Google the phrase "student lending crisis" and you'll be inundated with nearly two million links to a myriad of articles, blogs and editorials detailing the demise of the student lending industry. Before you chalk it up to governmental blunders and greedy bankers and move on to more pressing credit union issues like how you're going to sell used car loans to a membership base whose average age is pushing 50, take heed of a statement made by John F. Kennedy in 1959.
"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity."
So, where is the opportunity amid the turmoil? Take a closer look at the problem, which first began with the College Cost Reduction and Access Act of 2007 that slashed the yield lenders earn on federal loans. That tropical depression for student lenders grew into a Category Five hurricane in 2008 with unprecedented market turmoil and restricted access to capital, as the market for securitized loans–which student lenders sell to raise capital so they can fund more loans–simply evaporated. As a Wall Street Journal editorial succinctly stated, " The combination of legislative fiat and fewer investors willing to buy asset-backed securities amid the credit crunch has put the squeeze on lenders." This squeeze forced many traditional lenders to exit the marketplace for both federal and private student lending, leaving students and families scrambling for financing like never before.
While the future of federal student lending remains cloudy for lenders not named "government," the area of private student lending is one that credit unions should not ignore. With many lenders leaving the market and with those remaining charging high rates and fees, the window of opportunity is wide open. Growing more than 350% in the last seven years (to $23 billion in 2007), private student loans help fill the funding gap (the difference between the cost of attendance and federal aid and scholarships) that many students face. With tuition continuing to skyrocket, federal aid limits increasing a mere $2,000 and many parents struggling with declining home values and a weakened economy, the growth of private student loans is sure to continue.
The credit union industry is filled with well-intentioned phrases such as: "the credit union difference," "people helping people," "working cooperatively" and "connecting with Gen Y." While many credit unions exemplify these words on a daily basis, the private student lending market gives credit unions a perfect opportunity to back up the rhetoric while growing and diversifying their loan portfolios, providing superior economic value to members, delivering a product that will truly connect with Gen Y, and producing solid financial returns.
At its core, private student lending takes credit unions back to their roots–lending to members at a time of critical need. Along with buying a house and saving for retirement, paying for college is one of the three biggest financial decisions consumers faces during their lifetimes. Isn't it time credit unions filled this hole in their product line? The numbers clearly show the opportunity. In 2007, the average private student loan had a rate between 9% and 10%. On top of that, most lenders charged an origination fee that averaged between 4% and 5% but in some cases was as high as 11%. This year is likely to be marked by even higher rates and fees as the specialty finance companies that dominate private student lending struggle mightily due to the failure of secondary markets.
Credit unions, on the other hand, are balance sheet lenders with member deposits ready to lend. They are not subject to the same liquidity concerns and capital market fluctuations that many other lenders have experienced over the past year. And by working in a collaborative networked environment, they can do what is right for their members, the future of their cooperative and their country. All while offering a product that will truly enable members to make better lives for themselves.
With these thoughts in mind, a core group of credit unions and industry experts formed a new CUSO called Credit Union Student Choice. By investing in the future and working cooperatively, they developed an operational model that would allow credit unions to effectively enter a new market. Since launching in early May, credit unions partnered with Student Choice are approving private student loans with no origination fees and rates well below average. Not only does this provide tremendous economic savings to members, but it gives credit unions a long-term earning asset and a valuable opportunity to build a relationship with the future.
The effort to launch Student Choice and help credit unions get into the business of private student lending is not only about financing students' college needs; it demonstrates the basic principles of why financial cooperatives exist and can truly showcase the "credit union difference" by redefining quality in private student lending.
Opportunity is knocking. Are credit unions ready to answer the door?
Michael Weber is vice president of marketing at Credit Union Student Choice,
a private student lending CUSO. He can be reached at 563-599-1193 or
mweber@studentchoice.org
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