Student Lending — By The Numbers

Few will disagree that America’s mounting student loan debt is a problem: a problem for borrowers facing a weak (but hopefully improving) job market, a problem for colleges struggling to rein in costs and demonstrate value, and a problem for the biggest student lender in the game — Uncle Sam.

But while issues certainly do exist, a torrent of articles has been quick to apply such ominous tags as “crisis” and “bubble” to student lending. Even with rising debt and delinquency, are these terms really accurate? According to one recent article by Christopher Matthews on Time.com, the answer is a resounding no.

For credit unions that offer private student lending programs, or are considering a program, taking a closer look at the numbers can help separate rhetoric from reality, while also revealing important data to guide risk management and optimize loan performance.  

• 86% — Of the nearly $1 trillion in outstanding student loan balances, nearly 86% are backed by the federal government. Designed to provide access to education for all consumers, these loans are the most credit-challenged as they carry no traditional underwriting criteria. The remaining 14% are private student loans originated by financial institutions. These loans are significantly different as they’ve been underwritten with multiple credit criteria and most carry a co-borrower.
   
• 97% vs. 4% — According to TransUnion, between 2007 and 2012, federal loan balances jumped 97%, while private loan balances rose just 4%. Why? Surging college enrollment equals more students. Ever-increasing educational costs, cash-strapped parents dealing with a struggling economy; increased federal loan limits beginning in 2007, and a Federal student loan program that carries no traditional underwriting criteria equals more students with loans. Conversely, private student loans have remained flat over the same time period, as balance-sheet lenders have employed stringent underwriting criteria to properly manage risk.
   
• $2.8 Million — In light of rising student loan debt and a weak job market, the value of a college degree is being questioned and rightfully so. However, multiple research studies continue to show that a college education is actually more important than ever. According to a recent study from Georgetown University, college graduates, on average, earn $2.8 million more over their lifetimes than those who only have a high school degree. In fact, this earnings differential has actually grown over the last 15 years.  Ultimately, the key is for students and parents to view college as an investment and make smart financial decisions. Accordingly it’s imperative for lenders to dispense not just loan funds, but also information that will guide borrowers in making good decisions.
   
• 72.3% < $25,000 — Anecdotal evidence used in articles about student loans often focuses on students with huge student loan balances of $100,000 or more. According to data from the Federal Reserve Bank of New York, this scenario is actually quite rare. In reality, 72.3% of student loan borrowers have $25,000 or less in student loan debt, while only 5.4% have student loan debt of $75,000 or more.  
   
• 23% — Federal data shows that 23% of for-profit college students who began repaying their federal student loans in 2009 defaulted within three years. This number is roughly three times greater than default rates for traditional four-year schools. When reviewing student loan performance data it is hard to overstate the fact that for-profit schools are the epicenter of surging defaults.
   
• 12.31% vs. 5.33% — According to TransUnion, the 90+ day delinquency rate for federal loans was 12.31% as of March 2012, compared to just 5.33% for private loans. What’s more striking is that while federal student loan delinquency has risen 27% over the last five years, private student loan delinquency has actually dropped 2% — a clear indication of the value of underwriting.
   
• 1,745 Plus — Reading many of the articles written today, one might conclude that no one is paying back their student loan. However, Student Choice and partner credit unions began funding private student loans in 2008. Since then, more than 1,745 loans have been paid in full.
   
• 6.05% — This is the weighted average rate for loans made by credit unions who have partnered with Student Choice; a fair-value for borrowers that is also producing a solid risk-adjusted return to the bottom line.
   

• 1 — There are millions of numbers to consider when evaluating student lending, but for credit unions offering a private student loan option the most important number is one; helping one family at a time responsibly achieve higher education goals that will pay dividends for a lifetime.

While the list of statistics and numbers could go on and on, these are but a few that may help cast a new light on a very complex issue. As has been proven many times before, nothing is black and white. As with any issue, it’s critically important for credit unions to carefully evaluate and understand all the facts — especially in a market that provides a great opportunity to meet the needs of young adults and families.