From the Wall Street Journal to the activistblog Zero Hedge, economists and pundits have been activelydebating this year whether or not a student loan asset bubble exists and if so, when it mightpop.

The chatter intensified April 25 when Sallie Mae, the country'slargest originator of federally insured student loans, scrapped a$225 million debt offering. The Wall Street Journalreported the lender pulled the plug on the deal because investorsfelt the 3.5% interest rate offered wasn't enough to offset risk.Included with the article was a graph that showed as of year-end2012, more than 31% of all borrowers were 90 days or more past dueon their student loans.

Those numbers could make credit unions, still smarting fromcorporate credit union mortgage -backed security losses and loanlosses on their own books, shy away from the private student loanmarket in a time when the loans are one of the few products withconsumer demand.

However, CUNA Chief Economist Bill Hampel said despite the assetbubble talk, student loans are a good product for creditunions.

“One might talk about a bubble in the cost of higher education,that the cost has been pushed higher and higher, and at some point,the price has to burst,” Hampel said. “But it's different from thehousing bubble because student debt isn't really tied toyesterday's cost of a college education.”

Instead, the ability to repay depends upon the future earningsof students. And, Hampel said, despite higher than normalunemployment and underemployment rates for recent collegegraduates, the income differential between college grads and thosewithout a college education still compares favorably to the averageamount owed.

“Last year, the average total indebtedness of all students whohad some debt was $25,000. That's not huge,” Hampel said. “However,if it were common for most students to come out of college with$80,000 to $100,000 in debt with an entry level salary of $30,000to $50,000, that would be untenable.”

While Hampel did admit that access to credit has inflated theprice of higher education, he also said tuition costs haveincreased because campus technology hasn't improved, saying theclassroom experience is “still an old person standing in front of achalkboard as it's always been.” Dramatic reductions in governmentfinancial support has also prompted tuition increases, he noted.

The fact that the private student loan delinquency rate issignificantly lower than that of federal student loans alsodecreases credit risk for credit unions, said Jim Holt, vicepresident of sales operations for CU Student Choice, a private student loan CUSO inWashington.

Holt said the most recent 60-day delinquency rate for allprivate student loans is 5.4%, and according to NCUA financialreports, private student loans at credit unions had just a 1.46%60-day delinquency rate. Furthermore, he added, CU Student Choiceloans have an even lower 60-day delinquency rate of 0.89%.

How does the CUSO produce such impressive loan quality?Underwriting, Holt said. CU Student Choice employs strictunderwriting standards that consider only the best FICO scores,require a co-signer, and loans are made to students at certified,traditional degree-granting public and private four yearinstitutions, according to Holt.

Additionally, the CUSO offers a repayment relief program forunderemployed college grads that modifies the loan with a graduatedrepayment structure and amortizes outstanding balances over a40-year term.

“This is exactly the kind of solution the (Consumer FinancialProtection Bureau) has been asking lenders to put into play,” Holtsaid. “And then once (a borrower) finds that entry level careerjob, there's no prepayment penalty. It really helps prop up thosewho are struggling to start their career after graduation.”

How does CU Student Choice skirt the NCUA regulation thatprohibits credit unions from making consumer loan with terms ofmore than 15 years? Holt said the loans are structured asopen-ended, unsecured lines-of-credit, which also feature anadjustable rate that protects against interest rate risk. The CUSOalso offers a closed-end student loan product, he said.

Congressional hearings this year by the House Education andWorkforce Committee and the House Financial Services Committeeproduced witnesses who testified that extending terms could makecollege debt payments more manageable for underemployed graduates.CUNA Senior Vice President of Legislative Affairs Ryan Donovan saidduring an April 22 press call that a provision that would extendcredit union student loan terms beyond 15 years could even find itsway into regulatory relief legislation.

Hampel said a borrower's ability to repay a student loanincreases as the graduate progresses in his or her career. However,while credit risk is reduced with an extended term, Hampel saidinterest rate risk would increase for the closed-end, fixed rateloans.