Throughout the past two years, hundreds of mega banks and specialty finance companies fled the private student lending market. At the same time, more than 150 credit unions entered it with assistance from specialized providers. With the 2010 peak student lending season just a few months away, the experiences of these credit unions offer valuable insight.
The window of opportunity remains open
In summer 2008, as the "Great Recession" unfolded across America, the loan industry experienced a meltdown. The shattered secondary loan market dealt a catastrophic blow to hundreds of lenders who relied heavily on this market for the sale of their student loans. Today, few of those lenders show any signs of returning. Those that remain are balance-sheet lenders that fund and hold their own loans – a business model credit unions know well. Recently passed legislation eliminates the role of private lenders in originating Federal student loans, but the new law does not negatively impact the tremendous opportunity for credit unions in the $12 billion per year private student loan (PSL) market. With the cost of college education increasing yearly, and consumers facing depleted savings accounts and reduced home equity, the need for fair-value private student loans to fill educational funding gaps will increase.
Credit unions deliver superior value
The exodus of lenders has created a private student lending marketplace that epitomizes basic supply and demand theory. As loan supply lessens and demand from consumers remains strong, prices have risen, leaving students and families facing average private student loan rates between 10% and 11%.
In the Student Choice program, individual credit unions set their own interest rates. Average rates on the 13,000 loans that have been made are slightly more than 6.2%. These rates save members an estimated $250 million in fee and interest rate expense over the loan life compared to typical private student loans. In just two lending seasons, credit unions involved in private student lending have captured nearly 5% market share and redefined value in education finance, all while adding attractive member relationships to their balance sheet.
Expertise is critical
Much like the credit union industry, higher education finance has a language and culture all its own. For example, a key risk-mitigation aspect of private student lending is loan certification. The loan certification process allows the college financial aid office to "certify" the loan request by validating student enrollment, certifying the requested loan amount is less than cost-of-attendance minus other financial aid, and setting the disbursement date (funds are sent directly to the school but made payable to the student).
The vernacular might seem foreign, but understanding it and having systems in place to manage the process is critical to success. For the majority of credit unions, working with a partner that understands the language and can navigate the deep waters of certification, disbursement, servicing, risk mitigation, and compliance is essential in developing a healthy private student loan program.
Direct relationships are paramount to long-term success.
The credit union industry knows well the benefits, and perils, of indirect lending. Indirect loans are a source of revenue, but they do not often result in deep member relationships or an opportunity to showcase a commitment to the community. NuUnion Credit Union ($856M, Lansing, MI) has created a genuine opportunity for a productive member relationship while also showcasing its commitment to Michigan students and families at a time of need. The credit union maintains ownership and control over its direct private student lending program and has achieved recommended lender status at seven area colleges. This school recommendation, along with other organic marketing campaigns, has resulted in more than 1,000 new members (private student loan borrowers and co-borrowers) who live, work, or attend school in the credit union's core market.
If you're interested in learning more about private student lending, contact Jim Holt at 815-577-3334 or by e-mailing firstname.lastname@example.org.
Credit Union Student Choice is the foremost provider of turn-key private student lending services to America's credit unions. A credit union service organization (CUSO) that launched in May 2008, Student Choice now works with 111 credit unions across the nation. Visit http://www.studentchoice.org for more information.
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