MIAMI-Credit unions shouldn't pay too much attention to negative headlines regarding private student lending, according to the author of a just-completed white paper on the loan category.
There are numerous advantages associated with private student lending, reminded Jim Jerving, who moderated a panel session during the 2012 CUNA Lending Council Conference.The panel of experts, which included successful CU private student loan lenders that participated in Jerving's paper, "Demystifying Private Student Loans," shared benefits of the loan along with tips for running a student loan program well.
Don't Believe Media Hype
Jim Holt, VP of sales for the private student lending CUSO Credit Union Student Choice in Washington, addressed the numerous media reports that have indicated the student loan "bubble" may burst (Credit Union Journal, Nov. 28).
"About eight months ago I became frustrated with numerous articles in the media on private student lending which did not peel the onion back and show the stark difference between private student loans and federal student loans," said Holt, noting federal student loan delinquencies (12.31%) more than double private student loan delinquencies (5.33%). "Furthermore, CU Student Choice has funded close to $820 million in loans for 240 credit unions and our charge-off rate is below 1%."
Ezra Becker, a VP at TransUnion, Chicago, noted that between 2007 and 2012 student loan balances increased by 75% to $893 billion. Federal loan balances are up 97%, while private loan balances are up 4%. During the same timeframe, the average student loan balance per borrower increased 30% to $23,829.
But the key number, he asserted, is that from 2007 to 2012 delinquencies on federal loans were up substantially, while delinquencies on private student loans decreased. "Private student loan delinquencies went down 2%, and have been a stable number in recent years," said Becker. "A stable number, too, allows lenders to price the risk more effectively than a number that is moving."
But he also noted that private student loan delinquencies, compared to other oans, are still high, at 5.33% at the end of Q1, 2012.
Sherry Nelson, educational lending manager at the $1.6-billion UW CU in Madison, Wis., said UW has very low charge-offs and delinquencies in its $71-million student lending portfolio due to what she said is excellent communication. "Once the loans start going into repayment, we keep close contact with borrowers and co-signers. When we find that they are unemployed or underemployed, we also offer short-term solutions to help them out. We have consistently seen that when student borrowers get into trouble, cosigners come in to assist."
Bill Sweeney, CEO of the $80-million CORE FCU, East Syracuse, N.Y., emphasized the importance of financial education. He shared that CORE has an extensive financial education program in local high schools that not only gives prospective borrowers a sound understanding of how to manage their finances, it gets the CU in the door just as the young adult heads off to college.
Education also extends to parents. "You have to be focused when you share costs for a private student loan. You have to run the numbers for the family, really show the exact costs and have limits on what you will lend. The more focused on the facts, and the more educated the entire family is regarding the loan, the better decisions they will make."
Rick Burden, SVP at the $440-million Notre Dame FCU, South Bend, Ind., emphasized the importance of having the college certify how much aid the student needs. "We stared out by doing large amounts, but we cut back to $15,000 a year. We made some adjustments-at the beginning we loaned too much."
Mike Long, chief credit officer at UW, added his CU sets a limit of $40,000 to $45,000. "We think this puts them in a good place to succeed when they graduate."
Vigilance Still Key
TransUnion's Becker added that even with limits in place, CUs have to remain vigilant. "The credit union should understand what's happening with lending, overall, in their area. So if they see a change in their student lending portfolio they will have a better understanding of what may be occurring, basing decisions of a benchmark of sorts, and therefore make more accurate decisions."
Long reiterated the advantages of getting into the private student lending market, citing strong performance of the loans at UW. "Almost 90% of the loans are cosigned and the average credit score of cosigners is 730. If these same people walked into a branch and said give me a $25,000-limit credit card you'd fall all over them. These loans are a real opportunity for credit unions."