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By CU Student Choice
As we roll into spring 2016, credit unions across the nation will soon be rolling out a bevy of new products and well-intentioned initiatives, many of which will be aimed at loan growth and young adult member development — two pressing needs for almost all credit unions.
One product that directly addresses both needs is private student lending (PSL). While this type of lending has grown significantly in the credit union space over the past several years (growing from $1.5 billion in the fourth quarter of 2011 to $3.5 billion in the final three months of 2015, it’s also a product that’s often been viewed with a skeptical eye.
This skepticism is not surprising considering the relative newness of the asset class, heightened regulatory scrutiny (including from the NCUA, which spelled out very clear PSL guidelines in 2014), and perhaps most importantly, news headlines lamenting rising student debt and delinquency. If one were to only read the headlines, it would be easy to dismiss the significant opportunity at hand.
Many lenders — including startups, regional and national banks, and, of course, hundreds of credit unions — are finding success in the PSL space, not only in delivering a much-needed product set (ranging from traditional in-school loans to innovative consolidation options) that connects with young adults, but also in delivering products that will perform in the long-term. Indeed, according to a recent report by the Brookings Institution, “2013 data confirm that Americans who borrowed to finance their educations are no worse off today than they were a generation ago. Given the rising returns to postsecondary education, they are probably better off, on average.”
In considering the “significant growth” of PSL assets in the credit union space as mentioned above, it should be noted that credit unions are taking a measured approach to entering this asset class, attracting young adults and delivering fair value without compromising their institutions’ balance sheets. According to NCUA Call Report data from 4Q2015, of the 719 credit unions engaged in PSL, the average PSL loan concentration is just 1.04%.
Also, when reading headlines about rising debt and delinquency, it’s important to understand that private student loans make up just 7.5% of overall student loan balances. All too often, these loans are mistakenly lumped in with the massive federal student loan portfolio when the issues of delinquency and default are discussed, even though their performance is drastically different.
In fact, according to industry analyst Measure One in a December 2015 report, loan performance metrics have continued to improve for the nation’s largest active PSLs and holders of student loan debt. The six participants analyzed in the report account for the majority of both outstanding private student loans and new originations. Among the report’s highlights:
While those numbers are strong and improving, what’s even more impressive is the performance of loans originated by credit unions. Unlike some of the largest PSLs, credit unions are unburdened by legacy loans tied to the reckless heyday of private student lending, and have built sustainable lending portfolios by implementing several key principles, including:
Strong performance numbers seem to be validating this disciplined approach. Nearly 250 credit unions utilize the Credit Union Student Choice lending platform and, combined, have nearly $1.8 billion in outstanding private student loans. Of that total, 60% ($1.1 billion) is now in full repayment status.
In reviewing undergraduate loans only, comprising $836 million of the most seasoned loans in repayment (as of the fourth quarter of 2015):
When credit unions first began offering private student loans through the Student Choice platform in 2008, they did so with a desire to help their members responsibly pay for college and with the belief that proper underwriting would yield solid performance and long-term member relationships.
Now, nearly eight years later, the numbers are telling a very promising story. More than 70,000 borrowers have now worked with a credit union to fund the most important decision in their young financial lives. The rewards of that relationship are not only paying off in the short-term, but will yield positive results for many years to come … for both credit unions and members.
This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.
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March 7, 2016
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