Is there financial health after delinquency? For borrowers behind on their student loan payments, the damage to their credit score and no option for bankruptcy relief may have them wondering.
State Employees’ Credit Union ($25B, Raleigh, NC), in tandem with two state educational institutions ─ the College Foundation of North Carolina (CFNC) and the North Carolina State Education Assistance Authority (NCSEAA) ─ is out to change that and assist local students in many other ways.
The program works like this: If a borrower defaults on their pre-2010 Federal Family Education Loan but they make nine consecutive payments to the loan holder at an agreed upon rate, they can qualify once for loan rehabilitation. This process removes the dent in their credit score, makes them eligible for further student aid or other loans products, and potentially allows for new payment terms on the orginal student loan.
Rehabilitated loans may then be purchased and held by the NCSEAA ─ the state’s agency for financial aid ─ or sold to another provider of funds like SECU. The loans continue to be serviced by the CFNC, which manages collections, applies payment to the balances, handles federal reporting, and other tasks.
"The credit union has a history of purchasing student loans, and we have partnered with the CFNC and NCSEAA for over 30 years to support a variety of student-related initiatives,” says Mike Lord, chief financial officer.
“The interest rate on rehabilitated student loans varies based on the terms in existence when the loans were originated, but they average around eight to 10 years to maturity and will provide good yields,” Lord says. “They’re a valuable asset, particularly when we are awash in liquidity and really looking to put our dollars to work.”
SECU’s portfolio includes about $2 million of regular student loans purchased years ago, as well as a $500,000 block of rehabilitated student loans purchased this quarter. NCSEAA previously purchased the majority of these loans to hold in its own portfolio, but the organization saw an opportunity to expand this program by selling loans to SECU.
“When SECU agreed to purchase the rehabilitated loans, it freed up the NCSEAA to use their own funds to enhance this and other student-oriented programs,” Lord says.
While the loans will make up a miniscule portion of SECU's overall $13.5B loan portfolio, the credit union plans to purchase up to $5 million in rehabilitated loans a year for the next five years.
Servicing costs from the CFNC itself are relatively low. And while the credit union has no contact with loan holders directly, the product generates a healthy ROI of about 5%. The credit union also receives a federal guarantee that covers between 95% to 98% of the principal and interest in the case of default.
"There’s very little credit risk to start, given the high standards to qualify for the program, and the guarantee that SECU will be repaid makes it an even stronger investment," says Lord. “It’s pretty hard to go wrong with this type of investment, but much depends on your interest rate risk position, the type of assets on your balance sheet, and the type of funding you have.”
But the program is also about more than just financial return. "We're supporting investments in the education of our members and their families,” says Lord. “It’s an excellent fit with our social mission of trying to improve their lives .”
SECU’s other recent investments included the 2008 purchase of $1.6 billion worth of bonds secured by federal and private student loans, all but $200 million of which have since been redeemed.
“That was around the time the auction rate market went away,” Lord says. “These were great assets for the credit union and provided significant support to student lending in North Carolina at a time when capital markets were very unfavorable."
During a special Saturday in February, SECU employees assisted thousands of students with filling out their Free Application for Federal Student Aid (FAFSA). The entire 244 branch network (normally closed on weekends) was opened specifically for this purpose.
Additionally, the SECU Foundation ─ funded entirely by members through a $1-a-month donation from their checking accounts ─ has awarded roughly $4 million worth of education scholarships to students every year since 2004, for a total of $36 million.
“One student at each of the 355 public high schools in North Carolina are awarded a $10,000 scholarship, as determined by their internal scholarship committee, plus there are two $5,000 scholarships awarded to students in each of the 58 community colleges across the state,” Lord says.
“Having all these various options for supporting higher education, our students, and our membership is a fantastic win-win for us."