Student Loans Pondered
Gary Perez is upbeat about the future of private student loans.
The president/CEO of USC Credit Union, which serves students, faculty, staff and alumni of the University of Southern California, said he didn’t always feel positive about what critics describe as a financial bubble ready to burst.
Until recently, in fact, the $370 million USC CU, which serves 62,000 members from its Los Angeles headquarters, was in the process of sunsetting a student loan initiative that once made USC CU the largest credit union participant in the Federal Family Education Loan Program.
FFLEP, initiated by the federal Higher Education Act of 1965, once was the second-largest provider of federally guaranteed student loans in the country. After the passage of the Health Care and Education Reconciliation Act in 2010, the program was eliminated, removing the public sector safety net from beneath private student loan providers, including credit unions.
On Oct. 4, Perez met with his asset/liability committee to examine the performance numbers for the credit union’s existing student loans, which dropped from a peak of $350 million in 2008-09 to a current portfolio of around $80 million.
What they discovered has caused a change of heart for the credit union veteran.
“With a delinquency rate less than 2%, our portfolio has performed much better than any reasonable person would have anticipated given the severity of the economic downturn,” Perez said. “If our losses were lower than anticipated, that validated the point where we can remove some of our conservative shields and start helping members again with this critical product.”
Recently, major lenders such as J.P.Morgan Chase and U.S. Bank have exited the student loan market. At the same time, government agencies are taking third-party loan servicer Sallie Mae to task for poor service.
Some credit unions have become gun-shy when faced with a loan category that, at an aggregate $1 trillion, is second only to home mortgages as the highest level of U.S. consumer debt.
“We were once at $100 million in student loans,” said Greg Smith, president/CEO of PSECU in Harrisburg, Pa., which formerly was one of the nation’s top 100 FFELP participants. “Now we have about $20 million in student loans and we’re slowly easing ourselves out of the market.”
Smith cites a growing default rate primarily among federally insured student loans and the rapidly rising costs of higher education, which he described as a “hockey stick-shaped spike” similar to the rapid rise of real estate prices in the mid-2000s just prior to that particular bubble’s burst.
When it comes to financing what are essentially long-term, high-balance signature loans, Smith sees a potential threat to participating credit unions’ bottom lines.
“I have a concern about racing headlong into that business,” Smith said. “I have a feeling it could end badly for credit unions.”
Not all credit unions see such a dark horizon. In fact, student loans are on the rise, according to NCUA data.
Private student loan activity among federally insured credit unions has risen significantly over the past two years, growing from about $1.5 billion in December 2011 to slightly more than $2 billion in December 2012, an increase of almost 36%. In the first six months of 2013, the total rose nearly 13% more, to slightly less than $2.3 billion.
During the same period, delinquency rates were 1.29% in December 2011, 1.36% in December 2012 and 1.2% in June 2013. Loan charge-offs were even less.
“To date in the credit union industry, student loan performance has been on par with other loan products,” said Ben Hardaway, NCUA communications specialist.
Such trend information doesn’t surprise Mike Long, EVP/chief credit officer for $1.8 billion University of Wisconsin Credit Union in Madison, Wis. With $315 million, or 28% of the credit union’s overall loan portfolio, in federally guaranteed and private student loans, Long believes UWCU is currently the second largest provider of student loans among credit unions nationwide.
UWCU is bullish on the future of student loans and Long is an unabashed cheerleader for the lending product, which hovers near 1% delinquency at any given time, making it one of the credit union’s top-performing loans.
UWCU believes so strongly in the importance of student loans that, following the 2010 dissolution of FFELP, the credit union started CU Campus Resources, a CUSO that provides customized student loan and advisory services to credit unions that have relationships with schools in their community or are large, community-based institutions. Long is the CUSO’s president/COO.
The 11 credit unions, including UWCU, that participate in the program hold more than $21 billion in assets and serve 1.5 million members. As of August, the CUSO had funded more than $100 million in private student loans for its participants.
The advantages provided by CU Campus Resources have had a positive impact on the $5 billion CEFCU, based in Peoria, Ill., according to Katie Mueller, CEFCU’s private student loan manager.
“The growth that we have seen since starting our program in February 2011 has been outstanding,” Mueller said. ”We projected reaching $20 million in five years and we did $24 million in three years. We are very excited.”
CEFCU, which serves 280,000 members in central Illinois, began offering student loans in a market where almost no banks or credit unions had such a program. It offers only private student loans and services its portfolio in-house.
“We’ve helped so many students fulfill their college dreams with the loans. It’s had a very positive impact on our bottom line as well,” she said.
In addition to offering in-school student loans, CEFCU also has received many requests from for consolidation loans from recent graduates and their parents, who are looking for ways to combine student loans to get a better handle on monthly payments.
CU Campus Resources’ Long said the CUSO would like to add four more credit unions.