Student Lenders Making Headlines, Time for CUs to Act on Opportunity

In a market dominated by a small number of larger firms, opportunities still exist for credit unions to bring in student loans.

 
 

This time when many high school seniors start making one of the most important decisions, where to go to college. What they may not be thinking about yet, however, is how to finance their education.  However, according to the National Student Loan Data System, there were more than $50 billion new student loans generated for college students in the 2006 fiscal year. This number has been on the rise the last few years as college tuition rises at about twice the rate of inflation. From a student lending standpoint, this is one of the busier times of year as many institutions are attempting to bring in some of this business.

Student Lenders Making the Headlines
Just this past week, the banking industry’s interest in student lending made the headlines with JP Morgan Chase and Bank of America entering an agreement to purchase student lending giant Sallie Mae for $25 billion. This comes at a time when other student lenders are embroiled in disputes over their relationships with college and university financial aid offices. Education Finance Partners has agreed to pay $2.5 billion to resolve an investigation, after it was found to have paid at least 60 schools to guide students to their loans.

Industry Dominated by Powerhouses
These trends are important because like many other niche areas, the student lending market is one that is dominated by a key number of powerhouses. The Top 100 originators in 2006 accounted for more than 90% of the total number of loans. Of those top 100, only three were credit unions. Those three credit unions were:

Credit Union

 

12/06 Assets

 

2006 Student Loan Originations

 

2006 Rank

Purdue Employees (IN)

 

$503M

 

$119M

 

48

USC CU (CA)

 

$324M

 

$100M

 

53

University FCU (TX)

 

$762M

 

$80M

 

68

Overall, the credit unions that fell in the Top 100 accounted for approximately $300 million in new originations, which amounts to around 0.6% market share. There is clearly a market for student lending, but how can credit unions take advantage of this opportunity?

Focus on Value

The key to an increase in student loans comes with awareness. Most families think of the larger for-profit companies like Sallie Mae, mentioned above, when it comes time to apply for a student loan without even realizing that their credit union can offer a comparable service. For example, Sallie Mae currently charges up to a 3% origination fee for a Stafford Loan, while credit unions like USC FCU and Purdue Employees FCU offer no origination fees and can even offer cash back options.

Much has been written lately about the “preferred lender lists” and the difficulty of national exposure for smaller organizations. To counteract this effect, credit unions need to be proactive in bringing in student loan business. Credit unions located on or near university campuses need to make their presence known to students as early as possible. Each of the three credit unions in the top 100 work closely with their universities and each improved their national ranking in student loan originations from 2005. For those credit unions who are not in close proximity to a university, action must be taken to provide student lending opportunities for local residents before they relocate to their new university.

There is no question that the student lending market is one where credit unions can bring in new member business and provide a much needed service for their members. However, credit unions must fight an uphill battle in order to earn that business. The key for credit unions is to make their services and opportunities known to students as soon as possible and to show those students how the value of their local credit union can outmatch a larger national institution.

 

 

 

April 16, 2007


Comments

 
 
 
  • Interesting viewpoint. But probably more interesting is where do these institutions stand on HOLDING these student loans? It does provide a nice stream of income when you originate and SELL them along with the servicing..much like a 1st mortgage but HOLDING them in your portfolio provides a better service to the students as members.
    Rick
     
     
     
  • A tip of the hat to Mr. Connors, who is right on target with these comments. Kudos to you for highlighting these three credit unions so that we may learn from their success in this market.
    Anonymous
     
     
     
  • I''m a credit union customer and gone so far as to ask my credit unions if they have any way for me to designate them for my student loans. If they say I can select them as my lender, my next question is whether they will service them or sell them, but this seems to be the point where they get confused. I want my credit union to handle all of my money, so when I log in to "online banking," I want to see this account in there with my whole financial picture. Rick (above) makes a great point about holding the loan. If the CU is just going to sell it anyway, there''s no point in going through the hassle of trying to choose a lender that''s different from the one the originator automatically assigns.
    Chris