While involved in federal student lending for many years, Members 1st FCU had grown increasingly concerned about the multitude of members who were forced to resort to private student loans to cover educational costs not covered by scholarships and federal loans. In 2008, the $1.5 billion asset credit union based in Mechanicsburg, PA decided to take action.
"Over the years we've seen an increasing number of students and families turning to alternative sources to fund sky-rocketing educational costs," said Edgar Lehman, Members 1st A.V.P. of consumer lending. "We've always been committed to meeting all the financial needs of our members and developing a relationship with them. The private loans we saw in the marketplace featured high rates and fees, and were simply not very attractive for our members. We felt that we could provide a credit union solution that would not only provide better value to our members and help us connect with Gen Y, but also deliver long-term value to our bottom line."
After researching numerous private student loan products and solutions, Members 1st decided to partner with Credit Union Student Choice, a new credit union service organization (CUSO) that was founded in early 2008 by several of the nation's leading credit unions and CUSOs. "It was important to us that this product was designed by credit unions, for credit union members," said Lehman. "It met our requirements in terms of product flexibility and customization while providing excellent value for members. We also felt the partners and leadership involved in the networked structure were credit union and member-focused, and truly committed to service and value."
According to Lehman, another key element of the Student Choice solution was the ability of Members 1st to retain these loans on their own balance sheet, rather than referring them to a bank for a nominal, one-time fee. "We've always had ownership of our member student loan portfolio. Even though servicing is done through business partners, members recognize that their loan is here at the credit union," said Lehman. "Having the loans on our balance sheet is another product that enhances and expands the 'PFI' relationship with our members. Properly structured and priced, these loans will contribute to our overall loan program while still offering the best value for our members. From a risk standpoint, we have good overall credit quality members and good portfolio risk management."
Considering the competitive marketplace for private student loans, Lehman and Members 1st felt confident they could price their loan in such a manner that it would be a win-win for both the credit union and the member. "We saw private loans that not only featured rates in the double digits, but also tacked on origination fees up to 6%," said Lehman. "And with the ongoing credit crunch and collapse of the auction rate securities market, we knew it was only going to be tougher for many of the traditional players in this area."
Members 1st launched their private student lending solution on June 16, 2008, and priced the loans to be market competitive while at the same time covering cost of funds, operational expenses, and projected losses. "With the Student Choice solution, we knew our costs going in and could price accordingly. Given the good credit quality of our general membership and the underwriting standards we employ, we were able to establish our pricing at very competitive rates," said Lehman.
To mitigate risk, all of the loans are certified – meaning the loans are forwarded to the school for verification of enrollment and need. Once approved, the money is sent to the school at the time(s) specified by the school for that academic year. Excess loan funds sent to the school (beyond what the school itself requires) are then disbursed to the student by the school. In addition, all loans must have a co-borrower with a credit score of 660 or greater, while the student borrower must have a zero credit score, or a credit score above 620.
The loans are indexed to the one-month LIBOR (currently at 2.46%) and feature a margin that is dependent on credit score. One of the biggest member values is that there are no fees associated with this loan; which you traditionally see on private student loan products in the market.
"Our pricing is very competitive, as evidenced by the successful introduction to our members and the initial demand we’ve been experiencing," said Lehman. Since launching just two months ago, Members 1st has already approved 163 loans totaling more than $2,000,000.
"While we felt this product would be well-received and we expected to see increases over previously offered alternative loan products, the volume has still surpassed what we could have anticipated in just the first couple of months. Interestingly, the credit quality mix has also been higher than expected, with almost 85% of loans being approved and the average FICO running at 755."
While it's still very early in the life cycle for their private student lending solution, Lehman feels Members 1st has created a win-win situation for members in need and the credit union.
"We are extremely pleased with the program thus far, and confident that this product will offer superior economic value to Gen Y members and their families, while also helping us grow and diversify our loan portfolio at the same time."