As millions of college students head back to campus in a few weeks, hundreds of credit unions will be supporting their educational dreams with a private student loan.
Meant to fill the funding gap that many students face after they have exhausted lower-cost sources of aid — including grants, scholarships, and federal student loans — school-certified private student loans are a critically important educational funding mechanism for millions of American families. In fact, in the wake of rising college costs, annual private student loan volume grew from $8.68 billion in 2012 to $11.6 billion in 2017.
Today, hundreds of credit unions are also actively engaged in offering student loan refinance to college graduates. The refinance market has exploded in the past several years, with both emerging fin techs and traditional lenders jumping into the space chasing high-quality loans and long-term relationships with highly coveted young professionals.
Although it’s easy to lump both in-school and refi loans into the “student” loan bucket, that would be a mistake. To best serve members and grow these products, it’s imperative that credit union lenders understand the unique qualities of each.
Different Loans, Different Borrowers
In addition to buying a home and saving for retirement, funding a higher education is one of the three biggest financial decisions faced by the average consumer. According to a 2015 Gallup Poll, paying for college is the top money concern for parents of children younger than 18 years old. More than seven in 10 parents indicated they were “very” or “moderately” worried about the issue.
Not surprisingly, determining how to pay for college is often a family decision, and the influence of parents is paramount. Although the borrower of an in-school private student loan might be a 19-year old undergraduate student with limited credit history, the key decision-maker — and co-borrower on the vast majority of in-school loans — is likely a 51-year-old mom or dad with a 750+ credit score and $80,000 income.
Refi loans, on the other hand, target college graduates who are looking to save money and/or simplify their payments by refinancing and consolidating their outstanding student loans. The typical borrower is likely in their late 20s to early 30s with a 750+ credit score and promising career trajectory. Some might need a co-borrower to meet stringent underwriting criteria, but a much higher percentage than on in-school loans will be able to qualify on their own.
The Right Channels At The Right Time
Although consistent, targeted marketing is the right approach for most any product, picking the right channel at the right time is a key factor in a niche market like student lending. And with the competition ratcheting up significantly within the student loan market, credit unions need a concerted, focused effort to gain traction.
For in-school loans, seasonality plays a huge role. Roughly 85% of all applications arrive during the summer lending season that runs from June until early September. That being the case, it’s critically important to pull the right marketing levers in late spring and throughout the summer when millions of families are searching for funding options.
An omnichannel marketing approach that includes traditional channels such as newsletter articles and website banner ads mixed with highly targeted direct mail, e-mail, and digital marketing (don’t forget to target parents!) during this key timeframe yields the best chance to cost-effectively appeal to both members and non-members in the credit union’s field of membership. And, due to the angst that often accompanies this decision for students and parents, credit unions should focus on deploying educational content that can help families better understand the process.
Targeting is important for in-school lending, but it’s even more important for student loan refinance. In addition to basic organic efforts and targeted digital marketing to build awareness, implementing a laser-focused strategy such as a credit prescreen to identify existing members with strong credit and outstanding student loan balances or marketing via an affiliate marketing website, such as Lending Tree, can be good options.
In addition, some credit unions have found success by working with select employee groups that employ a high percentage of young professionals, positioning student loan refinance as an employee benefit.
This is an approach that has been used successfully by SoFi, which has taken a page out of the credit union playbook by working with more than 400 corporate partners ranging from Microsoft to membership organizations. According to a senior representative from the online lender, this channel has been extremely cost-effective and opens the door to a coveted demographic in need of a full range of financial services.
Risk, Rates …
Not surprisingly, the risk profiles for in-school and refi loans are a bit different. With in-school loans, the biggest question mark is whether the student borrower will graduate and find gainful employment. With refi, that question has been answered.
Credit unions can mitigate risk on in-school lending by employing disciplined underwriting that encourages co-borrowers and restricts loans to students who are attending traditional four-year not-for-profit schools. With this type of lending in place, credit unions are experiencing solid performance on in-school loan portfolios.
In reviewing the performance of seasoned undergraduate loans from credit unions who are using the Credit Union Student Choice lending platform, data indicates 90-day delinquency rates of less than 1%, with annualized charge off rates at less than 0.75%. In addition, these credit unions, are also recognizing strong return (as defined by the credit union’s individual pricing) that is on par or above other asset classes.
The rates credit unions can charge, however, reflect this risk. While in-school lending is somewhat less rate sensitive, increasing competition and market conditions in recent years have forced lenders to sharpen the pencils and offer both variable and fixed-rate options.
Not surprisingly, refinance is extremely rate sensitive, as borrowers need a financial impetus to pull the trigger, and fierce competition among lenders has fueled an attractive market for savvy, high-credit borrowers who are looking to aggressively pay down student debt. This is reflected in data from credit unions offering refinance via the Student Choice platform. By far, the most popular repayment option selected by borrowers is a fixed rate with a 10-year repayment term.
…. And Relationships
Ultimately, credit union lenders have an opportunity in the “student” loan space, via both in-school and refinance lending. By offering both, credit unions can appeal to members at multiple stages of life — college student, college graduate/young professional, and parent — and establish a genuine opportunity for long-term relationships.
According to research conducted with nine credit unions (representing nearly 8,000 borrowers) that offer the Student Choice lending program, average checking account penetration for their Student Choice borrowers was nearly 65%. More than 21% had a credit card, and 10% had an auto loan. These numbers indicate young adult borrowers are willing and able to seek out their credit union for ongoing financial needs.
Understanding the unique nature of these loans is essential. By combining the right pricing and repayment term with the right underwriting criteria with the right marketing channel at the right time, credit unions can earn a rewarding return.