Lending habits among American consumers have been shifting since the Great Recession began in 2008. Consumers are not as willing to take on more debt, which is a positive trend for borrowers over their heads in credit card and other expensive loans. But for credit unions, the slap in the face of the lending portfolio has roughed up the bottom line. A new white paper from the CUNA Lending Council addresses the question, "Should Credit Unions Offer Private Student Loans?"
Private student loans are an opportunity worth considering as lenders seek more options and income. Some readers will recall the bad old days of student loans when financial institutions would lend funds for college expenses with few questions asked. The money went directly to the students, often without the school involved. These loans financed quite a few motorcycles as well as trips to Amsterdam. And if finances went south, bankruptcy was used to get out of paying back the debt. Times have changed; schools now certify the student's financial needs. Loans are paid directly to the college and it's rare to have the loan discharged through bankruptcy. More regulations have been added.
The cost of a college education has increased more than the rate of inflation or salaries. Low-income college graduates or those burdened by student loan debt are questioning the value of their degrees. With unemployment hovering around 9% and an economy that continues to limp along, the prospect of entering years of indebtedness is also causing some high school graduates to pause and reflect on the value of a college degree. But a large number of these graduates and their parents still regard a college education as a good investment and a ready vehicle to a middle-class lifestyle. Government guaranteed loans, grants and personal savings no longer cover the cost of college for a number of families; students and their parents are turning to private student loans to finance the gap. Credit unions are relatively new to this type of lending but they can offer value by educating students and parents and serving as trusted advisers through the complex maze of student lending. And trusted, honest advice about financial matters is worth its weight in gold.
College students are a difficult market to reach. If they are looking for credit, they will typically go to a bank or college financial aid officers and ask for recommendations. Like consumers — and even members — who seek a mortgage, many are unaware that credit unions offer student loans.
For a number of credit unions that are on the sidelines, offering private student loans offer too many challenges: a complicated loan process for lenders as well as students and parents as well as increased regulation. But for others, these same challenges and the lack of an active secondary market are reasons for partnering with a CUSO. Pooling resources and risk in this market truly makes sense. Today, virtually every private student loan provider encourages borrowers to exhaust free and cheap funding options before turning to a private student loan. Many of the bad actors of pre-2008 are no long in the business. The risk is there, of course, but so is the potential for income.
So, as the CUNA Lending Council paper asks, "Should Credit Unions Offer Private Student Loans?" There is no definitive answer to this question, of course. What isn't unsure is the growth and popularity of student loans (see chart at left). In conversations with chief lending officers, the consensus is that attitudes are evolving and this may signal a permanent change in lending behavior. Consumers are less comfortable about using debt and view credit as a "necessary evil," according to Jason Osterhage, chief lending officer, Delta Community Credit Union, Atlanta. If credit unions can lend differently by offering education along with their loan products as well as an honest appraisal of the member's options—serving as a trusted advisor—they will out behave the competition and have a better chance of succeeding.
Student Loan Market Evolves
Like other areas of the economy, a market contraction occurred from 2008 to 2010 as the amount of private student loans fell from an estimated $17 billion in 2007-08, to $8.5 billion in 2008-9, to $6.3 billion in 2009-10, according to the College Board.
Even though smaller credit unions are using the services of CUSOs to offer student loans, there is a correlation between size and those credit unions offering student loans. About one-third of credit unions with more than $1 billion in assets offer students loans while nearly 1% of those credit unions with $20 million or less in assets offer these loans.
The University of Southern California Credit Union's experience is a textbook case study of creating value and differentiation with private student loans.
The $332-million organization located in Los Angeles originated private student loans from 2007 to 2009. The last loan was made in 2009 after the credit union decided to place a moratorium on private student loans because of the changes in the marketplace.
It's noteworthy to evaluate USC CU's private student loan performance since most credit unions lack a history with this type of loan. Of the $12.1 million in its private student loan portfolio, $6.2 million is currently in repayment, $2.3 million in loans are in the grace period and $3.2 million accounts for loans for students still in school
Of the loans currently being repaid, the delinquency ratio is 0.16% and there were only two charge-offs totaling $22,000, according to CEO Gary Perez.
Borrowing funds to go to college is the most important financial decision a young person can make. Providing private student loans in this new environment favors credit unions that are true to co-operative principles.