The Three Rs of Higher Education Finance

The concept of reading, ’riting, and ’rithmetic is a valuable tool for credit unions considering the opportunity in education finance.


Attributed to a toast given by British Parliament member Sir William Curtis in 1825, the three Rs were long known as the foundations of a basic skills-oriented education program. Reading, writing, and arithmetic might be obsolete in today’s era of standards-based education, but the concept is still a valuable tool for credit unions considering the opportunity in education finance.

It’s in the headlines and stories. Increasing college costs, including those at budget-strapped public universities, have left students and families searching for affordable college financing options. According to a 2010 survey by Gallup and Sallie Mae, 46% of families borrowed money in order to help pay for college. The federal government’s student loan programs (Stafford and Perkins) are the most widely used student loan and remain the best and most inexpensive way for students to borrow. However, students are also relying on private student loans to fill funding gaps, with 13% of families using them in 2010 versus just 8% two years earlier.

Nearly $9 billion in private student loans was originated in 2010. These options remain a critical funding component for millions of students. The “student loan” moniker might mask the issue, but it’s important to understand these loans are a family decision, often times with mom or dad playing the role of co-borrower.

As any financial institution can attest, writing loans is a risky business. Understanding that risk, and employing proper mitigation tactics, is the key to portfolio performance. Private student lending is distinct in many ways, but it’s not unlike mortgage or auto lending in that there are important factors credit unions can use to mitigate risk, including:

  • Risk-based pricing with minimum credit score requirements and criteria that strongly encourages a co-borrower.
  • School certification to verify enrollment, validate loan amount, and determine fund disbursement.
  • Restricting loans to students who are attending traditional four-year schools with a proven history of low student loan defaults.
  • Lending directly to students and families within an existing field of membership to establish an opportunity for genuine, long-term relationships.

For credit unions that want to eliminate risk totally, it might seem easy to refer borrowers to another lender or choose not to make these loans. But the answer is not that easy.

  • Reputation risk is inherent in any scenario where business is referred to another provider. This is especially the case in student lending, where the referring credit union has zero impact on the value being delivered to the member or the experience they will endure. Referral programs might also cherry-pick the best members, leaving many still searching.
  • Competitive risk must also be considered. Referring loans to a bank (such as Sallie Mae) that is aggressively pursuing consumer deposit relationships via savings, checking, CD, and money market accounts might give pause to credit unions. Other dominant student lenders, such as Discover, also see tremendous opportunity in deepening borrower relationships through deposit and lending accounts, such as credit cards.

Regardless of a credit union’s role in student lending, risk is present in some shape or form. Understanding, accepting, and aligning that risk with a credit union’s business strategy is essential.

Delivering superior value to borrowers is an admirable goal, but it’s only possible if value is also being returned to the bottom line. In 2010, the average private student loan rate on a national level was approximately 8.5% (variable rate that resets quarterly based on index). Credit unions currently involved in student lending are better serving borrowers while simultaneously returning value to the balance sheet. The 25,000 students and families who’ve borrowed from a Credit Union Student Choice credit union, rather than an average lender, will save millions over the life of the loan.

The numbers have to make sense, but the rewards from student lending can be measured in more than just ROA. Fulfilling a social role by delivering fair-value credit to those in need, establishing new relationships with young adults and families, and helping students achieve a critically important achievement in life are all part of the mathematical equation.

Credit Union Student Choice is the leading provider of higher education financing solutions to America's credit unions. A credit union service organization (CUSO) that launched in May 2008, Student Choice now works with 185 credit unions across the nation. Visit for more information or contact Jim Holt, VP Sales Operations at (815)577-3334 or



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