Credit unions may want to cater to the needs of a segment of the U.S. population that some lenders may have written off: debt-burdened recent college graduates.
Despite wave after wave of headlines highlighting the pessimism of Americans under 30, a new survey from MagnifyMoney.com suggests that younger folk are actually a lot more optimistic about their futures than previously believed — and have an appetite for loans to help finance those futures.
The survey revealed that although more than 60% of recent university graduates are facing a life of paying back their student debts, 58% think their finances are better than their parents were at their age — belying the popular notion that Millenials are mired in gloom and doom.
"This is the first wave of Millennials that graduated into a growing job market, and their measured optimism reflects growing opportunities for those on the right side of the education divide, whether or not they have debt," said Nick Clements, CEO of MagnifyMoney.com.
Of those free of any student loans, 64% think they will be better off their parents in the future; for recent grads with student loan debt, the figure was a surprising 63%. Even recent graduates who are confronting a minimum of $50,000 of debt, 61% are confident they will be better off financially than their parents in the future.
The survey also suggested that grads are getting their debt balances under some control (or at least believe they have the capacity to do so). In that vein, some 60% of recent graduates with loans think they will be able to pay them back in 10 years or less. However, for graduates facing particularly onerous debt — at least $50,000 — only 33% adhere to that timetable. Of that segment, 38% believe it will take more than 20 years to pay off the debt or that they will never be able to pay it back.
Among all student loan borrowers, just 5% said they will "never" be able to pay off all the debt.
The survey also found many graduates are not even aware of some government programs designed to alleviate that very burden.
The MagnifyMoney survey found that only 40% of its respondents had even heard of the Federal government's "Pay As You Earn" or the "Income-Based Repayment" programs. Under these programs, college graduates who took out federal student loans can have their payments capped at between 10% to 15% of their discretionary income, while loans not paid off after 20 to 25 years will be forgiven.
"While there is a growing number of private lenders ready to refinance student loans and offer lower rates, every Federal borrower should first look at these income-based repayment options," Clements said. "They are incredibly generous, and offer a means to avoid a lifetime of debt for many borrowers."
Although many young Americans find themselves awash in debt, strangely most do not carry any credit card debt (only 32%, in fact of all grads; and 39% for those with student loans). Clements partially attributed this to the 2009 CARD Act which eliminated marketing on campuses by credit card companies.
"The incidence of credit card debt among recent grads is significantly lower than among the broader population, which is closer to 40%... [and] also a reveals a healthier approach to debt by this post-financial crisis cohort," he stated.
But Clements cautioned that it remains unclear if college grads will continue to avoid the lure of credit cards or not as they age.
"We still don't know if avoiding credit card debt is the 'new normal' for this generation. Credit card marketers will certainly be sending them offers in the mail regularly, and their discipline may not last a lifetime," Clements said.
Still, the survey suggests that Millennials will eventually seek out loans for autos and homes (and other big-ticket items) much like their parents and grandparents did — but with some caveats.
"Credit unions are uniquely positioned to take advantage of the needs of the sub-group of the population," Clements told Credit Union Journal. "But credit unions — and other financial institutions — may have to change some of their underwriting rules in order to serve this new field of customers who are living in dramatically different economic times than their forebears did."
For example, Clements cites, if younger people are not acquiring credit cards, they would likely have no credit history and no FICO score. "Under normal circumstances, a person like that would not qualify for any kind of loan," he said. "But suppose they have a decent job with a good income at a successful, stable company like Google? Then they might make a very good creditworthy consumer — even without a FICO score."
The changing nature of the economy also plays into this discussion, with part-time work, freelancing, self-employment or frequent job changes more common now.
In the past lenders would look askance at such things, but financial institutions may simply have to adjust their due diligence to allow for structural changes in the economy and society, Clements suggested.
"The days of someone working full-time at one company for their full career are over," he said. "Job changes and moves may not be such a bad thing anymore, and lenders must realize this when seeking out customers for loans."
Thomas G. Murphy, vice president, student and alumni services and consumer lending at Harvard University Employees Credit Union, a $486-million institution based in Cambridge, Mass., strongly advocates for the idea of credit unions embracing young college graduates as new members.
"This generation of recent graduates has a significant need for financial education combined with transparent and reliable financial products," he told Credit Union Journal. "Their needs are perfectly aligned with the missions and consumer-friendly products at credit unions."
Like any offering to a new group of individuals, credit unions may need to develop new products to meet the needs of this group, but Murphy added he doesn't believe that credit unions need to "overhaul their risk management models to accommodate" them.
Indeed, Murphy thinks any loan products credit unions offer college graduates should be linked to financial education. Even at Harvard, he said, less than 15% of students have received formal financial education, according to HUECU's own research.
"The lack of proper education often leads to costly financial mistakes, poor financial planning, and higher stress," he noted.
Clements suggested credit unions learn from one finance company that has already taken advantage of this potentially huge new market of credit-worthy (but largely unscored) consumer segment — Social Finance Inc. (or SoFi) of San Francisco. "They have done incredibly well, catering to this new market," he said.
Indeed, starting up in 2011, SoFi has already funded in excess of $2 billion in loans, including student loan refinances, plus mortgages, personal loans and other loans.
"Credit unions could follow the example set by SoFi," Clements said... but there's a catch.
"Millennial and recent college graduates are extremely tech-savvy and they demand top-of-the-line mobile technologies from their financial institutions," he said. "Some credit unions really need to upgrade their websites and their mobile services."
But credit unions may already have at least one advantage over banks. "Millennials want to like credit unions, especially since banks have gained such a negative image in their minds in the wake of the financial crisis," he said. "But credit unions will have to modernize to appeal to them."
A number of other studies also indicate that things are not as gloomy for college graduates as once believed. For example, a survey conducted by TransUnion, a Chicago-based information and risk management firm, found that despite the rapid rise in student loan balances over the past decade, such debt has apparently not hindered younger consumers from taking out — and paying off in a timely manner — auto, mortgage and other loans.
"Going to school impacts young consumers' access to credit; while in school, students may be less likely to have a job and generate the income necessary for loan approval. However, most catch up once they leave school — and their ability to catch up has not changed over the past decade," said Steve Chaouki, executive vice president and head of TransUnion's financial services business unit. "Our survey demonstrates that consumers in their 20s with student loans in repayment — that is, once they finish school — are, in fact, able to access credit at levels similar to or better than their peers who do not have student loans."
The survey revealed that after a long lull during the wake of the financial crisis, since 2012, student loan borrowers became very active in opening new auto loans, mortgage originations and credit cards.
"The immense growth in student loan balances does not appear to be driving any different impact on new credit access today than what we saw a decade ago," said Charlie Wise, co-author of the survey and vice president in TransUnion's Innovative Solutions Group.
In fact, young consumers carrying student loan debt are actually experiencing lower delinquency rates than their borrower peers without such debt.
"This is an important finding, because it shows lenders that rather than being concerned about student loan borrowers' ability to manage new credit, this may actually be an attractive marketable group, both in terms of higher credit demand as well as potentially better repayment performance," said Wise. "Lenders looking to attract and maintain relationships with Millennials should find this news encouraging."
Wise told Credit Union Journal he communicates with credit unions all the time, and "their consistent refrain is that they want Millennials as new members and want to do things to appeal to them. I think the bottom line is that credit unions can significantly increase their business by loaning to this large new market without having to abandon their underwriting standards."
Speaking from the perspective of lenders, Brendan Coughlin, head of auto and education finance at Citizens Financial Group, said his institution is committed to partnering with its customers during each and every important stage of their life.
"Going to and paying for college is an important milestone; and we want to work with borrowers to help them realize their goals through solid financial management," he told Credit Union Journal. "Whether they chose to borrow from us or not, our goal is to advise our customers on the best solution for them so we can earn their trust and loyalty. As a responsible student lender, making sure that borrowers understand their options throughout the life of their loan is an important part of our approach."