On the exciting day in May 2008 that student lender Credit Union Student Choice opened its virtual doors to serve an initial partnership of 7 credit unions, it appeared to the uninformed that this new CUSO’s staffers were truly marketing visionaries. The student loan market was utterly in the tank, with established lenders bailing on their student loan business to flee the turmoil of seized-up credit channels. And this ill-timed contraction was occurring in a funding climate where the gap between capped federal loans and necessary financing for secondary education could reach anywhere up to $100,000 per student. College-bound high school seniors and others preparing to study in the fall were increasingly stuck between the proverbial rock and hard place.
As a newly launched CUSO, Credit Union Student Choice is a textbook example of smartly leveraging the power in cooperation to achieve a mutually desirable goal. A classic turnkey solution, CU Student Choice gives credit unions the ability to offer their own fully branded, full-service private student loans at reasonable rates and no fees to a liquidity-challenged market, without adding additional staff. And, with the credit unions holding the loans in portfolio, they are retaining the full long-term economic benefit while initiating and cultivating important relationships in the burgeoning youth market that these loans serve.
Fast forward four months. The results were in and looking good: seventeen credit unions in 14 different states were now offering enhanced member values through reasonably priced student loans, thanks to Student Choice. And 10 credit unions were waiting in the wings, expected to officially come on-board by November 2008.
According to Jeffreys, credit unions’ balance-sheet lending capabilities have put them in a powerful, and enviable, position to gain local market share, build long-term relationships with young adults and schools, and provide a valuable financial service to their members, at a time when many other lenders have pulled out in the face of dislocated capital markets. And, just how large is this private funding slice of the pie? In 2007, about $23 billion of the $73 billion funding gap nationwide was filled with private student loans.
Most private student lenders over time had grown to rely on secondary market access to fund loans, but the ballooning mortgage meltdown and ensuing credit crunch saw that funding option completely evaporate. Many lenders stopped writing new loans or significantly hiked their fees and rates, as cost of capital spiked. “Credit unions are not subject to these same liquidity concerns and capital market fluctuations,” said Jon. “This difference gives them a wonderful opportunity to do what they do best—use proper risk management and offer appropriate terms to lend member deposits, for the good of the members, the credit union, and the community.”
Outlining the key drivers of the Student Choice business model, Jon reviewed the time a scant year before when the roughed-out proposal for Student Choice was first placed on the table. He and his colleagues had been closely tracking the student lending market for months and did not need a crystal ball to see that mainline channels of private college tuition funding were headed for a brick wall. It was July 2007 and the malaise of the national credit crunch was already underway, spreading from an increasingly troubled mortgage market to other lending channels.
As they began to craft the Student Choice feasibility study in this unsettled climate, it soon became obvious that a CUSO would be the optimal model to drive the process. They knew that a CUSO would provide the scale, intellectual capital, and market reach that CU Student Choice would need for a smooth launch on an aggressive timetable. The student lending window of opportunity is a clearly delineated high season of early spring through late summer, now rapidly approaching on the near horizon.
Reflecting his interest in aviation, Jon was currently following the construction of the Boeing Company’s new Dreamliner aircraft, a process which was tapping into a broad cross-section of aeronautical manufacturing partners in 14 locations around the globe.
“All Boeing is really doing is taking delivery of the various pieces of the Dreamliner, constructing the jet in one location, and then marketing the complete airplane. In a lot of ways, that’s really what we did with Student Choice,” Jon said.
“We could have done everything ourselves, but what we wanted to do was partner with the folks around us.”
Jon cites the business model in the popular book Wikinomics by Don Tapscott and Anthony Williams as the intellectual underpinning for Student Choice and its 21st century way of doing business. As the book’s authors note, “…collaboration and self organization are powerful levers to cut costs and innovate faster. As a growing number of firms see the benefits of mass collaboration, this new way of organizing will eventually displace the traditional corporate structures, as the economy’s primary engine of wealth creation.”
“By partnering with other CUSOs, we were able to roll out Student Choice at lower cost, while achieving speed to market,” Jon said. “After our feasibility study validated that credit unions really would be a better source of these private funds, we moved from concept to launch in 10 months, a compressed timeframe, to say the least.”
As a student loan company completely built from within the credit union industry, Student Choice is living testimony to the power and value of networks. “Because we are a networked environment with only three employees, we really must rely completely on the shared expertise of our partners,” Jon said.
Innate qualities in the credit union culture combine to reinforce the breadth and reach of the Student Choice business model. Historically, one core advantage credit unions have is their lack of volatility within their market niche. Unlike some for-profit firms, credit unions are going to be there; they will open their doors tomorrow. And this deeply rooted strategic position is bolstered by a credit union’s twin strengths: a common client base and a shared mission. Student Choice and its partners are all not-for-profit entities, another unique attribute in the world of private student lending.