Phone surveys at dinner time. Ominous (yet fully approved) television ads. Endless speeches filled with soaring rhetoric (and questions about the value of Big Bird). Ah yes, ‘tis the season for political theater.
And in conjunction with the season, it seems as though every issue has become fodder for political debate. Whether it’s gas prices or replacement referees in the NFL, a politician surely has an opinion that he or she is willing to share. The issue of student lending and outstanding student debt has certainly not escaped political scrutiny.
Student loans have become a matter of national public policy and a hot-button political issue ─ and deservedly so. Some argue that government needs to do more. Others argue that government is already doing too much and is making things worse.
Valid points can certainly be found on both sides of the debate. Unfortunately, clear-cut solutions aren’t nearly as forthcoming. As the debate continues, the simple fact remains that students and families are caught in a very challenging position.
Politics is the art of looking for trouble, finding it everywhere, diagnosing it correctly, and applying the wrong remedies.
— Groucho Marx.
According to multiple sources, outstanding student debt has risen to nearly $1 trillion. More than 86% of these loan balances are in the form of Federal student loans, according to TransUnion. So why the boom?
Higher Costs: Between 1982 and 2008, median family income rose 147%. Over the same time period college tuition and housing costs rose an astounding 439%, according to the Center for Economic and Policy Research
More Students: In spite of costs, in today’s economy, the value of a college degree has never been more important. Accordingly, college enrollment has surged to record levels. Consider that in 1959, just 45.1% of high-school graduates enrolled in college. In 2009, that percentage has jumped to more than 70%, according to the New York Times.
Not Enough Savings: The recession has severely impacted the ability of parents to pay for their child’s education through savings or other funding sources (such as home equity). Although parents may be reluctant to take on additional debt, student loans continue to be a reality for the vast majority of students and families.
Although Federal student loans are the most consumer-friendly financing option, and incredibly important to the educational success of millions, they are also the most challenged from a risk perspective. They carry no traditional underwriting criteria (no co-borrower or credit score required) and are readily available to almost all students, regardless of the school being attended. This last point is especially significant when considering that pointed although only 12% of students nationwide attend for-profit colleges, those students account for more than 50% of all student loan defaults, according to the New York Times. Coupled with a depressed job market, it’s not surprising that delinquency rates on Federal student loans have risen significantly in the last five years.
Private student loans (PSLs) make up the remaining 14% of outstanding student loan balances. A recent report from the Consumer Financial Protection Bureau detailed abusive lending practices during the PSL boom years of 2005-2008. Fueled by skyrocketing tuition costs, soaring enrollment, and free-flowing capital from the asset-backed securities market, aggressive lenders stepped in. With a focus on quantity over quality, and little concern for risk management or borrower education, loans flooded the market. And, much like the issues that plagued Federal student loans, it’s not surprising that similar problems impacted the private student lending market in the late 2000’s.
What may be surprising, however, is that due to market-corrections, delinquency rates on private student loans have actually fallen over the last several years. The return of balance-sheet lenders, sensible underwriting, and borrower education is a positive trend for both students and lenders.
We cannot solve problems with the same thinking we used when we created them. — Albert Einstein.
As politicos and government agencies debate the future of Federal student loans and higher education, credit unions involved in private student lending have taken a much more direct approach. Unlike the irresponsible lenders of the mid-2000s, credit unions function on a completely different model. By leveraging their balance-sheet lending capability and incorporating best practices and responsible underwriting, credit unions are delivering a unique and superior product to members, carefully managing risk, and returning positive value to the cooperative. Consider the following:
A Focus on Education: College is a huge investment and it’s imperative that students and families treat it as such by understanding how to best pay for it. Stressing 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: Sensible underwriting criteria factors in credit score and history, and encourages use of a co-borrower.
Certification: School certification is critically important as it engages the school to verify enrollment, validate the loan amount, and determine fund disbursement.
School Quality: 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.
Repayment Length:By providing a longer repayment term, borrowers will face manageable monthly payments as they enter the workforce.
Relationships: Credit unions lend to students and families within their existing field of membership, establishing an opportunity for genuine, long-term relationships.
College costs are not going down, and student loans are not going away. The need for fair-value education financing and common sense advice is more important than ever. Credit unions are part of the solution, not by spouting political rhetoric, but by doing what they do best: working with students and families, one at a time, to provide financial solutions and educational loans that will empower them for the rest of their life.
Considering that we’re in the midst of another important season (outside of the political arena), maybe we should heed the words of a great leader who made his name outside the beltway.
“People who work together will win, whether it be against complex football defenses or the problems of modern society.” — Vince Lombardi.
I’m Jim Holt, and as an employee of a CUSO that works hand-in-hand with credit unions to help students and families, I fully approve this message.
To learn more about private student lending, please visit http://www.studentchoice.org/CUSCWebinar.html and sign-up to attend one of Jim Holt’s free educational webinars.
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.
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