans and the ability to work with borrowers to prevent default. The 0.5% discount might encourage students who qualify for cheap federal loans to take out these costlier private loans. College grads are having trouble finding decent jobs, and borrowers in the private market will have the most trouble paying off their loans if they can't find work (interest rates will rise). The labor force participation rate is near a thirty-year low largely because so many discouraged millennials have stopped looking for work. We expect these issues to persist for the foreseeable future and that the private student loan market will come under increased scrutiny as a result of lenders' refusal to restructure terms with risky borrowers.
The private student loan industry has developed a negative rep for the "poor treatment of borrowers." Wells Fargo certainly hasn't gone unscathed. According to the Consumer Financial Protection Bureau, WFC received the fourth most complaints out of all the private student lenders in 2015. The complaints extend beyond loan repayment issues. According to the survey, 59% of the complaints pertain to interaction and communication issues with the lenders. Amazon's partnership with Wells Fargo is a marketing ploy, but ironically, AMZN is putting its brand at risk by associating with an industry that many believe does not treat its customers right. Amazon is a consumer-oriented business, and the firm's commitment to customer service has helped it build the brand that customers are so loyal to today. Leveraging the perks of Prime to dupe naive students into taking out riskier loans may not sit well with customers.
Partnering with WFC should lead to Prime membership growth over time, but Amazon doesn't need to reach for new customers. There is a risk that AMZN could do more harm than good by associating with the private student loan market, which has a bad rep in many circles. The job market is tough and college grads will continue to struggle to meet loan payments. The negative sentiment surrounding private lenders will therefore persist, if not worsen, in the coming years. Amazon may have to live with some of the backlash.
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