“If these borrowers could refinance, their debt would be much more manageable. Given today’s historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market.”
— Richard Cordray, Director, Consumer Financial Protection Bureau
The borrowers CFPB Director Cordray is referring to are the millions who borrowed a private student loan in the past decade. As college costs began rising dramatically in the late ’90s, private student loans became a necessity for many students and families searching for ways to fill educational funding gaps. Unfortunately, profit-motivated lenders were more than happy to dole out high-rate, low-value loans to students, emphasizing volume over risk and offloading the assets into Wall Street securities. Those loans continue to strain some borrowers finances, causing potential delay in other investments such as homes and autos. Accordingly, many groups, including the CFPB, have called for private lenders to take the lead on refinancing and modifying loans.
Although private lenders, including banks and credit unions, play a relatively small role in today’s student lending marketplace, there is more than $150 billion in outstanding private student loans. Because loans are unsecured, they carry higher interest rates than standard home or auto loans. However, many borrowers took out these loans during a time that is not reflective of today’s rate and regulatory environment. Now, thousands of young adults, many of who are employed college graduates, are dealing with high-rate debt.
“Most borrowers aren’t looking to get off the hook,” says Rohit Chopra, the CFPB’s student loan ombudsman. “They just need a payment plan that works.”
The Business Case
Assisting members by providing fair-value credit is a noble cause and a hallmark of the credit union industry. But it only works if the lending program also returns value to the cooperative. Credit unions who are considering a private student loan consolidation or refinance program must take several factors into consideration when evaluating the opportunity.
An Improving Sector
Risk is the No. 1 factor for credit unions to consider when looking at student loans. Many assume doom and gloom in this space, but that is not necessarily the case. According to a September 2013 report from Moody’s Investor Services, the private student loan default rate index on $40 billion of securitized balances dropped to 3.6% in second quarter 2013, the first time it has dipped below 4.0% since 2007. This is less than half of the 7.9% peak in third quarter 2009. The 90-plus delinquency rate for second quarter 2013 was 2.1%, down from 2.4% in second quarter 2012.
"Ninety-plus delinquencies will continue to decline slowly, continuing their downward trend since peaking in mid-2009," says report author Stephanie Fustar, a Moody's assistant vice president and analyst.
A consolidation program removes several of the biggest questions in student lending removed from the equation, such as will the student graduate and will he or she find a job? To be eligible for a consolidation loan, all borrowers must have graduated and be gainfully employed. Credit unions can further mitigate risk by layering in additional underwriting criteria, including debt-to-income and school quality. By removing common questions and leveraging proven underwriting criteria, these loans can perform very well.
Credit unions are eagerly searching for ways to grow relationships with young adults and expand their lending portfolios. Offering a private student loan consolidation program brings together these goals. PSL consolidation borrowers are prime candidates for future deposit and lending relationships, including auto and mortgage.
Given the high rates that many student lenders socked borrowers with during the past several years, earning a strong return on asset while delivering fair value is achievable on a private consolidation loan. Credit unions can create a true win-win situation by helping members refinance high-rate loans while bringing value to the bottom line and establishing the opportunity for long-term member relationships.
Over the past several years, millions of credit union members have dramatically lowered their monthly obligations by refinancing debt, such as mortgage and auto loans. A broad public awareness of refinancing tools coupled with targeted campaigns and helpful credit union staff have helped members accomplish this. The time has come to bring the same effort to young adults saddled with onerous private student loan debt.
Jim Holt brings more than 20 years of student lending experience to Credit Union Student Choice. As the vice president of sales operations, Holt serves as the main point of contact for credit unions interested in learning more about the CU Student Choice program and uses his industry knowledge to help them successfully enter the private student lending market.
As the leading provider of higher education financing solutions to America's credit unions, CU Student Choice and our network of partner credit unions are redefining value in private student lending. Join us, and start giving students the credit they deserve.