<p>ARLINGTON, Va. – For a long time credit unions have spelled `student loan' with four letters, said John Garey, Manager of CUNA Mutual's Student Loan Network, but for their own sakes they need to sharply alter that opinion. "I am passionate about this," Garey acknowledged, "I believe in credit unions and I think student loans represent a strong opportunity" for them he said. Through the late 1980′s, student loans had a bad reputation among many credit unions, Garey explained. The complicated diligence the loans required, along with the convoluted and often changing government regulations and high staff requirements to originate and service the loans meant that many credit unions got out of the student loan business by the late 1980′s. Now CUNA Mutual's Student Loan Network and a similar program run by the $135 million USC Credit Union seek to reintroduce the loan product to more credit unions. Garey and other advocates for the loans argue that student loans can help credit unions recapture a key youth demographic where their membership has been dropping. "We're getting old," remarked USC CEO Gary Perez, "student loans provide an excellent vehicle for credit unions to reintroduce themselves to this key demographic." Garey echoed Perez's observation's pointing out that addressing members' needs for student loans means reaching members at a point where many times they feel they most feel the need for a friend. "Parents often don't understand the student loan process," Garey said. "Many times it mystifies and frightens them. They need a source of information they can trust," he added, calling serving the need a perfect niche for credit unions. Student loans come in two types, so-called Stafford Loans, which are made to the students themselves and are often for roughly five or six thousand dollars, and Parental Loans for Undergraduate Education or PLUS loans that are made to parents and are usually are for over $10,000 dollars, according to Michael Kim, manager of USC's student loan program. USC was recently named by Greenleaf Gazette, a business magazine that addresses higher education issues as the largest credit union student loan leader, with a 2000-2001 loan volume of $73.7 million. Student loan advocates also stress that the loans are simply a good deal for credit unions. First, the loans are 98% government guaranteed, Garey said. Second, they are variable – the interest rates change according to a pre-set market standard once a year to the student or the parents and quarterly to the credit union, he explained. Also the credit unions are shielded from instant rate risk. Should the variable interest rates rise to more than the student's rate the federal government will step in and make up the difference, he said. The way it works is something called the "special allowance," Garey explained. On July 1 the loan rate adjusts for the borrower to a rate based on the 91-day Treasury rate plus a subsidy and that rate sets the floor for the lender. But each quarter the government calculates the "special allowance" based on the three-month commercial paper rate. When this rate exceeds the borrower's the government pays the difference, Garey said. Garey touted the experience of Notre Dame Federal Credit Union that saw its student loan business grow from 18% of the credit union's loan portfolio ten years ago to 38% now. This guaranteed income stream has allowed the credit union to move away from auto loans and into fixed-rate student loans," Garey said. The two types of loans are a good complement for each other, Garey noted. Finally, credit unions need to be part of a coming wave of student loan activity, expected to reach as high as $48 billion in annual loan volume, according to the Student Loan Network. Getting credit unions to offer student loans is the mission of both CUNA Mutual's Student Loan Program and Trojan Financial Services (TFS), a CUSO that USC founded and which started reaching out to other credit unions to help them start student loan programs last year. Both programs seek to help demystify the process for credit unions as well as provide back-office support for the credit unions to offer the loans with a minimum amount of staff. Garey related the experience of Suncoast Teachers Federal Credit Union that had seven staff people dedicated to originating and servicing its student loans and was able to reassign five of them after joining the Student Loan Network. Over a thousand credit unions, or about 60% of credit unions that offer student loans belong to the network, Garey said. One crucial step is adding a university to the credit union's field of membership, Garey said, and getting the school to add the credit union to its list of preferred loan providers. Both the Network and TFS offer credit unions advice on how to make the necessary inroads and also refer the credit unions to a third party to service and originate the loans. One difference between the Network and TFS involves the fate of the loans on the credit union's balance sheets. Garey is firmly of the opinion that the loans are a net plus for credit unions and that many, if not all, should keep them on the books, especially since there is evidence that the student loan relationship will lead to other relationships with the student as he or she matures, starts a family, etc. TFS by contrast asks credit unions it helps set up a student loan program to sell it the loans they originate. But Perez pointed out that a credit union need not sell the loans to the CUSO immediately and that keeping the loans may not be in the best interest of every credit union, especially since there is usually a premium attached to their sale. The question of whether to sell or not to sell has been growing in importance since the current low interest rates for the loans is expected to lead to a wave of loan consolidations, Garey said, under the same terms as the original loans. Credit unions need to have the loans on their books to take advantage of that, and other financial institutions such as Sallie Mae and Citybank have already begun pitching consolidation services to credit union borrowers. [email protected]</p>