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In order to make its student loans more attractive, Discover Student Loans, a unit of Discover Financial Services (DFS - Analyst Report), has decided to cut down the interest rates on its fixed rate student loans for undergraduate, graduate and post-graduate students. The company is now offering fixed rate loans with an interest rate beginning at 5.49%.

While the health professional, law, MBA and graduate student loans of Discover Financial carry an interest rate between 5.49%–7.89%, undergraduate student loans have a range of 5.49%–9.99%. Thus, apart from some undergraduate students, most students can get loans at lower rate than the Federal Direct PLUS loans, which carry a fixed rate of 7.9%.

Half of the graduate students will also get loans at a lower rate than the Unsubsidized Federal Stafford Loans, which carry a 6.8% interest. Moreover, the lack of origination fees as compared to the 4% charged by Federal Direct PLUS loans and 1% by the Unsubsidized Federal Stafford Loans acts as an added advantage for Discover Financial.

Additionally, the company does not charge any late payment or returned payment fees. Even the variable rate student loans of Discover Financial are at par with the Prime Index (3.25% at present).

The low rates should help attract more students toward Discover Financial’s student loans. The company’s student loans are gradually gaining popularity. This is also boosting the income of the Direct Banking segment of Discover Financial.

We expect the company’s earnings from student loans to continue growing, buoyed by the low rates. Discover Student Loans is among the largest private student loan providers in the U.S.

Discover Financial carries a Zacks Rank #2 (Buy). Other companies worth considering in the financial sector are Regional Management Corp. (RM - Snapshot Report) – Zacks Rank #1 (Strong Buy), World Acceptance Corp. (WRLD - Snapshot Report) – Zacks Rank #2 (Buy) and Vantiv, Inc. (VNTV - Snapshot Report) – Zacks Rank #1 (Strong Buy).

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