What do you covet more – a new member that is 22, gainfully employed with a strong FICO, or a 75-year-old new member who has retired and maintained stellar credit for the past 30 years? You likely want both. However, does your preference change if your credit union has a significantly aging membership? I’m guessing the answer is “yes."
If your 2012 strategies include increasing lending, lowering your average member age by adding new young adult members, or increasing relationships per member, then providing flexible and affordable financing for higher education is a smart choice. However, given the recent cautionary flags raised on this asset class of late, is now the right time? To help answer this question, let’s address the Top 3 myths in student lending:
Myth #1: The debt is unsecured. Defaults are rising. A college education just isn’t worth it anymore.
It is true that financing higher education comes with no collateral, and reconciling that risk against rising default rates can be daunting. Upon further inspection however, it is clear that the reported rise in student loan defaults is specific to loans issued by the Federal government. These loans carry no traditional underwriting criteria or co-borrowers. And, even more importantly, the school being attended is a factor. According to a recent New York Times article, while less than 12% of the nation’s college students attend for-profit colleges, this population account for nearly 50% of all student loan defaults.
Credit unions can mitigate risk exponentially by adhering to two key principles:
- lending only to students attending traditional, four-year, not-for-profit colleges and universities.
- layering in conservative underwriting that encourages a co-borrower (who in many situations will be a parent that has been a long-time credit union member).
Couple this with some recent good news. According to a report from the Collegiate Employment Research Institute at Michigan State University, there will be 7% more jobs waiting for graduates of bachelor degree programs in 2012. In the report, Recruiting Trends 2011-2012, Dr. Phil Gardner writes, “the expansion is coming from a strong push at the bachelor’s degree level, which will increase by approximately 7%, according to the 4,200 employers seeking full-time talent.”
This is just one of many positive indicators that underscores the importance of gaining a college degree. Today’s unemployment numbers are another good sign. The Bureau of Labor's November report states that those with college degrees carry a 4.4% unemployment rate, compared with 8.8% for those with a high school diploma and no college experience. The Bureau of Labor also pointed out that, on average, those with a college degree would earn $1,783 more per month than those without a degree according to 2010 numbers.
|Education Pays: Unemployment Rates vs. Media Weekly Earnings in 2010
|Source: Bureau of Labor Statistics, Current Population Survey.
College is expensive. Ultimately, though, it is a worthy investment for young adults and families. And, by employing proven consumer lending principles, credit unions can wisely invest in students by offering affordable higher education financing.
Myth #2: Student lending is a lose-lose proposition with razor thin margins and regulatory concerns.
If properly managed, private student lending can produce ROAs on par with other strong consumer lending products while responsibly providing a low-interest rate for today’s youth. And, often times, these rates are as much as 200-300bps under what the large competing brands offer. Why are rates so high in this low interest rate environment? The short answer is a lack of competition.
According to the latest College Board findings, in 2010, nearly $8 billion was originated in private student loans. This accounts for 7% of the overall education borrowing and a dramatic decrease from the $22 billion that was originated by lenders just a few years ago. Such a decline contrasts with the popular discourse of rising student debt, but fuels the demand for competition and ultimately, more affordability.
This contraction is a product of less competition and lending capacity, due in large part to the small appetite for private loan securitizations by an investment community still reeling from the mortgage crisis. The unfortunate byproduct of this tighter supply and growing demand is inflated interest rates for the consumer.
Related to ongoing regulatory concerns, much like other asset classes, a vigilant and ongoing review of the credit decisions and operating model is critical. While there are CUSOs and third-party providers that can manage this entire operation on your behalf, such programs demand transparency and control by each credit union participant. Katherine Weber, an attorney specializing in credit union regulatory issues, advises that “in today’s regulatory environment, it is tantamount for credit unions to have ultimate credit decision authority and ability to conduct regular audits of any automated decisioning process that is employed by a third party or CUSO”.
Easing regulatory concerns by partnering with an entity that employs the proper controls can be a great solution to help both member and credit union.
Myth #3: Responsible lenders should avoid this market as Occupy Wall-Streeters are calling for borrowers to walk away from all student loan debt.
The Occupy effort seeks 1 million signatures to garner public support and eventual legislative relief in cancelling student loan debt. That’s helpful in heightening the awareness of rising debt, but falls drastically short as a viable solution.
The rhetoric reinforces the fact that your members need a solution today. The rapid escalation of higher education costs is placing financial hardships and unnecessary anxiety on families across this country. In a speech at the University of Texas at Austin, President Obama highlighted that tuition and housing costs rose 439% from 1982 to 2008, compared with a 147% increase in median family income (not adjusted for inflation). As families struggle with trying to save more for college, the significant year-over-year tuition hikes often outpaces such efforts and is placing more debt upon the student.
Student loans are, and will continue to be, a real need for the vast majority of college students. Credit unions may help in several ways:
- Showing students and families the advantages of using low- and no-cost financial resources, including scholarships, grants, and government loans.
- Making clear the proper role of credit and encouraging its responsible use among parents and students.
- Focusing on long-term member relationships.
Credit unions have a unique opportunity in the student lending market. Providing a private student loan is important, but delivering a higher education financing solution that establishes a solid foundation for long-term financial success and a strong relationship with a trusted local financial institution should be the goal. Achieving this goal brings back the dreams of higher education without the nightmares of suffocating debt after graduation. Don’t conveniently avoid doing the right thing – start earning valuable long-term relationships with young members today.
To learn more about private student lending, please visit http://www.studentchoice.org/CUSCWebinar.html and sign-up to attend one of Jim Holt’s free educational webinars.
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. Before joining Student Choice, Jim served as Vice President, Sales for Overture Technologies, a leader in marketing and decisioning tools within the private loan space. Prior to his role at Overture, Jim served as Vice President at Citibank's Student Loan Corporation and Senior Vice President at College Loan Corporation. Jim has been a frequent speaker at higher education forums and is credited with crafting unique financing partnerships at prominent universities and colleges across the country.