When many of us think about student loans, we probably visualize a fresh-faced 20-year old striding across a picturesque campus at a traditional four-year school. If we’re thinking about surging student loan defaults however, that visual would be wrong.
Jim Holt, Chief Revenue Officer, Credit Union Student Choice
According to a new report from the Brookings Institution, the “so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans.”
The dramatic rise in enrollment at for-profit schools is best exemplified by reviewing the top 25 schools whose students owed the most federal student loan debt. In 2000, only one for-profit institution appeared on this list. In 2014, however, 13 for-profit-schools populated the list. These borrowers owed approximately $109 billion — nearly 10% of all federal student loans.
Brookings Report Video Recap
Delinquency Drop Likely
Drawing on a unique set of administrative data on federal student borrowing matched to earnings information from tax records, the groundbreaking report draws a much clearer picture of student debt problems. Booming enrollment at for-profit colleges and two-year schools — driven in large part by the recession — resulted in millions of former students being ill-prepared to manage their student loan payments. The research showed that half of borrowers exiting school in 2011 had attended a for-profit school or two-year college. In turn, these borrowers represented 70% of federal student loan defaults.
In stark contrast, the report pointed out that most borrowers at traditional four-year schools have relatively low rates of default, solid earnings, and steady employment rates.
The report authors also note that federal student loan delinquency is likely to drop in the future, with a “lag of several years,” due to several key factors:
A significant drop in the number of borrowers who are attending for-profit and two-year schools, due in part to improving economic conditions. (The number of new borrowers at for-profit schools fell by 44% between 2010 and 2014.)
Expanded oversight of for-profit institutions.
Expanded eligibility and enrollment in income-based repayment plans (available to federal student loan borrowers), which allows borrowers to suspend or make reduced payments when their income falls.
Lessons For Lenders
For credit unions that offer — or are considering offering — private student loans, the report from Brookings adds much-needed clarity to the murky and often-times sensationalized issue of student debt. While there are certainly broad challenges in the student loan marketplace, the report captures the perfect storm of the great recession and the flood of non-traditional borrowers to for-profit and two-year colleges — a trend that has now reversed significantly.
In spite of rising costs, college continues to be a worthy investment that millions of young adults will wisely embark upon every year. According to a Pew Research Center study, in 1979, people with only high school educations earned 77% of what college graduates made. Today, high school graduates earn just 62% of what those with four-year degrees earn — a testament to the value of a college degree.
Accordingly, credit unions have a tremendous opportunity to assist families with one of the biggest and most important financial decisions they will ever make. By leveraging their balance-sheet lending capability and incorporating best practices like those listed below, credit unions can craft a program that delivers a superior product tomembers,mitigates risk, and returns positive value to the cooperative.
Education: It’s imperative that students and families understand how to responsibly pay for college. Stressing to prospective borrowers the importance of exhausting all lower-cost funding options and connecting them with tools that help them understand the value of a degree is essential.
Underwriting: Sensible underwriting criteria that factors in credit score and history, encourages the use of a co-borrower, and takes into account the type of school has a major impact on repayment. Data from credit unions partnered with Student Choice underscore the strong performance of this asset class.
Relationships: Lending to students and families within an existing footprint leads to a genuine opportunity for long-term relationships and a younger membership.
College costs are not going down and the need for fair-value education financing is more important than ever. By focusing on the important details that exist behind the headlines, credit unions can play an important role in helping members and redefining value in education finance.