Over the past 12 years, more than 700 credit unions have stepped up to help members responsibly fill college funding gaps and refinance outstanding student loan debt via private student lending programs. In fact, many credit unions first launched theirprograms during the Great Recession, just as other lenders stepped away.
Despite the unknowns and challenging economic environment at the time, these credit unions took the long view and recognized the value of higher education for their members. By implementing prudent underwriting and fair-value loans, this investment inthe next generation of members has paid off, in the form of high-performing loans today and long-term member relationships that will benefit the cooperative far into the future.
While the coronavirus pandemic has flipped the entire world upside down, now may be the perfect time to revisit higher education finance, not only to ensure that programs are built to address today’s challenges, but that they’re ready fortomorrow’s opportunities.
Help Distressed Members
As the pandemic emerged this spring, credit unions focused first and foremost on helping members in distress, including private student loan borrowers. While the Federal CARES Act mandated payment relief options for federal student loan borrowers, creditunions had already implemented short-term payment relief options for private student loan borrowers who were impacted by the pandemic.
For credit unions partnered with Student Choice, a special COVID-19 disaster forbearance was created, allowing affected members to easily obtain an initial three months of payment relief. Moving forward, individual borrower situations should be reviewedto possibly receive forbearance extensions, giving impacted borrowers the time needed to get back on their feet.
This approach aligns with published notices from federal regulators, including the NCUA, that encouraged financial institutions to assist members. A carefully implemented and executed forbearance plan, along with a robust servicing and collections strategy,has always been a key tool in effectively managing student loan portfolios, and will prove to be especially helpful in today’s environment.
Review Underwriting
While it’s likely that few people will walk away from this pandemic financially unscathed, history has shown us that college students and those with a higher education are best suited to not only weather a storm but surge forward in the months andyears ahead.
In fact, during the Great Recession, unemployment rates for those with only a high school degree were more than double those with a college degree.Throw in the extra $1 million in lifetime wages that come from having a college degree, and it’s clear that supporting higher education dreams pays off for both members and credit unions.
To maximize portfolio performance, credit unions must implement sensible, disciplined underwriting criteria. Key factors include:
- Risk-based pricing with minimum credit score requirements and criteria that strongly encourage 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.
This type of underwriting has allowed credit unions to achieve strong portfolio performance over the past 12 years. In reviewing a large subset of seasoned undergraduate student loans in full repayment from the Student Choice portfolio, repayment trendshave been extremely stable, allowing credit unions, on average, to recognize a very sustainable return (in the range of 3% ROA) that is on par or better than other asset classes.
Innovate To Meet Member Need
This spring and summer, the standard planning process used by college-bound students and families is out the window. Typically, in early summer, college choices have been made and funding needs are soon to be finalized.
However, because of uncertainty around whether fall classes will be held on campus or online, this year many families are unsure on funding needs and may even be questioning their school choice. To help address these challenges, credit unions should focuson flexible funding solutions, along with tools and resources to help families make responsible decisions.
In alignment with those member needs, credit unions partnered with Student Choice have the ability to assist members via new and enhanced solutions, including:
- A new online resource hub, with relevant and timely information ranging from college planning during the pandemic to advice on negotiating with a college for more financial aid.
- College access and repayment counselors who can provide personalized support via e-mail or phone call.
- A robust online college comparison platform that helps families find the right financing and academic fit.
- An innovative line of credit functionality that allows members to secure their funding even if they are unsure of school choice or the exact amount needed
By acknowledging that things are not business as usual, and evolving products to better meet member needs, credit unions can differentiate and highlight their singular focus on serving the member.
Be There For Your Members
According to a 2015 Gallup poll, 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. Add in the uncertainty around whether collegeswill resume classes as normal and new financial challenges brought on by the pandemic, and it’s clear that many college-bound families need a guiding hand.
New research from the Filene Institute supports this assertion. In a survey of more than 1,500 credit union members, 81.5% indicated that their bank or credit union offered little to no help in understanding options around funding college. Even more startlingis the fact that nearly 50% said the financial aid department at their school offered little to no help. Many turned to friends and family. While this may have proved helpful, the overwhelming majority (72.4%) said that process was very or somewhatstressful.
Ultimately, credit union lenders have an excellent opportunity in the education finance loan space to be there for your members. By offering thoughtful, targeted solutions that balance member needs with program sustainability, credit unions can empowerthe next generation of members and build meaningful relationships in the process.