Private student loans account for just 0.2% of the U.S. creditunion loan portfolios, according to Callahan & Associates, butstudent loan CUSOs and credit unions that offer student loansbelieve they're a worthwhile addition to any CU's product suite,citing potential relationships with young members as a majorbenefit.

Tapping in to the college student market is an obvious motivefor credit unions with a student loan offering, but how does theproduct affect their bottom lines? Experts from student loan CUSOsCUStudent Choice and CU Campus Resources and one CU CampusResources credit union partner said student loans are a goodinvestment, but ultimately, the loans pay off in the form of youngmember cultivation.

The complex student loan making process entails certifying loansthrough schools, arranging for tuition disbursement and abiding bygovernment regulations. While it's possible for credit unions todevelop student lending programs on their own, most partner with aCUSO, which assist CUs with student lending aspects such astechnology, paperwork, underwriting, pricing and educationalresources for students and parents. By working with a CUSO like CUStudent Choice or CU Campus Resources, credit unions can makestudent loans without the added cost or hassle of creating theirown program, the CUSOs say.

“Student lending is a very unique process because the loans haveto be certified with the school and sent electronically, and it'sdifficult for credit unions to make all those connections on theirown,” said Mike Long, executive vice president and chief credit officerfor the $1.3 billion, Madison, Wis.-based University of WisconsinCU (the second largest credit union provider of student loans) andCU Campus Resources executive vice president and chief operatingofficer. “A credit union could dream up a private student loanproduct and offer it themselves, but it's usually more efficient towork with a CUSO.”

Jim Holt, vice president of sales operations for CU StudentChoice, said partnering with a CUSO is more cost effective forCUs.

“It's difficult because credit unions are reluctant to invest inthe technology and resources,” Holt said. “From an outsideoperational and regulatory perspective, it makes sense to work witha CUSO.”

CUs typically do not ask for fees from their student loanborrowers, which leaves interest as the primary source of studentloan earnings. Long said most CUs calculate an interest rate basedon the borrower's creditworthiness and the cost of originating andfunding the loan. UW CU's yield on student loans is about 3.17%, abetter return rate than an auto loan with a fixed APR of 2.99%delivers, for example, Long pointed out. Another plus of studentloan interest rates for CUs is that they're variable not fixed.

“You can compare it to other investments that credit unions canmake, like with a corporate credit union, which results in returnsof less than 0.5%,” Long said. “If you invest your money in studentloans, you're going to get returns, which is what everyone islooking for at the moment.”

CUs can begin accounting for interest income as soon as theymake a new student loan, but the biggest difference between studentloans and other types of loans is their cash flow, experts said.With payments typically deferred until after the borrowergraduates, it can be more than four years before payments startcoming in. And they could come in very slowly. CU Student Choice,for example, offers borrowers a flexible repayment term of 20 to 25years.

Citizens Equity First, a $4.6 billion, Peoria, Ill.-based CU,began working with CU Campus Resources in February 2011 afteroffering a student loan program of its own for several years.Credit Manager Doug Higgins said CEFCU enlisted the services of the CUSO in light of regulatorychanges and to streamline its student lending process; the CU had agoal of originating $5 million in student loans this year, whichHiggins said it will meet comfortably.

CEFCU's student loan portfolio manager, Greg Jaeger, pointed outthat with a variable interest rate, student loans add strength to aCU's lending portfolio, but said they're “not intended to be bigmoney makers.”

“With regard to earnings, it's an unusual type of loan becauseit's deferred, and you won't see that cash flow for a number ofyears,” Jaeger said. “We look at it from the broader point of viewthat it's helping us establish relationships with younger members,who might come back to us for auto loans and first mortgages. It'sa good chance to support the member to get ahead.”

Today's competitive job market for new graduates raises concernthat borrowers may have trouble making payments on their studentloans. Long said CU Campus Resources' CU clients have relayed suchconcerns, but UW CU's student loan financials tell a differentstory: 32% of the credit union's student loan portfolio is inactive repayment, and of those loans, just 2% are delinquent and0.01% have been charged off. Long added that while parents cosignon most student borrowers' loans, it's the students who are makingpayments.

Aside from the interest earnings CUs receive on student loans,experts agree that just offering the product can lead to longerterm financial benefits. Once a student borrower establishes arapport with a credit union, he or she may stick with theinstitution for other services.

“No matter which hat you're wearing at the credit union, thereis value in student lending,” Holt said. “If you're the chiefmarketing officer, you're looking to attract young members, andthis is the perfect fit for that. If you're a loan officer, you'relooking to drive up your loan to share ratio. And if you're theCEO, you're always looking for new solutions.”