Mind The Gap

Opportunity abounds for credit unions that know the market,the basics, and the potential risks of student lending.


As students head home for the holidays, they are reminded of both the cost and the value of their education. 

The value is consistently high, but the cost grows year after year. Students find themselves with insufficient funding from traditional sources such as the government or their schools. They are standing on one side of a funding gap. 

Private student loans are a viable way to bridge this gap, and credit unions are in an excellent position to serve young members. To do so, credit unions have to understand the basics of student lending, risk management, and market opportunity. 

  • Private student loans are non-federally insured loans meant to cover the gap between available funds and the cost of education, says Rick Thornburg, senior vice president of lending at Eli Lilly Federal Credit Union ($932.7M, Indianapolis, IN). As costs rise and funds become scarce, that gap increases.
  • The risk in student loans is not as substantial as it might initially seem. “First, the majority of these loans are cosigned by the parents of the student borrower,” says Mike Long, chief credit officer at the University of Wisconsin Credit Union ($1.2B, Madison, WI). In UWCU’s case, almost 90% of these loans have a cosigner. To help further mitigate exposure, the loans are not dischargeable in bankruptcy and generally are certified by the school.
  • The economic downturn has had mixed effects on the student lending market. Thornburg reports weaker applicants in terms of credit score and job status, specifically with the cosigners. Economic instability for the parents might also mean less of an ability to cover expenses, such as continuing education. Despite fears that a weak job market might make it more difficult for students to get a job and repay loans, Long what he’s seen doesn’t match that grim prediction.
  • Long offers an outlook on the industry today: “There has been a contraction of lenders in this space as the securitization market for these loans has dried up. That means balance sheet lenders like credit unions have the potential to make quality loans to their members and potential members.”

Like the young members who need them, student loans are distinct. Understanding the product and the market makes the decision to enter or refrain clear.