Two-thirds of Americans receive some measure of postsecondary education, and 60 percent of them will require some level of financial assistance to pay for it. For many, borrowing (and repaying) their student loans will be their first significant experience with a lender. It is an opportunity that credit unions cannot afford to miss.
How does student lending work?
There are two major ways that students can borrow money for their education: FFELP and Alternative (private loans).
FFELP stands for Federal Family Education Loan Program. Loans under FFELP include the Federal Stafford Loans (subsidized and unsubsidized), Federal Parent Loan for Undergraduate Students (PLUS) Loans, and Federal Consolidation Loans. Funds for these programs come directly from the government through the school or are provided by private lenders such as credit unions or banks. All FFELP loans, regardless of the lender, are guaranteed by the federal government. The interest rate for these loans is set by the government every July.
The second type of funding is private loans. Since FFELP loans do not always cover all the costs a student incurs, a growing number of students take out a secondary loan to cover the difference. Many times these loans are from the same provider of the FFELP loan, but given the greater variance between alternative loan programs many students search for lenders with the best rate and fee structure. Such comparison shopping has become much easier because of the Internet and increased competition between student lenders.
Why is student lending an opportunity for credit unions?
With college tuitions rising by at least 5 percent every year (www.collegeboard.com), and an increase in the number of students attending college, it is easy to see why the student lending market has grown by over 180 percent in the past 10 years to over $140 billion.
Bad News, Good News
The dramatic increase in student loan recipients and dollars has not gone unnoticed by banks. Of the top 100 FFELP loan originators, which account for nearly all of the student loan market, only seven are credit unions. Credit unions hold an estimated 2 percent share of the total student lending market—not large by any standards, but enough to show that it can, and should, be done.
As credit unions attempt to grow loan portfolios and develop a new generation of loyal customers, the student loan market represents a perfect opportunity; an opportunity that many credit unions may someday regret missing.
To learn how leading credit unions are reaching this market, check out our webinar, Student Loans: Opportunity in a Time of Crisis - The Unique Advantage of CUs in the Student Lending Market.