The Perfect Storm of Higher Education
When the banks left New York's Lower East Side in the 1980's, the neighborhood reacted with a breakthrough idea: Let's skip the middleman and take care of each other. They pooled their money and the Lower East Side People's Federal Credit Union was born.
This is the story of credit unions all the way back to industry's beginning: regular people taking a "do it yourself" approach to solve seemingly insurmountable environmental pressures and creating something new.
The moral is simple: When people lose access to a fundamental need, we find creative ways to restore that access.
There's a perfect storm of increased need and decreased access brewing in the world of higher education.
Traditionally, credit unions who play the student lending game fall into one of two camps.
Camp One keeps the program at an arm's length. By referring borrowers to groups like Sallie Mae and collecting a bounty on each head, these credit unions bring in revenue and forego the risk. What they win in one-time revenue, they lose in long term relationships.
Camp Two sees student loans as an entr?e into a larger relationship. They're partnering with groups like Student Choice and Fynanz to compliment student loans with offerings like financial education and consolidation loans. The loans are on their books, so they assume the risk but also have "skin in the game" to keep their member financially healthy.
In order to manage risk while growing responsibly, organizations like UW Credit Union make sure they're the last resort, work directly with schools to certify no more money is lent than needed, and use cosigners and investigate existing debt to make sure borrowers can afford the loan. As a result, their write-offs are negligible.
But the game is changing.
The U.S. Department of Education reported that the overall student loan default rate in 2008 was 7%, up from 6.7% in 2007 and 5.2% in 2006.
College tuition has inflated at around 8% per year since the 1970s, says FinAid.org. That means my best friend's new baby (her name is Finley, she's beautiful), will pay more than three times what today's college freshman spend.
And, while the "learn more, earn more" salary gap continues to climb, making college key for higher wages, the relative value of a degree is changing. In her book "DIY U," Anna Kamanetz explains:
"If you look at the median incomes by education since 1970, there's no increasing return to a college degree to go with the increased cost. There's a steep decline in the incomes of less-educated workers combined with a flat declining income for more-educated workers."
In other words, the penalty for not going to college is rising, while the reward has flatlined.
Groups like UW Credit Union show us that credit unions can lend responsibly and keep their members healthy. But we saw from the housing crisis' domino effect how the decay of one system, even if we keep our hands clean, can bring down the rest.
It's time to stretch beyond what we know. Innovations are already happening outside of the financial industry to disrupt these trends.
Do-it-yourself education projects like Josh Kaufman's Personal MBA, the Kahn Academy, and Jim Bloom's Edupunk movement are helping a new wave of students to skip over the middle-man of high-priced colleges and follow a self-directed path to higher learning.
Kentucky's Barea College has created an educational barter system for a time-rich, cash-poor generation by offering its 1500 students free tuition in exchange for 10 - 15 hours of work for the school each week.
How will credit unions answer the shift? Our Do-It-Yourself roots might hold some of the answers.
The Crash Network is a grassroots organization of more than 100 young credit union professionals. Its activities include meetings, mentorships, online collaboration and development projects. Opinions expressed are the personal views of the author.
Brent Dixon is an adviser at the Filene Research Institute.