Credit Unions Still Leery About Private Student Loans
In the current white-hot lending environment, private student loans stand as potentially one of the most profitable loan products a credit union can offer, with value to both borrower and lender. Yet, some cooperatives are still shying away from what was once one of the most controversial financial products in the market.
Lenders that offer private student loans have realized remarkable growth with remarkably low delinquency rates. In 2015, they expect more of the same, including additional growth in the area of consolidation loans, which are designed to better serve members by aggregating multiple student loans into one monthly payment, often with a significantly lower interest rate than the existing loans being consolidated.
Still, those who have been successful with private student loans are dumbfounded by the lack of acceptance, or even interest in what they consider an excellent loan diversification product.
“It's been puzzling for me personally to observe,” Mike Long, chief credit officer for the $1.9 billion University of Wisconsin Credit Union in Madison, Wis., said about credit unions’ overall lack of student loan acceptance. “It's an unsecured consumer loan, which credit unions have been doing since they started. Just because it has ‘student’ attached to it doesn't mean they should be leery of it.”
According to data from Callahan & Associates, UWCU is the country's second-largest student lender. Of UWCU's total $1.3 billion loan portfolio, private student loans comprise $106 million, according to Long.
But UWCU also is servicing $200 million in federally guaranteed student loans that it granted prior to the 2010 shutdown. That amount is down from the roughly $500 million in guaranteed loans at the height of the credit union's involvement in the program.
“So, we’ve seen significant runoff,” Long said, adding due to the strong affiliation throughout Wisconsin's statewide university network, UWCU's private student loan program has performed well.
“Our private loan program has had nice manageable growth,” Long said. “We’ve seen annual growth of between 10% and 15% since 2009, but we’re wildly more successful than most other credit unions with these loans.”
That success is the result of a stronger affiliation and longer history in offering student loans, but market innovations are helping more credit unions enter the private market in ways that are both safer and more profitable, according to some industry leaders.
Read more: CUSO corners student loan niche ...
“Credit unions have a great future in private student loans,” Jim Holt, chief revenue officer for Credit Union StudentChoice, a Washington-based student loan CUSO, said. “Credit unions are always looking for ways to attract new, young members, and what better members to attract than those seeking and earning a college degree?”
Credit Union StudentChoice is one of a number of CUSOs that have emerged in the wake of the Health Care and Education Reconciliation Act to help credit unions enter the private student loan market with minimal risk and maximum profitability. Holt said the CUSO currently works with 244 credit unions and manages $1.5 billion in private student loans for its members.
The CUSOs provide both marketing and back-office services in promoting and processing private student loans. Some allow participation loans with other credit unions, while others enable credit unions to work exclusively with their own memberships. All use each credit union's own underwriting standards in the loan approval process.
Holt and others have said CUSOs play a valuable role in promoting and supporting credit union participation in private student loans. Overall, credit union participation in such programs has almost doubled, growing to $2.5 billion in 2014 up from $1.3 billion in 2011. Since the total private student loan market is $93 billion, there is ample room for continued growth in 2015 and beyond, according to Holt.
Default rates on student loans always have been an issue and the current federally guaranteed student loan program still sports a 13.7% default, largely due to a lack of good underwriting standards on the original loans, Holt said. Private student loans rely on those thresholds, and in 90% of all cases, a parent or relative co-signs with the student, which further ensures loan repayment.
Even though many private student loan programs are relatively new, early trends indicate a vast improvement in delinquency and default ratios, Holt said. Using data from MeasureOne, a San Francisco consulting firm that analyzes the financial impact of student loans, he said across all institutions, the private student loan annualized charge-off rate is 3.16%. Among the credit unions participating in Credit Union StudentChoice, the annualized charge-off rate dropped to 0.67% for the first quarter of 2014.
For UWCU, the delinquency rate has been 1.5% and the charge-off rate a mere .2%, Long said.
“That's better than either our credit card program or any secured loans we offer,” he added.
Both Long and Holt expect to see an increase in loan originations and credit union participation throughout 2015. They also think that consolidation loans are poised to take off.
UWCU introduced consolidation loans in 2014 and it already has $4 million on the books and growing, Long said.
“Credit unions didn't necessarily see what their place might be in student loans in the past, but this may be their biggest opportunity,” he offered. “Through student loan consolidations, we can offer better rates than the federal loan program. Even if we just consolidate private loans we can put members in a better position than they are today.”