Properly Managed, Student Loans Offer Benefits
A college education has long been intertwined in the fabric of the American Dream.
President John F. Kennedy proclaimed American Education Week in 1961, saying, “Let us think of education as the means of developing our greatest abilities, because in each of us there is a private hope and dream which, fulfilled, can be translated into benefit for everyone and greater strength for our nation.”
Those words as ring true today as they did when President Kennedy issued that proclamation. Education can unlock the enormous potential of the American spirit and remains a basis of our national economic might.
But this benefit comes at an increasingly higher cost. College costs have increased much faster than families’ incomes and financial aid. In 1961, it cost about $2,300 to attend an Ivy League college for a year. That amounted to about 40% of the median household income. Today, the average cost for that same education is around $54,000, astonishingly more than 100% of median household income.
Private student loans increasingly fill the financing gaps for a large majority of students in the United States. They are also one of the fastest-growing products in the credit union industry.
The average balance on a credit union student loan is $6,400, and nationally, the average student loan debt is $29,000. About 70% of all graduates carry student loans into their new lives. Many have found it hard to start those new lives with debt sometimes equaling the price of a home, and monthly payments to match.
The NCUA sees a good match between consumers in need and credit unions committed to serving those needs. Student lending is a potentially promising opportunity, when managed well, to establish long-term relationships with consumers at the beginning of their financial lives. It is also an opportunity to ensure your members receive the best deal possible. We encourage credit unions to meet this need prudently and with the interests of the membership in mind.
We identified private student loans asStude part of our supervisory focus early in 2014 and issued a letter to examiners and credit unions outlining appropriate program management expectations. We did this because we see affordable student loans as a valuable product for credit unions and their members.
The NCUA encourages credit unions to continue to adopt best practices that both serve members and control the unique risks associated with student loans. Specifically, credit unions should consider several strategies.
Know the product, the marketplace, and your members’ needs. A well-managed student loan portfolio can open the door to opportunity for your members, and enhance your bottom line. Poorly managed, the portfolio is fraught with risk, as well as lost member confidence. See how the NCUA will evaluate your portfolio through our Private Student Loan Supervisory Letter.
Exercise appropriate oversight over third-party relationships. Make sure any vendors you work with uphold your credit union's standards. Your oversight and due diligence are critical to ensuring your members are treated fairly and the portfolio performs as expected. Use the NCUA's third-party questionnaire to make sure you cover all the bases.
Use care and counseling early on. Student loans contain complexities not common with other types of consumer credit. Be sure you clearly inform and educate your members on the benefits, risks and obligations of this unique form of credit. Encourage your members to visit the NCUA's consumer education website at www.mycreditunion.gov to learn about student financing options. Remember, build a strong beneficial relationship today, and this borrower will become a lifelong loyal member.
Work with borrowers who hit a bump in the road. It is in your interest, as well as your members’ interests, to reach reasonable accommodations for struggling borrowers safely and soundly.
Debbie Matz is chairman of the NCUA. She can be reached at 703-518-6301 or firstname.lastname@example.org.