When it comes to student loans, the hits just keep on coming. A recent report from TransUnion underscores the significant challenges faced by student loan borrowers and America’s biggest student lender — the Federal government.
According to the TransUnion study, reported student loan balances increased by 75% between 2007 and 2012, with the average student loan debt per borrower increasing 30% to $23,829. During that same time period, federal student loan delinquencies rose 27%.
While these numbers are scary, they should come as no surprise. Surging college enrollment equals more students. Ever-increasing educational costs, cash-strapped parents dealing with a struggling economy, and a Federal student loan program that carries no traditional underwriting criteria and makes funds available directly to students equal more students with loans.
The rise in Federal student loans during this time period is especially notable. According to TransUnion, between 2007 and 2012, federal loan balances jumped 97%, while private loan balances only rose 4%. What’s even more noteworthy is the marked difference in performance between federally backed student loans and private student loans during this time period.
As federal student loan delinquencies rose 27%, private loan delinquency rates actually dropped 2% in that same timeframe. The 90+ day delinquency rate for federal loans was 12.31% as of March 2012, compared to just 5.33% for private loans.
BETWEEN Q1 2007 AND Q1 2012, FEDERAL LOAN DELINQUENCIES ARE UP 27% WHILE PRIVATE LOAN DELINQUENCIES ARE DOWN 2%.
Image Source: TransUnion
With Federal student loans making up 92% of all student loan accounts and 86% of overall balances, it’s clear that the government faces a serious dilemma. There is no doubt that using the power of Uncle Sam to invest in America’s youth through low-cost educational loans is extremely valuable. But how can support be extended without deepening the problem?
A typical freshman undergraduate can only borrow up to $5,500 their first year (with a maximum cap of $31,000 for Federal Stafford Loans for all years) yet the average cost of education for a private four year college in 2012 was $29,056 per year, according to the College Board.
The government program is designed to allow access to education. However, despite this spirit of providing access, little to no underwriting does lead to high defaults. And with Stafford loan limits capped, many students are still left with significant funding gaps. Finding a balance between the cost of education and affordable financing is the key.
Private student lending, which has evolved greatly since the aggressive “wild west” lending model of the mid-2000s (that emphasized volume over risk and value), has a role to play here. Unlike Stafford loans, private student loans carry substantial underwriting to manage risk. And, when coupled with the credit union value proposition, private student loans can be a viable companion piece to Federal Stafford loans.
Today’s sustainable lending programs are being built on several important pillars:
More than ever before, college must be viewed as an investment. While the college wage premium remains significant, it’s imperative that students and families understand how to responsibly pay for it. Stressing to prospective borrowers the importance of exhausting all lower-cost funding options — including free money through grants and scholarships, as well as Federal student loans — before turning to private lending sources is essential.
Underwriting Matters (A Lot)
As evidenced by the stats from TransUnion, sensible underwriting criteria that factors in credit score and history, and encourages use of a co-borrower, has a major impact on repayment.
School certification is critically important as it engages the college financial aid office to verify enrollment, validate the loan amount, and determine fund disbursement.
History is clear that factoring in the quality of the school based on historical default rates is one of the best ways to manage risk and return strong value to borrowers. For example, according to the College Board, for-profit schools have a cohort default rate that is more than triple the cohort default rate of traditional not-for-profit schools.
Offering longer repayment periods and graduated repayment options can dramatically assist students that are entering the workforce and may be underemployed for a period of time.
Lending to students and families within an existing footprint leads to a genuine opportunity for long-term relationships.
While there is no quick and easy fix to the often publicized, macro-level issues faced by the Federal student lending program, there are significant opportunities for smart, disciplined lenders at the micro level. The unique not-for-profit structure and community focus of credit unions not only gives them a unique ability to understand and serve the needs of those they serve, these attributes also help credit unions deliver value back to the borrowers. By offering fair-value education financing solutions, credit unions are helping families achieve their dream of higher education, one member at a time.
Jim Holt brings more than 20 years of student lending experience to Credit Union Student Choice. As the Vice President of Sales Operations, Jim serves as the main point of contact for credit unions interested in learning more about the Student Choice program and utilizes his extensive industry knowledge to help them successfully enter the private student lending market. For more information, please contact Jim Holt at firstname.lastname@example.org