This article has been updated from a version that ran in May 2013.
In its approach to customer service, The Disney Institute embodies a philosophy: "It may not always be our fault, but it is our problem." That phrase also mirrors the perspective adopted by many of the nation’s credit unions as they address growing concerns over student debt and its long-term impact on their members’ lives.
In the past few years, this issue has become the topic du jour for media outlets, research papers, regulatory agencies, and political pundits. And with total student loan debt now topping $1 trillion and rates on federal student loans rising yet again, it’s become a matter of significant public policy debate. Not surprisingly, there is no shortage of finger pointing when playing the blame game.
It’s The Government’s Fault
Of the more than $1 trillion in outstanding student loan balances, nearly 86% are backed by the federal government. Designed to provide access to education for all consumers — a noble goal — these loans are the most credit-challenged as they carry no traditional underwriting criteria. According to the CATO Institute, this free-flow of cheap money has led to massive overconsumption of higher education, resulting in poor completion rates and exorbitant college prices. Regardless of your opinion on the role of government in student lending, it’s clear that Uncle Sam is a key stakeholder.
It’s The School’s Fault
According to data from Bloomberg and the U.S. Department of Labor, the cost of obtaining a college degree has increased by 1,120% between 1978 and 2012. There is much debate as to the driving factors behind the staggering cost increases. Some point to frivolous spending by schools on administrators, luxurious dorms, campus building projects, and other amenities. But as The New York Times reports, public colleges and universities, which enroll three out of every four American college students, have also been hit by funding cuts as states struggle to keep their economic houses in order. Add in the proliferation of expensive for-profit universities over the past 15 years and it’s clear that many factors come into play when explaining cost increases.
It’s The Student’s Fault
Although many are sympathetic to the plight of students and parents as they seek higher education in the face of a weak economy and surging college costs, personal responsibility can’t be overlooked. More than ever, college must be viewed as a financial investment. In his Op-Ed in The Main Wire, author Sam Adolphsen of the Center for Open Government points out that racking up thousands in debt to achieve a degree in a field that yields a low wage simply doesn’t make sense. And as CNNMoney reports, the proliferation of students attending graduate school is further ratcheting up overall student debt.
It’s The Lender’s Fault
Private lenders play a relatively small role in today’s student lending marketplace — as private student loans amount to approximately $150 billion of the $1 trillion in outstanding student loans — but they’re coming under increasing scrutiny from the Consumer Financial Protection Bureau (CFPB). In many ways, today’s private lenders are paying for the sins of their forerunners.
Private student lending boomed in the early 2000s amid the dramatic increase of college costs. 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. The remnants of those boom years continue to be a drag on some borrowers, leading many — including the CFPB — to call for lenders to take the lead on refinancing and loan modification.
There are many factors at play when it comes to student debt. And although credit unions aren’t at fault for the current environment, they are faced with a problem. Immediately, students and parents are in dire need of guidance and fair-value education financing. In the mid- and long-term, credit unions can leverage their philosophy to help borrowers minimize cost and loan balances, thereby helping members achieve financial fitness. This role also enables the credit union to assist with future auto and mortgage loans, as recent reports indicate that student loan debt is hampering the ability and willingness of young adults to buy cars and homes.
So what are the specific opportunities for credit unions in becoming part of the solution?
Developing A Sustainable Private Student Lending Program
Over the past several years, hundreds of credit unions have cautiously entered the private student lending market. By focusing on several important pillars, these credit unions are delivering value to borrowers while managing risk and returning positive results to the bottom line.
Education: While the college wage premium remains significant, it’s imperative that students and families understand how to responsibly pay for it. 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 several of the largest private student lenders in America underscore the strong performance of this asset class.
Certification: School certification is critically important because it engages the college financial aid office to verify enrollment and validate the loan amount as well as allows financial aid officials to counsel the family in making certain they have exhausted other, more affordable options.
Repayment: Offering longer repayment periods and graduated repayment options helps support students that are entering the workforce who might be underemployed for a period of time.
Relationships: Lending to students and families within an existing footprint leads to a genuine opportunity for long-term relationships and a younger membership.
Developing A Sustainable Private Student Loan Consolidation Program
Focusing on the pillars mentioned above, credit unions have an opportunity to bring significant value to college graduates who have entered the workforce but are challenged by multiple, high-cost private student loans. Consolidating those loans into a new credit union loan could eliminate the hassle of multiple payments and potentially save the borrower thousands of dollars over the life of the loan.
The blame game is easy to play and developing solutions might be daunting, but it’s clear that credit unions are stepping up to the challenge. By offering responsible financing solutions built on Main Street values, credit unions can positively impact the student lending marketplace.
Jim Holt brings more than 20 years of student lending experience to Credit Union Student Choice. As the Vice President of Sales Operations, Jim serves as the main point of contact for credit unions interested in learning more about the Student Choice program and utilizes his extensive 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, 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.