At a recent seminar hosted by the Community Bankers Association, Doug Bennett, the President of Earlham College (Indiana) spoke about challenges in secondary education. His thesis was that the two biggest challenges are access and quality. Schools control the quality of the education process and the burden is on the organization to improve. However with secondary education, the burden to provide access is placed on lenders. In 2007, the funding gap (the difference between the cost of attendance and federal aid & grants) was more than $73 billion. About $23 billion of this gap was filled with private student loans. Access to this funding is vital for families to send their children to college. The challenge, however, is that too often families assume access also means quality, that they are getting a fair deal.
Looking at the student loan market, especially the private loan market, credit unions have the ability to provide families access to quality funds. That is the fundamental goal of Credit Union Student Choice, a new CUSO designed to enable credit union to offer members private student loans. Providing quality access equals creating superior member value.
Over the past several years, about two-thirds of private loans originated have been pooled and sold as asset-backed securities. This allows great transparency into the market, despite the fact the consumer market lacks transparency on rates and fees. In 2007, our research showed that the “average” private student loan had a rate between 9% and 10%. On top of that, most lenders charge an origination fee which averages between 4% and 5%, but in some cases can be as high as 11%. When considering the average loan balance was $10,000 this means students and their families were paying $450 in origination fees alone, and receiving just 95.5 cents on the dollar. Since most students defer principal and interest payments while in school, the origination fees added to the overall financed amount and immediately began accruing interest. Because lenders were providing access at these terms, families assumed these loans were quality loans.
Last fall a collaborative group of some of the nation’s largest credit unions designed the Credit Union Student Choice CUSO, when it became clear that the credit union industry would be able to offer superior member value. By framing the product around maximizing member value rather than maximizing shareholder earnings, credit unions are beginning to set a new standard in private student lending. Because credit unions have member deposits to lend to other members, they are not subject to the same liquidity concerns and capital market fluctuations traditional student lenders have experienced over the past 6 to 9 months. In today’s environment, credit unions’ cost of funds is decreasing while traditional student lenders’ cost of funds is increasing. The differential in funding cost can be passed on to members in the form of lower rates and no fees.
Credit unions launching Credit Union Student Choice are setting rates that today are as low as 3.85%, with most rates averaging below 6%. These loans have no fees assessed to the borrower. On a $10,000 loan, credit unions will be able to save members over $4,500 over the life of the loan. Consider if a family has 3 children and 4 years of school for each child: $4,500 x 4 years x 3 children is a savings of $54,000. The economic savings credit unions are providing their members is staggering. By combining access and quality, credit unions across America are enabling thousands of families to send their children to college at a fair price.
A fundamental benefit of student lending is the ability to provide access that will enable members to get a education which will improve their lives. Access to education is vital, not only for individual members but also for the future strength of the community and our nation as a whole. Credit unions need to seize this opportunity. By becoming major players in student lending credit unions will only strengthen their communities and their cooperatives.
Members need funding for college. Credit unions, by providing access to funds at a fair price, have the opportunity to redefine how Americans think about paying for college. By bundling access and quality, superior member value is possible.