The problem of snowballing student loan debt is well-documented in what seems like a weekly ritual in the media. While it is true that graduates are often left with numerous loans, each with different payment schedules and terms, we hear precious little about solutions.
One solution that credit unions can offer is student loan consolidations—a relatively new product—that can benefit both the borrower and the lender.
Borrowers are able to roll multiple loans into one, thereby reducing interest and monthly payments and making student loan debt easier to manage. Funds are freed up for productive purposes like automobile loans, mortgages and investments.
Lenders receive multiple benefits, including a well-performing asset on their balance sheets since qualified borrowers are earning income and have graduated—strong historical indicators of positive repayment. They also receive an entrée to the Gen Y market; a demographic that has bypassed credit unions in recent years.
If the loan experience is positive, these young members will be back for additional services and products, which can translate into an opportunity to gain lifelong members.
The best way to describe the mechanics of loan consolidations is through the real-life example of Shelby Jenkins, 27, who pursued her pharmacy degree at Ohio Northern University, a private college in Ada, Ohio. She spent eight years pursuing a six-year degree, including two years caring for her father, who was suffering from health issues. She ultimately earned her doctorate in pharmacy and today she works as a fill-in pharmacist for Cleveland-area Wal-Mart stores.
Jenkins graduated with $300,000 in debt, a staggering amount that is becoming more common, especially with advanced degrees in the healthcare sciences. Her monthly payments to service the interest-only portion of her 25 different student loans totaled $2,800, about half of her monthly income. Interest rates on the loans ranged from 9% to 13%.
Jenkins wanted to do something about her debts and sought out a student loan website designed to educate borrowers and match them to student loan programs among participating credit unions.
Eventually she secured a loan with the $178 million Aspire Federal Credit Union in Clark, N.J.,to consolidate $120,000 of her private student loan debt. Her initial lender charged more than 9% interest; Aspire's 5.5% interest rate helped reduce her payments to $1,950 per month, freeing up an extra $850.
Jenkins is now paying toward the principal, and she was able to move out of her father's house to live on her own. Her debt is more manageable and it's no longer an overwhelming burden.
Consolidation loans are also advantageous for parents—who typically co-sign for the loan—since it is much easier to keep track of one loan as opposed to multiple loans with differing terms and payments. Most programs also offer a co-signer release, which allows the co-signer to remove the debt obligation after the borrower has demonstrated positive repayment habits and meets credit criteria on his or her own. The release is particularly advantageous for parents with several family members attending college, as well as for co-signers unable to take advantage of the current low interest rate environment due to their child's student debt.
Aspire is one of the earliest participants in cuStudentLoans, a program comprised of credit unions offering private student loans and consolidations. The program is powered by LendKey's loan origination and servicing infrastructure, and according to supporting data, has produced superior performing assets:
- The consolidation portfolio has more than 4,000 loans and is nearing $250 million in total financing.
- The average FICO score on the portfolio is 745.
- More than 98% of portfolio is current.
- Only 0.33% of total loans account for 60-day or greater delinquency.
Loan participations are also offered to enable more credit unions to participate and mitigate risk.
The program also offers education to members who apply for loans, ensuring that applicants know the best refinancing options. The program's consolidation loan portfolio, which was launched in 2011, accounts for more than $200 million in 3,900 consolidation loans.
Vince Passione is CEO of LendKey Technologies Inc.
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