Take the rapidly rising costs of college education, mix in a private student loan market that has grown 450% in the last seven years alone, add a mass exodus of traditional lenders because of restricted access to capital, and you've got a volatile recipe for turmoil in the student loan marketplace. What you also have is a huge window of opportunity for credit unions to step up and productively meet the needs of the member while also addressing key organizational goals. Goals such as:
Building long-term, productive relationships with Gen Y
Growing and diversifying the loan portfolio
Helping existing members and the broader FOM during a time of critical need
While these goals are certainly admirable, for Digital Federal Credit Union (DCU) the initial decision to enter the business of private student lending came down to something much simpler. “At DCU , our vision is to help all members achieve financial well-being,” said Diane Richard, DCU 's Vice President of Consumer Loans. “It's well known that the average wage for a person with even a little bit of college education is much higher. We had to ask ourselves how we could help make that happen.”
Historically, DCU provided equity loans to assist with educational financing and also referred people to Sallie Mae for federal student loans. “While this was helpful to members we realized the financial gap between federal support and the cost of college was becoming a serious challenge for families,” said Richard. “Our members had a need for private student loans and were being forced into other options that oftentimes failed to deliver true value or placed the full financial burden on the parent. We needed to be there with a true student loan solution.”
For well over a year, DCU researched ways to provide their own private student loan service, eventually deciding to collaborate with several other credit unions to establish the new Credit Union Student Choice CUSO. Employing a networked business model, Student Choice gives DCU a turn-key solution that manages the key challenges and risks commonly associated with student lending while also leveraging best-of-breed partners to handle call center operations, automated credit decisioning, loan servicing, insurance, and fully co-branded websites for each participating credit union.
“From a numbers standpoint, when we looked at income potential, risk management, and other costs, our research showed that owning the loan asset and outsourcing the servicing was the best solution for us. This is somewhat the opposite of the fixed-rate mortgage market where our preference is to retain the servicing and sell the asset,” said Richard. “The Student Choice solution gives us this ability. First and foremost we want to be the members' first choice for almost every type of loan, and by actually offering our own private student loans we're plugging a big hole in our product line and delivering superior economic value. This is a great example of why financial cooperatives exist.”
According to Richard, another key component of the program was the ability to recognize the full value stream that can only come from a long-term loan relationship, not a one-time referral fee. “As a balance-sheet lender we certainly want to generate income with the loan, but more importantly we want to develop deeper long-term relationships with young members, expand relationships with the families of students, and build meaningful relationships with colleges in our service area. As a credit union, you are not likely to deliver meaningful value to the member if you are referring them to other for-profit entities. This is especially true if you have no say in setting the rates and fees that your members will receive from the referral.”
Early results seem to indicate that DCU may be moving to the head of the class for providing private student loans. In just four weeks, 67 DCU members have been approved for nearly $1.25 million in loans.
“The bottom line is that we believe offering a private student loan product where we actually control the pricing and can build upon the relationship is not just good for the member, it's good business for the credit union,” added Richard.