Since December, 50 firms have pulled out of writing federally-backed or private student loans. In April, giants Bank of America and Citicorp announced pullbacks – Bank of America said it would stop writing private student loans, and Citicorp’s said it would stop writing ones at schools where paybacks were unsatisfactory as well as stop writing federal student loan consolidations altogether.
Eastman CU has had a private student lending program (it does not write federally-backed student loans) since 1989. Eastman’s is now the largest such program of all U. S. credit unions at 1,758 on the books for $26 million (average balance about $29 thousand). The student loan program has been growing at more than 20% a year.
Eastman CU is the largest credit union in Tennessee at $2 billion in assets and 100,000 members. It began as the credit union for the Eastman Chemical Company, affiliated with the Eastman Kodak Corporation of Rochester, N. Y. It is now a community charter for northeastern Tennessee and southwestern Virginia as well as scores of SEGs. It has 18 branches, including ones in Texas (also operating under a community charter), South Carolina and Arkansas. Lisa Broadwater joined Eastman in 1996 1988 and is now the manager of consumer lending product development.
Large financial institutions are dropping out of student lending, but you are going strong. What does your program do for your credit union?
LB: We started this program in the late 1980s when Eastman Chemical Company employees discovered they were making “too much money” to qualify for financial aid. The growth rate of the program shows that we are helping people. We have found that when you make this kind of a commitment to young persons – and it could be a $125,000-unsecured loan to a 22-year-old – they tend to be grateful and become lifetime members. They bring their savings and loans. Later they bring in their children to open accounts. With student loans we plant the seed of lifetime loyalty.
And, of course, it is our philosophy and a credit union’s purpose to help people, and but we believe that these loans build a more educated community, thus a higher income community, a better quality of life, and a caring society. We also find a good percentage of our student borrowers are local people and that they tend to stay in the region after they have finished their degrees.
Do you try to broaden the relationship?
LB: Yes. We offer a student VISA card with a $1,000 limit without a co-signer. Students learn how to handle credit wisely. In addition, most of the students establish online relationships. About 90% of the student loan advance requests come to us online.
You mentioned unsecured. What has been your delinquency rate?
LB: Overdue 60 days is 0.14%. In 2005 our charge-off rate was 0.07%. Last year it spiked to 0.47%.
Give us the mechanics of the program.
LB: We make private student loans only. The college must be a 2- or 4-year accredited school, or a trade school approved by our credit committee – we loan to students at cosmetology, truck driver, pharmacology and like schools. The student can be full- or part-time. We set the loan up as a line of credit. When the student shows us an acceptance letter we sit down and figure out all the costs: tuition, room, board, books, lab or travel fees if any, laptop if required, and so forth – we cover the entire cost of the education. Interest payments on money advanced begin immediately. Principal payments can be put off, if desired, until six months after graduation. No loan extends more than 15 years; if principal is delayed four years, the amortization rate is calculated at 11 years. There are no application, processing, or annual re-application fees, and no prepayment penalty. Advance requests are generally deposited to the student’s ECU account to pay the fees themselves. Students have to show they have made at least a 2.0 grade average before receiving the next semester’s advance. Usually advance requests are processed for no less than $500. Seventy-eight percent of the loans are co-signed, normally by the parents, who very often make the interest payments while the student is in school. The rate is based on prime plus a margin depending on the student’s credit score and adjusts quarterly, the floor being 6% and the ceiling 18%. If a student has no credit score, we give the A rate. Students can apply online but we highly recommend they come in for an initial visit and bring their co-signers. We keep all the loans on our books. We also make student loan consolidation loans, the maximum term being 11 years.
Are you preferred by certain schools?
LB: Not in a formal sense. We are invited by some to set up tables at meet-and-greets, and some colleges recommend their applicants to us.
What is your competition and what do you consider your differentiators?
LB: Our competition are the federally-guaranteed loans. Generally when people come to us, they have already looked at those and they need more money, or more flexibility. We consider our differentiators to be flexibility, as well as offering to cover all expenses, plus not charging fees and not having lots of red tape.
Can you give us an example of flexibility?
A long-time member came to us and told us about his dream of becoming a professional pilot. The flight school did not meet our guidelines because it wasn’t accredited and didn’t routinely issue grades. We wanted to help this member so we asked the flight school to provide written progress reports to us instead of grades. They did; the member successfully received his pilot’s license and then obtained a very good job. He has never missed a payment. And he now brings all his business to us because he appreciates what we did for him.
How do you expect to grow your program?
As I said, schools recommend us. We also get very good word-of-mouth referrals. We go to high schools, colleges and trade schools and discuss our program. We market on our website, in our newsletter, and in local newspapers. A promotion this summer will be a drawing for a furnished dorm room among approved loan applicants.
What if a student drops out of school?
If we haven’t had a request in a while for a student loan advance we suspect such persons have dropped out and we get in touch. We tell the members that if they are not going to school, they must begin principal and interest payments.
Do people complain they can’t make the payments while they are in school?
This rarely happens. The parents normally make the interest payments while the student is in school. For older students, either the spouse pays or the students get a part-time or full-time job. Very few say they can’t make the interest payments.