Students Loans Are Profitable Niche for Credit Unions
- Credit unions poised to prove that student loans are viable investments.
- Slight growth last year has increased the industry’s comfort level.
- Emphasizing the differences between federal and private student loans is key for credit unions.
Last year was not the most glowing year for student loans, reputation-wise. The Consumer Financial Protection Bureau’s release of numerous negative comments from the public on their experiences as private student loan borrowers, comparisons of student loans to the burst mortgage bubble and the fact that national student loan debt grew to nearly $900 billion has led to questions about how wise it really is to make or take out a student loan.
But credit unions in the private student lending business are set on turning bad news to good and hope to prove that private student loans are viable investments for credit unions and their members. In 2012, while private student loans remained a small sliver of credit unions’ total loan portfolios, their popularity grew. According to Callahan & Associates, private student loans compose 0.32% of credit unions’ total loan portfolios as of third-quarter 2012, a small hike from third-quarter 2011’s 0.23%.
The Washington-based research and analysis firm also reported outstanding private student loans at credit unions total just over $1.9 billion as of third-quarter 2012–an increase of around $600 million in the past year–and the number of credit unions that hold private student loan balances grew from 488 in 2011 to 581 in 2012.
This slight growth is likely due to an elevated comfort level with student lending among credit unions, according to Mike Long, executive vice president and chief credit officer for the $1.6 billion, Madison, Wis.-based University of Wisconsin Credit Union, and executive vice president and chief operating officer for student lending CUSO CU Campus Resources, and Jim Holt, vice president of sales operations for student lending CUSO Credit Union Student Choice.
“Generally, credit unions are becoming more comfortable with this asset, as credit unions get more mature with offering this product to their members,” Long said. “Obviously, there’s a need for these loans, and I can see where credit unions fit in, but we’re still as credit unions not comfortable with being able to predict how these loans will ultimately repay. As more data starts coming in on maturing portfolios, then we can show that these loans will perform if you underwrite them properly.”
In their quest to dispel myths about student loans, emphasizing the stark differences between federal and private student loans is key for credit unions. For one, the asset quality of private student loans at credit unions is much better than that of federal student loans, with a 1.45% delinquency rate and a 1.05% annualized net charge-off rate, Callahan said.
In a Nov. 6 white paper, “Demystifying Private Student Loans,” authored by financial services writer Jim Jerving and produced by CU Campus Resources and Credit Union Student Choice, TransUnion data show all private student loans with a 5.33% delinquency rate and federal student loans with a 12.31% delinquency rate.
“This is partially due to the fact that unlike federal loans, which are need-based, the loans that credit unions offer are underwritten by credit and other risk criteria and scrutinized before acceptance just like any other type of loan that they offer,” said Andrew Bolton, senior industry analyst for Callahan. “They are not very similar to federal loans because those are granted without any sort of credit underwriting or risk evaluation of the borrower.”
In the white paper, Jerving points out that federal loan balances increased by 97% from 2007 to 2012, to $766 billion, while private student loan balances remained somewhat stagnant during that time period, reaching $127 billion in 2012. He also stresses that student loans should not be compared to the mortgage meltdown, as mortgages were held by financial institutions and totaled $8.1 trillion, while student loans total $893 billion and are mostly backed by the federal government. “Student loan debt does not threaten the financial system as did the mortgage crisis,” he stated.
And those borrower complaints released by CFPB, Long and Holt say, mostly had to do with poor loan servicing–something credit unions can’t be blamed for.
“Credit unions completely provide much different service,” Holt said. “It’s all about member service, helping educate them, making sure that they realize that these are loans and making sure that they exhaust all of the more affordable solutions first. In fact, one of the things that I found to be interesting was the CFPB cited that 12.4% of private student loan borrowers applied for aid but elected not to take out Stafford loans. So here’s an example that shows the need for education, and this is where credit unions, once again, are making a difference.”
UW Credit Union demonstrated positive private student loan performance in 2012, with an outstanding private student loan portfolio totaling around $74 million, 35% of those loans in repayment, a delinquency rate of 1.5% and charge-off rate of 0.2%, Long said.
The $188.6 million, Wall, N.J.-based First Financial Federal Credit Union, which offers the cuScholar Private Student Loan and cuGrad Private Student Loan Consolidation products through a partnership with financial technology company Fynanz, has a $5.6 million private student loan portfolio with 2.5% of loans in repayment and a delinquency rate of just 0.01%, said Alice Stevens, chief operating officer for First Financial FCU and chair for cuStudentLoans LLC.
Stevens said the rules of First Financial FCU’s private student lending program are strict enough to help eliminate the worry that students won’t be able to find jobs or make their loan payments when they graduate. She said the majority of borrowers have cosigners, the program requires an in-school payment of $25 per month, and the credit union can stop distributing funds if payments are not made, for example.
Of the private student loans originated through CU Campus Resources and Credit Union Student Choice, 90% and 97% of them carry a co-signer, respectively, according to Long and Holt. The strong presence of co-signers greatly eases credit unions’ fears of lending to students who will soon enter a competitive job market, they both said.
“What also helps is the fact that [Credit Union Student Choice] offers repayment relief, and that really helps members upon graduating who may be underemployed,” Holt said. “They may find that their payments are high and have some heartburn over making them consistently, so we offer these graduated repayment options to help them avoid slipping into early delinquency and default.”
The benefits of private student lending for credit unions go beyond the opportunity to attract and build relationships with young members. Experts say the financial benefits of private student loans are not often talked about but are very real.
“Many credit unions are offering auto loans at rates below 2% to their members, whereas a private student loan can yield sort of an average variable rate yield in the 5% range, even in this ultra low interest rate environment,” Long said. “So where credit unions are struggling with loan to share ratios, where they’ve got more deposits coming in than they can possibly lend out and are having to invest that money in very low interest rates, this is another product that can deliver returns back to the credit union in the form of interest margin, which can boost their ultimate net income and their capital ratios over time.”
Stevens noted that one reason why First Financial FCU entered the private student lending market was because the credit union was nearing its regulatory cap for outstanding business loans and needed a new way to keep up with loan portfolio runoffs.
“Our private student lending program allows us to make strong loans with a good net yield over more than 6%,” she said. “They’re good performing loans, they’re healthy for the credit union and we feel like we’re helping members.”
Holt and Long predicted that along with credit unions’ continued interest in making private student loans, 2013 will bring more involvement in student loan consolidation programs. Long suggests credit unions take a proactive role in student loan consolidation by contacting their local credit bureaus to find out how many of their members are struggling to pay back student loans they obtained from other financial institutions.
Bolton added that going into next year, he believes credit unions with private student loan portfolios will continue to be conservative with the number of student loans they make, and that credit unions entering the private student loan market will do so on a trial basis and with assistance from student lending CUSOs.
Today’s college grads may not be guaranteed jobs straight out of school, but that hasn’t stopped credit unions from lending to them. By taking a cautious approach, diligently following underwriting standards, and educating students to help ensure they only borrow amounts they need and believe they can afford to pay back, credit unions are making private student lending programs worth their while.