A private student loan from Discover Bank may be a good option if you have excellent credit and have been considering a variable rate — and are confident that you’ll be able to make more than your minimum payment after graduation. The company also offers personal loans. We review Discover Bank’s private student loan below.
The major draw is that Discover’s student loans have zero fees of any kind. However, they could end up costing you more in interest if you take full advantage of their repayment terms, which are longer than for most private student loan options.
Before you consider any private student loan, max out all available federal aid. Find out if you’re eligible by filling out the Free Application for Federal Student Aid, or FAFSA.
Discover, known primarily for its credit cards business, acquired The Student Loan Corporation in 2010. Since then, it’s grown that $1 billion business to a $9 billion student loan portfolio. In addition to loans for undergraduate and graduate students, there are also options for students in law, medical and MBA programs.
At a glance
- Fixed: 6.24% to 12.99% APR. Variable: 3.87% to 11.12% APR.
- Six- to nine-month grace periods, 15- to 20-year terms.
- No fees of any kind. Deferment and forbearance options available.
The average loan amount for undergrads is $12,500, says Danny Ray, president of Discover Student Loans, although you can borrow up to the cost of your education. The average annual percentage rate for Discover’s student loans was 7.02% as of March 31, 2016, according to the company. By comparison, the highest rate for a federal student loan is currently 6.84%, for parent or graduate PLUS Loans.
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Do you qualify?
|FICO credit score|
(borrower or co-signer)
Discover tends to approve applicants with excellent credit, or more likely, those with a creditworthy co-signer. In fact, according to the company, about 90% of their student loan borrowers have co-signers. But Discover also considers many other factors, such as area of study and potential income, when determining whether a borrower is likely to be able to make payments in the future. Borrowers typically owe less than half their gross annual income.
Your credit won’t be checked until you tick a consent box on the “Credit Check and Other Verification” screen. Borrowers who don’t qualify on their own may have the co-signer option.
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According to Ray, the average timeline from application to approval is 14 to 17 days — but credit approval could take as little as 15 minutes if the borrower has all the necessary information handy, including Social Security number, desired loan amount and monthly income.
Borrowers who take out a student loan from Discover make payments through Great Lakes, a third-party servicing company. In 2010 and 2011, Discover acquired more than 800,000 student loan accounts from Citibank and began servicing those loans directly. The Consumer Financial Protection Bureau found that Discover practiced illegal loan-servicing tactics between 2011 and 2014, which affected some borrowers whose loans were originated through Citibank.
Like most private lenders, Discover lets you start to make payments while still in school, set at $25 per month. If you can’t afford it, you can defer payments while in school, but interest will accrue during that time.
Once you leave school and start making payments, there are several borrower assistance programs available should you have trouble keeping up. For example, you can get a three-month extension on your grace period as long as your first payment is less than 60 days late. Or you can take up to 12 months of forbearance — a temporary halt to making your payments — over the life of your loan. There’s also the option to reduce your payments to about the equivalent of your monthly interest, or at least $50 per month, for up to six months.
Where Discover shines
It’s nearly impossible to find a student loan company that doesn’t charge an origination, late-payment or insufficient-funds fee. In that respect, Discover stands alone. That can make a significant difference when it comes to managing the cost of taking out student loans.
Discover gives borrowers the opportunity to earn a 1% cash-back reward for a 3.0 or better GPA with every academic term — that’s not something you’ll come across with other private lenders. The best way to put that money to use: Pay down your accruing interest, which will then reduce the amount you pay overall. And, as with federal student loans, Discover also offers a 0.25% interest rate reduction for auto-debit payments.
Where Discover falls short
Longer terms than most private loans
Most private lenders offer 10-year terms, but Discover’s repayment terms range from 15 to 20 years, starting after the grace period ends. Your monthly payment may be lower than with a 10-year term, but you’ll ultimately end up paying more in interest. Think of it this way: If you owed $10,000 with a 7% APR, you’d pay $116.11 per month with a 10-year term. By the end of the loan, you’d have paid about $4,000 in interest. For the same amount with a 15-year term, you’d end up paying over $6,000 in interest — and your payments would only be about $26 less per month. The bottom line: If you take out a Discover student loan, try to pay more than the minimum each month to shorten your repayment time; there’s no penalty for prepayment.
Use Discover’s prepayment calculator to see how extra payments could affect your loan.
HISTORY OF ILLEGAL LOAN SERVICING PRACTICES
Between 2011 and 2014, Discover practiced illegal loan-servicing tactics, including overstating the minimum monthly amount due on nearly 7,000 borrowers’ loan statements and failing to provide some borrowers with information they needed to get a student loan tax deduction, according to the CFPB. The illegal practices affected borrowers whose loans were originated through Citibank and were being serviced by Discover.
Discover also broke debt collection laws during that time by making more than 150,000 loan collection calls early in the morning or late at night. In July 2015, the CFPB ordered the bank to refund a total of $16 million to more than 100,000 borrowers.
“Discover has already provided account adjustments or issued checks to nearly all affected customers,” Discover spokesman Robert Weiss says. The bank is trying to locate affected borrowers who have changed their addresses in order to reimburse them, he adds.
Fewer protections than federal student loans
Although Discover offers several options for dealing with times of financial difficulty, private loan repayment options just don’t stack up to federal programs like income-driven repayment, which could make your monthly payments as low as $0 per month and could help you qualify for forgiveness.
Higher interest rates than federal loans
Discover offers both variable and fixed rate options. Starting variable rates are usually lower than fixed ones; however, in general, it’s better to go with fixed rather than variable rates on private student loans so that your rates aren’t affected by changes in the market.
Since Discover’s fixed rates start at 6.24%, even borrowers with excellent credit will end up with a rate that’s higher than current federal rates. Even if you’ve maxed out your federal aid, there are other private student loan options that offer lower fixed rates for borrowers with great credit. Shop around to make sure you’re getting the best deal.