As students and families across the country prep for summer vacations, many are also faced with the daunting task of deciding how to pay for college. According to Sallie Mae, increasing tuition costs have forced 46% of families to borrow money to pay for college. The federal government’s student programs, such as the Perkins and Stafford loans, are the best option for students, but many families must also rely on private loans to fill funding gaps. In fact, more than 13% of families used such loans in 2010 versus just 8% two years earlier.
In the past three years, a growing number of credit unions have emerged in the private student lending market. Credit union student lending data is available for the first time in the 5300 Call Report, which presents the opportunity to take a closer look at the industry’s numbers.
More credit unions are offering a private student lending solution (380 credit unions reported at least one outstanding loan), but these loans remain a niche asset class. In fact, 70% of all credit union-held private student loan assets are held by credit unions that have more than $500 million in assets. These loans represent less than 0.20% of the $365 billion in total loans held by credit unions in that asset range.
For the entire credit union industry, private student loans total slightly more than $1 billion, which represents just 0.18% of the $565 billion in total loans held by all U.S. credit unions. Total student loan balances will grow as portfolios mature and more credit unions offer a solution, but even if private student loans are not a primary driver of overall loan portfolios, they can be an important way to diversify balance sheets while also meeting members’ needs.
Click on graph to view larger size. | NCUA 1Q 2011 Call Report Data compiled using Callahan's Peer-to-Peer Software
When reviewing student loan data, credit unions must understand the risk associated with the asset. Recent government reports cite rising defaults among the federal student loan portfolio, so it’s important to remember not all student loans are created equal. Credit Union Student Choice partner credit unions use a variety of risk mitigation efforts to ensure portfolio performance. Unlike Federal student loans that are originated without traditional underwriting criteria, private student loan origination is dictated by strict guidelines, including:
College financial aid offices certify all loans in order to:
Validate loan amount (which reduces over-borrowing).
Determine disbursement dates (so funds can go directly to the school).
Loans are restricted to students who are attending traditional four-year colleges with a proven history of low student loan defaults.
According to an article on InsideHigherEd.com, the spike in federal student loan defaults happened most dramatically at for-profit schools. Approximately 12% of all undergraduate students attend a for-profit college, yet these students represented approximately 27.7% of federal student loan borrowers who entered repayment beginning in October 2008, and nearly half (47.4%) of all borrowers who had defaulted on their loans within two years of entering repayment came from this group.
Borrowers must meet minimum credit score requirements, pricing is based on loan risk, and loan criteria encourages a co-borrower.
More than 98% of all loans held at CU Student Choice credit unions have co-borrowers.
Credit Unions are lending directly to students and families within their existing field of membership, providing an opportunity for genuine, long-term relationships.
Although private student lending isn’t likely to balloon most credit union loan portfolios, it does present credit unions with an excellent opportunity to diversify their balance sheet while delivering lasting value to students and families. Making loans can be a risky business, but understanding the risk and employing proper mitigation tactics is the key to building a well-performing portfolio.
The rewards are evident in more than just ROA. Fulfilling a social role by delivering fair-value credit to those in need, establishing new relationships with young adults and families, and helping students achieve a critically important milestone in life are all part of the equation. If that equation is balanced with a well-structured student loan portfolio, then credit unions can measure those results in long-term relationships and lasting member value.
Credit Union Student Choice is the leading provider of higher education financing solutions to America's credit unions. A credit union service organization (CUSO) that launched in May 2008, Student Choice now works with 200 credit unions across the nation. Visit www.studentchoice.org for more information or contact Jim Holt, VP Sales Operations at 815-577-3334 or by e-mailing firstname.lastname@example.org.
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