In May 2008, Credit Union Student Choice originated its first private student loan for one of our credit union partners. As a brand-new CUSO with just a handful of staff members, it was an exciting and nerve-wracking time.
With the Great Recession sweeping across America, many lenders were fleeing the student lending market, leaving students and families with few good options. However, a few bold credit unions stepped up, and with the assistance of Student Choice, started providing fair-value solutions at a time of critical need.
While our first thoughts after making that initial loan were something along the lines of “Great! Now what?”, we’re happy to report we’ve picked up a few things over the years, including 275 credit union partners and more than 80,000 member-borrowers.
Credit unions have carved out a strong position in the private student loan marketplace (for both in-school loans as well as student loan refinance) and are building sustainable loan portfolios while delivering strong member value.
With the peak summer lending season nearly upon us for in-school private student loans, now is a great time to reflect on 10 key takeaways that we’ve learned from 10 years of being in the business:
1. Underwriting matters
For in-school loans, sensible, disciplined underwriting criteria have a major impact on repayment. Key factors include:
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 schools with a proven history of low student loan defaults
Lending directly to students and families within an existing field of membership to establish an opportunity for genuine, long-term relationships
2. Not all schools are created equal
According to a 2015 report from the Brookings Institution, the “so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans.” Taking school quality into consideration is key.
3. These are not indirect loans
At conferences and industry events, credit unions are bombarded by the message that they must build relationships with young adults. Private student loans are proving to be a great way to do just that. According to research conducted with nine credit unions that offer the Student Choice lending program, average checking account penetration for their nearly 8,000 borrowers was nearly 65%, while more than 21% had a credit card and 10% had an auto loan.
4. The value of a college degree is more important than ever
In addition to much lower unemployment rates for college grads, according to the Bureau of Labor Statistics, the pay gap between those with a four-year degree and those with a high school degree is at a record high. Those with a four-year college degree earn a median weekly salary of $1,137, whereas employees with a high school degree average $678. And a recent report from Georgetown University points out that not going to college could cost individuals dearly, to the tune of $1 million in lifetime wages.
5. The need for private student loans has not diminished
In the past five years, total private student loan volume has grown from $8.68 billion in 2012 to $11.6 billion in 2017. This fact has not been lost on other lenders. Traditional private student lenders have retrenched after the recession and strongly re-engaged in the market, while new fin-tech lenders have appeared on the scene, with everyone trying to grow relationships with the coveted demographic of college-educated young adults.
6. Having a “student lending solution” means more than just offering a loan
According to a Gallup poll released in 2015, more U.S. parents worry about having enough money to pay for their children’s college education than other Americans worry about any other common financial concerns. In fact, 73% of parents who have children younger than 18 worry about funding college. Families going through major life events are seeking experts who can answer their questions and put their minds at ease. Credit unions can play an incredibly important role in helping students and families understand how to responsibly fund their education by mixing intuitive online resources with well-trained staff that can deliver personal support.
7. It’s possible to achieve strong ROA while also delivering strong value to the member
Credit unions, on average, are recognizing a very positive return for the cooperative (in the range of 3% ROA) that is on par with other asset classes.
8. Regulatory oversight can be successfully managed
As credit unions know all too well, we exist in a highly regulated environment. Student lending is certainly no different. With the NCUA, CFPB, and state agencies keeping watch, it’s imperative that credit unions know their program, know their portfolio, and know their partners.
9. Borrowers actually pay back these loans
With more than $1.5 billion in full repayment status, Student Choice and our partner credit unions can safely report that these loans are being paid back. In fact, more than 14,000 loans have been repaid in full in the past 10 years.
10. It’s not our fault, but it’s our problem
In its approach to customer service, The Disney Institute embodies a philosophy: "It may not always be our fault, but it is our problem." That phrase also mirrors the perspective adopted by many of the nation’s credit unions as they address growing concerns over student debt and its long-term impact on their members’ lives.
With total student loan debt topping $1 trillion, it’s become a matter of significant public policy debate and there is no shortage of finger pointing when playing the blame game. Some argue that the flow of cheap and easy money from the federal government’s student loan program has fueled college costs.
Others point to school cost increases being driven in part by frivolous spending on administrators and amenities. Students themselves catch flak for racking up debt to achieve a degree they know will yield a low wage. And who could forget private lenders? While they hold a small piece of the overall market, today’s lenders are still paying for the sins of their forefathers from the early 2000s, who doled out high-rate, low-value loans to students, emphasizing volume over risk and offloading the assets into Wall Street securities.
The blame game is always easy to play. Developing effective solutions is much harder. But after 10 years, we’ve seen very clearly that by offering a holistic program that encompasses straightforward advice and responsible funding solutions built on Main Street values, credit unions can be part of the solution.