Should credit unions consider making student loans to students' parents, instead of the students themselves?
That's what Citizens Financial Group Inc., a Providence, Rhode Island-based bank, is doing, having recently introduced a rather unique private student loan product whereby the borrower is not the student but someone who is financially supporting a student. Under the terms of the loan, the beneficiary of the funds — the actual student — isn't actually liable for any of the payments or liabilities.
Brendan Coughlin, president of auto and education finance at Citizens Financial, told Credit Union Journal that the loan is "particularly of interest to parents or family members that have the credit and financial footing to take on debt on behalf of a student and 'shield' them from the debt associated with higher education degrees these days."(Citizens Financial already offers a traditional private student loan that students can take out in their own name)
In addition, said Coughlin, since Citizens doesn't charge any fees — neither origination nor disbursement fees — he anticipates families will save an average of $627 on fees with the student loan.
Some credit union executives think that a student loan product of the type Citizens has in its portfolio would make an ideal offering for credit unions themselves.
Student loans currently occupy not only a very small slice of loan products offered by credit unions overall, but also of the whole private student loan market. According to NCUA, federally-insured credit unions had about $3.15-billion in student loan volume outstanding as of December 2014. That figure has soared about 20% in just a year, but remains dwarfed by the size of mortgage and auto loan businesses of credit unions (which range in the hundreds of billions of dollars outstanding).
Furthermore, Mike Long, chief credit officer at the Madison, Wis.-based $1.9-billion-asset University of Wisconsin Credit Union (UW Credit Union), estimates that credit unions account for only 2% of the total private student lending market in the U.S., suggesting tremendous potential upside for the movement in this sphere of the vast loan market.
The numbers involving the broad spectrum of student loans are mind-boggling — according to a report from Measure One, a data provider, as of the third of quarter 2014, federal student loans outstanding balance totaled some $1.13 trillion; while the entire private student loan market amounted to just $91.8-billion. Moreover, CU Student Choice points out that private student loans issued by credit union account for only about 7.5% of overall student loan balances outstanding
But, for now, many credit unions appear reluctant to enter the field of student lending.
Long estimates that of the approximately 6,500 credit unions in existence in the U.S., only about 600 have private student loan programs, while another 700 develop such products in a referral option with Sallie Mae (the nation's largest private student loan provider).
UW Credit Union began offering private student loans in 2005. They had been active in the guaranteed student loan program for many years and were one of the top credit union producers before that program was eliminated in 2010. Now, the institution has more than $300 million in student loan volume outstanding. Over a third of those balances are private student loans. "We were one of the first credit unions to get into private student loan lending," he told Credit Union Journal. "Since 2008, with the emergence of some CUSOs, it has become easier for other credit unions to issue private student loans."
Initially, the UW Credit Union loans were only applicable to students in the UW System but they are now available to students attending any 4-year, public or private, not-for-profit school located in the U.S.
Mike Weber, chief marketing officer of CU Student Choice, a CUSO that enables and facilitates the issuance of private student loans from credit unions to members, said that prior to the onset of the global financial crisis in 2008, credit unions did not really provide many student loans. But that changed with the 2008 founding of CU Student Choice which now accounts for an estimated half of the $3.15-billion in total credit union student loans outstanding
Weber estimates that since 2008 some 60,000 borrowers have taken out student loans from credit unions. Of that $1.7 billion in student loans outstanding, almost one-half are now in full repayment status.
Generally speaking, Weber noted, student loans issued by credit unions have tougher underwriting rules and more strenuous repayment terms than federally-backed student loans. "Plus, our charge-offs are below 1%, far lower than the default rate among federal student loans," he said.
Similarly, Long said that with UW Credit Union student loans, they have only had a 0.2% charge-off rate (compared to about 13.7% for federal loans, according to latest data from the Federal Reserve Bank); while about 56% of UW Credit Union student loans are now in full repayment. Long also noted that UW Credit Union imposes some limitations on their student loans — for example, they work it out such that no borrowers owe more than $40,000 upon graduation.
When the general public thinks about student loans, they likely focus on the gargantuan federal government program (now in excess of $1-trillion in volume, larger than either mortgage loans or consumer credit card debt), which has been marred by high default rates.
"One of the main problems with federal student loans is that they impose little to no underwriting whatsoever, with no concerns about the ability of the students to repay," Long said.
Typically, student loans issued by CUs are more restrictive than loans offered by the federal government — but with far lower default rates. Most credit union/student loans feature co-borrowers. "Almost 90% of our student loans have co-signers, namely parents or guardians," Long said.
Weber points out that the typical person seeking student loan is not necessarily an 18-year-old kid of out of high school. "It can be an older adult who wants more education and training," he said. "They are more likely to have a work and income history and better able to pay back such a loan.'
In contrast, most federal student loans, he said, really follow no underwriting process at all, and they do not even consider the applicants ultimate ability to repay loans — hence the large default rates.
Weber said that his CUSO recommends that credit unions not issue student loans any larger than an aggregate of $75,000 to undergraduates. He estimates the average annual student loan handed out by credit unions falls in the $12,000 range, while the total balances for the average borrower in repayment is around $27,000,
"I'm not sure why more credit unions have not become involved with student loans, perhaps there is a 'fear factor' what with the high rate of defaults witnessed in the federal loan program," Long said. "But more credit unions should realize that with common sense underwriting and proper safeguards in place, student loans can be just as profitable as other types of loan products."
Long commented that the state of the student loan market at credit unions is "probably now where the industry was with mortgage lending about twenty years ago."
As with auto and mortgage loans, credit unions may have very different rules and terms with respect to their student loans.
For example, Tom Murphy, vice president of student & alumni services and consumer lending at the $476-million Harvard University Employees Credit Union (HUECU) in Cambridge, Mass., noted that his organization currently does not provide loans to undergraduates HUECU primarily lends to students enrolled full-time in Harvard University-affiliated graduate programs. HUECU also offers a student refinance loan that requires individuals to have a minimum of three years of employment history, sufficient income to meet debt obligations and a good credit history.
"In contrast to most credit union student loan programs, federal student loans are provided with no co-signer. An 18-year-old student typically has no job, no income history and no credit history," Murphy told Credit Union Journal.
Citing that the new student parent loan product offered by Citizen's Financial is somewhat similarly priced as the Federal PLUS loans offered by the federal government, Murphy noted that it is a "good product" and one that credit unions might seek to replicate. "It's a loan with strong underwriting criteria and which requires fairly vigorous repayment terms, so I think it's something credit unions might look into," he added. "It's a family financing vehicle to augment student financial aid."
Weber also said he thinks that more credit unions will provide student loans and the total volume outstanding should continue to rise. "We have a unique opportunity, as more and more people are seeking to attend college, particularly those who are seeking advanced degrees," he said,
Long also believes the aforementioned new student loan product offered by Citizens Financial is a good idea. And, like traditional private student loans, should be considered by credit unions seeking to enter this business.
"Private student loans perfectly serve the credit union movement's credo of serving the public and membership," he said. "Student loans are a product that is irrefutably in demand and one that serves practical purpose to credit union members like auto loans and house loans."
But the bank product, Long added, seems more like "marketing spin" on products that already exists. "They have basically removed the student from the financial and loan picture," he said.
Long also revealed a perhaps ironic and under-reported aspect of keeping students out of the loan process. "A student can build and develop a credit history with a student loan," he noted. "If you exclude him or her from the loan process and responsibility, he or she will not acquire a credit history and score until much later in their life."