Student Loans Earn More Than Interest
Private student loans account for just 0.2% of the U.S. credit union loan portfolios, according to Callahan & Associates, but student loan CUSOs and credit unions that offer student loans believe they’re a worthwhile addition to any CU’s product suite, citing potential relationships with young members as a major benefit.
Tapping in to the college student market is an obvious motive for credit unions with a student loan offering, but how does the product affect their bottom lines? Experts from student loan CUSOs CU Student Choice and CU Campus Resources and one CU Campus Resources credit union partner said student loans are a good investment, but ultimately, the loans pay off in the form of young member cultivation.
The complex student loan making process entails certifying loans through schools, arranging for tuition disbursement and abiding by government regulations. While it’s possible for credit unions to develop student lending programs on their own, most partner with a CUSO, which assist CUs with student lending aspects such as technology, paperwork, underwriting, pricing and educational resources for students and parents. By working with a CUSO like CU Student Choice or CU Campus Resources, credit unions can make student loans without the added cost or hassle of creating their own program, the CUSOs say.
“Student lending is a very unique process because the loans have to be certified with the school and sent electronically, and it’s difficult for credit unions to make all those connections on their own,” said Mike Long, executive vice president and chief credit officer for the $1.3 billion, Madison, Wis.-based University of Wisconsin CU (the second largest credit union provider of student loans) and CU Campus Resources executive vice president and chief operating officer. “A credit union could dream up a private student loan product and offer it themselves, but it’s usually more efficient to work with a CUSO.”
Jim Holt, vice president of sales operations for CU Student Choice, said partnering with a CUSO is more cost effective for CUs.
“It’s difficult because credit unions are reluctant to invest in the technology and resources,” Holt said. “From an outside operational and regulatory perspective, it makes sense to work with a CUSO.”
CUs typically do not ask for fees from their student loan borrowers, which leaves interest as the primary source of student loan earnings. Long said most CUs calculate an interest rate based on the borrower’s creditworthiness and the cost of originating and funding the loan. UW CU’s yield on student loans is about 3.17%, a better return rate than an auto loan with a fixed APR of 2.99% delivers, for example, Long pointed out. Another plus of student loan interest rates for CUs is that they’re variable not fixed.
“You can compare it to other investments that credit unions can make, like with a corporate credit union, which results in returns of less than 0.5%,” Long said. “If you invest your money in student loans, you’re going to get returns, which is what everyone is looking for at the moment.”
CUs can begin accounting for interest income as soon as they make a new student loan, but the biggest difference between student loans and other types of loans is their cash flow, experts said. With payments typically deferred until after the borrower graduates, it can be more than four years before payments start coming in. And they could come in very slowly. CU Student Choice, for example, offers borrowers a flexible repayment term of 20 to 25 years.
Citizens Equity First, a $4.6 billion, Peoria, Ill.-based CU, began working with CU Campus Resources in February 2011 after offering 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 regulatory changes and to streamline its student lending process; the CU had a goal of originating $5 million in student loans this year, which Higgins said it will meet comfortably.
CEFCU’s student loan portfolio manager, Greg Jaeger, pointed out that with a variable interest rate, student loans add strength to a CU’s lending portfolio, but said they’re “not intended to be big money makers.”
“With regard to earnings, it’s an unusual type of loan because it’s deferred, and you won’t see that cash flow for a number of years,” Jaeger said. “We look at it from the broader point of view that it’s helping us establish relationships with younger members, who might come back to us for auto loans and first mortgages. It’s a good chance to support the member to get ahead.”
Today’s competitive job market for new graduates raises concern that borrowers may have trouble making payments on their student loans. Long said CU Campus Resources’ CU clients have relayed such concerns, but UW CU’s student loan financials tell a different story: 32% of the credit union’s student loan portfolio is in active repayment, and of those loans, just 2% are delinquent and 0.01% have been charged off. Long added that while parents cosign on most student borrowers’ loans, it’s the students who are making payments.
Aside from the interest earnings CUs receive on student loans, experts agree that just offering the product can lead to longer term financial benefits. Once a student borrower establishes a rapport with a credit union, he or she may stick with the institution for other services.
“No matter which hat you’re wearing at the credit union, there is value in student lending,” Holt said. “If you’re the chief marketing officer, you’re looking to attract young members, and this is the perfect fit for that. If you’re a loan officer, you’re looking to drive up your loan to share ratio. And if you’re the CEO, you’re always looking for new solutions.”