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.
Perception
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 guidelinesin 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.
Reality
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 bythe 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 analystMeasure Onein 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:
- Year-over-year delinquencies continued a significant downward trend.
- Overall, delinquency rates are the lowest since before the 2008 economic crisis. Early and late stage delinquency rates averaged 2.8% and 2.2%, respectively, for the latest four quarters and show year-over-year declines of approximately 13% and 11% respectively.
- Charge-off rates are low at 2.2% for the third quarter of 2015. The year-over-year charge-off decline is 6%.
- Loan performance continues to improve with each subsequent origination vintage. Delinquencies and charge-offs have generally declined for each successive vintage in each quarter after origination.
- As of the third quarter of 2015, total balances of the six Consortium Participants edged up 3.5% year-over-year to $66.5 billion, reflecting modest growth of 2.6% in balances for undergraduate loans, which represent 76.7% of all balances. In addition, there was growth of 17.2% in the smaller ‘Other’ program category (10.6% of balances) which includes consolidation/refinance loans and loans that are not coded by the participants as graduate or undergraduate.
Performance
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:
- Educating prospective borrowers before the loan to ensure proper decisions are being made.
- Risk-based pricing with minimum credit score requirements and criteria that strongly encourages a co-borrower.
- School certification to verify enrollment, validate loan amount, and determine fund disbursement.
- Restricting loans to students who are attending traditional four-year public or private schools with a proven history of low student loan defaults.
- Lending directly to students and families within the credit union’s existing field of membership to establish an opportunity for genuine, long-term relationships.
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):
- Less than 1% of loans in repayment were 90-plus days past due.
- Annualized charge off rates stood at less than 0.50%, down 9 basis points from one year earlier.
- Early to mid-stage delinquencies are stable among all seasoned origination vintages, remaining under 2%.
- Credit unions, on average, are recognizing positive return for the cooperative (as defined by the credit union’s individual pricing) that is on par with other asset classes.
- Borrowers, on average, are enjoying average interest rates of 6% with no origination or pre-payment fees and a relationship with a local lender they can trust.
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.