Strict Guidelines, Payment Revamp Buffer Loan Losses
A quick word association quiz: Bubble. Odds are some readers may have answered housing.
But lately there's been talk of a student loan bubble. While some observers warn rising student debt is dangerous, many point out that, as occurred when the housing bubble burst, credit unions are in a much better position than many lenders.
They’re in the private student loan market, rather than offering government loans, experts reminded. Just as mortgage lenders got into trouble with no-doc, low-doc loans, there is a concern government student loan requirements aren't strict enough. Credit unions, on the other hand, have held to prudent requirements for their student loans.
Darryl Dahlheimer, program director at LSS Financial Counseling in Minneapolis, is among those concerned about rising student debt. He confirmed a host of newspaper articles focusing on students facing heavy loan debts while graduating into an unpromising job market.
“It's absolutely statistically true,” Dahlheimer said. “By 2012, total student loan debt had grown to $1.2 trillion, more than the total credit card debt. Only 50% of student loans are in payment. For those who are out of school and should be paying, there's a 30% delinquency rate. Rutgers University surveyed a lot of college graduates and found one year after graduation 50% did not yet have a job.
So, is there a bubble?
Read more: Half of all student loan debt is in deferment ...
“For sure. Half the debt is sitting in deferment and growing and growing,” Dahlheimer noted. “Colleges, just like mortgage lenders did, have no real consequences. It's all federally backstopped.” President Barack Obama recently signed an executive order allowing student loan borrowers to limit repayment of their loans to 10% of their monthly income starting in December 2015. Is this a good idea?
“Any help is some help,” Dahlheimer acknowledged. “But how many people does it really affect? When the housing bubble happened, the federal government was very slow to roll out help. The ’pay as you go’ program is estimated to assist up to five million borrowers. That's a drop in the bucket.”
At the same time, LSS Financial Counseling stressed the impact of working with students to advise them on dealing with their debt. Data from LSS and the Federal Reserve showed 100% of student loans can be brought out of default through repayment counseling.
Besides prudent underwriting, credit unions can be even more protected from student loan defaults by offering repayment counseling.
Eric Bugger, vice president of consumer lending at the $2.8 billion Wright-Patt Credit Union in Fairborn, Ohio, agreed the amount of debt some students are shouldering is going to create problems for them.
If student loans take too much of someone's paycheck, they’ll struggle to purchase a vehicle or qualify for a mortgage, Bugger said. They may start their adult life with a financial burden that will take a long time to eliminate, he added.
“I believe the issue is more of a fear about not knowing what is going to happen and when,” Bugger said about a looming bubble. “It seems as though most credit unions are entering the student loan market in a sensible way by limiting who they’ll lend to, what schools they allow in their programs and by doing some basic underwriting before granting a loan.”
At the $1.9 billion University of Wisconsin Credit Union in Madison, while the average student loan debt is about $25,000, that's comparable to a typical new car loan, said Mike Long, EVP/chief credit officer.
Credit unions hold approximately $2 billion in private student loans, he said. Of that $2 billion, the top 25 producers hold 50%. The delinquency rate is 1%, which is lower than auto loans, with 0.2% charged off. The portfolio has not been growing rapidly, and at 9%, is a small part of almost any credit union's lending portfolio, Long added.
Vince Passione, CEO and founder of LendKey Technologies, a cloud-based technology company in New York, also applauded efforts by credit unions to make private student loans affordable and back them with conservative underwriting.
“Credit union student loans are in a very strong position, with no bubble,” Passione said. “There are expected family contributions, and repayment starts while the student is still in school. They know how much they will owe, and can build a positive credit score. With federal loans there's no underwriting. If you need it you get it.”
The key, he continued, is right-sizing the loan to match what the student can reasonably expect to earn. It's clear to people today that education is expensive. Are students taking on too much debt? It depends on the major they’re pursuing and their anticipated income, according to Passione.
In a report titled “Understanding Private Student Loans,” Passione listed factors credit unions should consider in establishing a private student loan program such as will your asset mix welcome another long-term loan product and us your institution large enough to support a private student loan program. Other considerations included does your market want student loans and will borrowers support the program and where is your institution in its business life cycle.
Passione's presentation noted that during the last four academic years, 90% of undergraduate and 75% of graduate private loans had cosigners, which may be an indicator of significantly low default rates.
“The biggest challenges for both borrowers and lenders might be getting past the alarmist headlines that continually mix private loans with federal loans in their discussion about high default rates,” Passione wrote.
The current generation of college students is unique, according to Richard Kump, vice president of member services at the $376 million UMassFive Federal Credit Union in Hadley, Mass.
Kump said there has been a willingness to take on student loan debt, but now there's a change in attitude and students want to keep their payments affordable. They want to pay that debt off quickly, and Kump sees some students making more than the minimum payment.
While some credit unions have a reputation as being liberal lenders, that's not the case, Kump said. Instead, they have established fairly strict income and credit requirements for private student loans. They’re also paying for insurance so if a loan does default, the credit union isn't stuck with a loss.
Counseling is vital, said Heather Shanahan in the program development office at Springboard Nonprofit Consumer Credit Management in Riverside, Calif.
“At the same time the cost of education continues to rise, we are also seeing the number of underemployed or unemployed graduates rising,” she said. “We offer counseling on all the options available to them and step-by-step guidance with a customized action plan.”
Shanahan described Obama's recent move to set a percentage limit on repayments of federal student loans as a step in the right direction that can help recent graduates afford items such as homes and vehicles and put some of their income back into the economy.
“There are payment plans currently under review which allow payments to be tailored to the borrower's income,” Shanahan said. “Refinancing options are also under review. We do believe credit unions can protect themselves by working directly with borrowers to avoid default, and by offering pro-active counseling to their members.”