Lenders Track Student Borrowers' Prospects
While there can be many reasons why a student decides to drop out, there is one important issue for student lenders: How to ensure that borrower continues to make payments on the loan.
When New Jersey credit unions and the New Jersey Credit Union League got together to develop a collaborative student lending program with student lending platform developer Fynanz, they had that issue in mind.
The program launched in May with 12 credit unions and has now grown to 17. The credit unions pool funds, participate loans at the point of origination and spread out the risk of the loans so not one credit union solely benefits from a good loan and not one credit union solely gets hit with a bad loan.
The loans also require a parent to co-sign, and only if the student establishes good credit and has a good grade point average will the co-signer be lifted for the last two years the student is in school.
The loan rate is also established based on several factors, the student's credit score and his or her GPA, course of study and years of study. The rate is based on Libor and each year the loan is rewritten, giving students a chance to get a better rate as they advance in school and in academic achievement.
"We're trying to ensure that students out there are going to school into a discipline where there's going to be a need. We also believe that if a student performs well in school, then they're probably going to get a job," said Linda McFadden, president/CEO of Xcel Federal Credit Union in Secaucus, N.J., one of the participating credit unions.
Every month the student is also required to make a $25 payment while in school that gets applied to interest and principal to remind the student of the debt and to get into the rhythm of making a payment every month.
After graduation, the student gets another chance to drop the co-signer from the loan if 24 consecutive payments have been made on time.
"This means a lot to the parents because without having to be the co-signer, they can go on to something else and not be tied up in a student loan for the next 20 or so years," McFadden said.
McFadden said that Xcel contributed $4 million to the lending pool and so far has $1.1 million in loans approved.
"We're very conservative as far as lending criteria. As we've added other credit unions to the group, they've asked questions, and we've tweaked some things here and there but not as much as we thought we'd have to."
Mike Weber, vice president of marketing for CU Student Choice, said that the CUSO's line of credit structure helps ease the burden of financial stress that can be one of the top reasons students drop out.
"It's definitely true that dropping out increases the chances of a borrower defaulting on the loan. We want to see kids stay in school, and, hopefully, the things we do will help them do that."
When a student applies for a CU Student Choice loan, they request the money they need for the semester and then get approved for a certain amount that they need for all four years. Many other student loans are structured so the student has to reapply ever year, Weber said, but with this loan the student knows they have secured financing.
"It takes away the big question mark always hanging over their head. Especially in this environment, a student could have the same credit score as last year and get denied for the loan this year."
An initiative CU Student Choice has had in the works since June, a partnership with the nonprofit Mapping Your Future, Weber hopes will also help encourage borrowers to stay in school.
Mapping Your Future provides career, college and financial aid and literacy to students, families and schools. The CUSO partnered with the organization to integrate some of its services onto the CU Student Choice Web site, www.studentchoice.org.
"Mapping Your Future provides information and resources for life skills students need in college. I think it's a must have in today's world. It's hard to mandate, but we're doing things to integrate it more into our program."
When a borrower does default on a student loan, Karin Brown, vice president of collections at Lending Solutions Inc., a lending solutions provider to financial institutions, said that collections on student loans are very different than collections on other loans.
"Student loans are a different kind of animal. There's a routine you have to follow to maintain the guarantee, and there's not a lot of flexibility."
Brown said there are very strict guidelines that lenders have to follow before they can determine there is no remedy for the problem.
"Student loans are unlike all other loans. They're long term, so they're on the books for a while," Weber said, and added that is why the CUSO felt strongly about going with an experienced loan servicer to handle collections on the CU Student Choice loans.
The CUSO uses University Accounting Service to service its loans and Weber said it has a very specific policy they follow in their collections process.
"After a certain number of days delinquent, they have a specific practice they follow. They get in contact with the borrower and help them get back on track."