Filling the Student Lending Gap
When President Trump rolled out his budget proposal in May, it included massive cuts to federal student loan programs.
Now that piece of paper seems so three months ago. In a politically divided nation, sometimes the best bet is on nothing happening.
But even if no changes occur in the ultimate budget Congress must pass this fall, college costs will continue to rise and students and their families will be struggling to pay the higher out-of-pocket costs.
Sallie Mae and other banks are gearing up for a bigger role, and so too is CU Student Choice, the largest CUSO, with members holding half of the $4 billion in private student loans on credit union books in March. Another CUSO, CU Campus Resources of Madison, Wis., was acquired by Thrivent Federal Credit Union in May.
Those involved in education finance are assessing the political scene, weighing last year's election results, discussions about cuts at the U.S. Department of Education and budget proposals from Trump and House Republicans.
“We expect there will be major changes coming. We don't know what that means or what that will look like,” Scott Patterson, CU Student Choice's president/CEO, said.
“Our assumption within the CUSO here is that the member need for alternative financing solutions will increase,” Patterson said. “The need to help members in this area has never been greater.”
Sallie Mae Chairman/CEO Raymond J. Quinlan told investors during a conference call in July that “Washington has been clear as mud about what will happen in our industry.”
“Because much of the discussion has been around various programs that may or may not be discontinued, especially the Plus programs, we have done quite a bit of work on strengthening our infrastructure, eliminating bottlenecks, with the idea that were the federal programs to change in such a way that our volume would increase significantly, we would be prepared,” Quinlan said.
There are signs others in the private student loan market are stirring.
Wells Fargo's private student loan portfolio totaled $12.2 billion on June 30. Citizens Financial Group started its private student lending business in 2009 and has since expanded to partner with nearly 2,500 not-for-profit higher education schools in all 50 states. The Providence, R.I., bank held $7.7 billion in private student loans as of June 30, up 40% from a year ago.
In February, Social Finance Inc. bought Zenbanx, a 36-employee FinTech company in Wilmington, Del., and announced plans in June to add 400 call center and internet technology workers there by the end of 2018. The San Francisco-based SoFi originated $8 billion in loans last year from mortgages to personal loans, but a major focus of its model is forming relationships with companies to offer student loan payments as a bonus to lure millennial employees.
Thrivent ($523.4 million in assets, 50,182 members) began offering private student loans in 2015. As of June 30, the Appleton, Wis., credit union had $22.4 million worth of student loans, more than double its portfolio a year earlier and accounting for 6.7% of total loans.
Right now, credit unions have only a tiny role. The nation's entire student loan portfolio was $1.4 trillion in public and private loans on June 30, up 6.2% from a year earlier, according to the Federal Reserve's consumer lending report.
MeasureOne, Inc., a San Francisco consulting company, said the nation's private student loan balance was nearly $64 billion in March, up 0.5% from a year earlier. Undergraduate loans, which accounted for 87% of the total, rose 0.7%, but graduate loans fell 4.1%.
Not only is the $4 billion held by credit unions small in comparison with industry leader Sallie Mae, a bank with $15 billion in private student loans on June 30, the total amount is small within credit unions.
Student loans made up only 0.4% of the loan portfolio of all credit unions in March, the same rate as December 2015 and up from 0.3% at the end of 2011. Those numbers include the 6,519 credit unions that did no private student loans.
Even among the 810 credit unions doing at least some student loans, they were still only 0.6% of its portfolios in December 2011, and have remained at 1% since 2015.
But like many credit union segments, it's a growth opportunity. Credit unions have been increasing loans at a rate higher than the national average.
Private student loans at credit unions grew an average of 34% per year from 2011 to 2015, and 9% in 2016.
So far this year, credit unions still seem to be making gains, according to second-quarter call reports recently released by the NCUA.
The 10 largest student lenders held just over $1 billion in private student loans, up 23% from a year ago.
These credit unions range in size from the nation's largest, Navy Federal ($82 billion in assets, 7.2 million members), to MIT Federal Credit Union in Cambridge, Mass. ($541.8 million in assets, 35,424 members).
Private student loans account for 0.35% of total loans at Navy Federal, but 21.8% of loans at MIT FCU, the fourth-largest credit union student lender, and an affiliate of CU Student Choice.
Private student loans are designed to fill the remainder left after college costs, federal loans, grants, scholarships and savings.
The formula has a lot of moving parts but some of the major directions can be reliably guessed: College costs will rise significantly each year and federal help will stay the same or decline. As a result, the remainder will be rising for most students.
“What keeps mom and dad up at night is ‘How do I finance the rest?’” Patterson said. “That gap keeps getting bigger each year.”
More students are borrowing for college, and their debt burdens continue to rise, even after adjusting for inflation, according to The College Board's most recent Trends in Student Aid report.
The average borrower left school in 2014-2015 with $28,100 in student loans, public and private. Ten years earlier, the cost was $23,800 in 2015 dollars.
The percentage of students borrowing for college rose from 58% of those graduating in 2004-05 with a bachelor's degree to 61% of those graduating in 2014-2015.
In the 2015-2016 school year, banks and credit unions originated $9.9 billion in private student loans, up from $9.1 billion a year earlier. The 2015-2016 amount included $4.5 billion by Sallie Mae, the former federal government enterprise that went private in 2004.
Sallie Mae, based in Newark, Del., has been watching the trend of parents taking an increasing role as direct borrowers for their children's education. It's projecting originations will rise to $4.9 billion this year.
In Sallie Mae's most recent annual report, “How America Pays for College,” the lender's surveys found 42% of families borrowed to help pay for school in 2016-17. About 14% used funds borrowed by the parent and 36% used funds borrowed by the student.
“The Federal PLUS Loan continued to be the most commonly used parent loan resource — used by 9% of all families — and accounted for the highest average amount borrowed ($10,226), though that amount was about $1,100 lower than the previous year,” the report said.
Among student borrowers, 33% used federal student loans, and 10% used private student loans. The average federal loan debt was $8,835, up by almost $1,500 from a year earlier. The average private loan was $10,707, up by $1,700.
Even with the higher costs, Patterson said people who graduate from a four-year college typically have higher incomes and lower risk of unemployment than those without one. Also, they have a better chance of being able to pursue a career that provides fulfilling work.
“Having a college degree is one of the best investments a person can make,” he said.
But the choices are emotional, and the students — and parents — run the risk of taking on more debt than they are likely to be able to repay, or debt that will hold them back for years.
The task for credit unions and their CUSOs is to help provide advice that is sound, and loans that are responsible, Patterson said.
“Are you making a loan that the member can pay back?”