How To Make Student Lending A Low-Risk, Low-Hassle Investment

Careful underwriting, default insurance, and other best practices are helping credit unions beat national loan default rates and introduce bundled products that create lifetime relationships with college grads.

As credit unions look for ways to diversify loan portfolios, a growing number of organizations are launching or revitalizing student lending programs.

Although student loans account for a small percentage of overall business, default rates are running well below those of auto loans. In New York, Northern Credit Union ($218.36M, Watertown, NY) introduced its student lending program in 2010. With 196 loans and loan balances of $4.9 million, Northern’s new program has recorded no charge-offs, and only two loans are more than 90 days delinquent that’s a 1% default rate as of June 30, 2015. Nationally, student loan default rates peaked at 14.7% in 2012 across all two-year and four-year institutions and are hovering slightly below 14%, according to the U.S. Department of Education’s National Center for Education Statistics. Research by the Federal Reserve Bank of St. Louis in 2015, however, asserts that, by factoring in loans not yet in repayment, the default rate could climb to 27% much higher than for any other type of debt including credit cards, auto loans and mortgages.


Northern Credit Union
Data as of 06.30.15

  • HQ: Watertown, NY
  • ASSETS: $218.36M
  • MEMBERS: 28,806
  • 12-MO SHARE GROWTH: 7.16%
  • 12-MO LOAN GROWTH: 0.35%
  • ROA: 0.98%

Student lending offers a growing source of revenue, especially as rising tuition forces students and parents to look for ways to fill the gaps. The average student loan amount in 201213 was $7,000 that’s a 39% increase over the 200001 amount of $5,100, according to the U.S. Department of Education.

We have seen student loans become more profitable interest income-wise, says Michael Woods, assistant vice president of finance and accounting at Northern, which helped send 170 students to in-state colleges and 261 to out-of-state colleges this year. They are attractive to both the credit union and the borrower.

Third-Party Support

Like many credit unions entering the student lending market, Northern wanted to manage its risk and upfront investment, so it chose to partner with loan processor Credit Union Student Choice, a Callahan affiliate. Student Choice provides a comprehensive infrastructure for processing, underwriting, certification, funding, servicing, and marketing.

Student Choice brought to the table a turnkey program, says Brian Caird, consumer loan manager at Northern. That shortened our learning curve and allowed us to bring the program to our members relatively quickly. Without a partner, we most likely would not be in this marketplace.

Student Choice’s underwriting has delivered a 0.34% net charge-off against more than $600 million in loans in full repayment across all its partners.

We set up a fairly robust and best-practice program, Woods adds. After approximately four years, we have started to loosen up the underwriting strings a little to allow for more flexibility and greater reach.

Reducing Risk With Default Insurance


Elements Financial Credit Union
Data as of 06.30.15

  • HQ: Indianapolis, IN
  • ASSETS: $1.13B
  • MEMBERS: 76,416
  • 12-MO SHARE GROWTH: 4.24%
  • 12-MO LOAN GROWTH: 18.87%
  • ROA: 0.98%

Student loan delinquency varies by educational institution, with the riskiest loans going to public, two-year institutions 20.6% default rate and the lowest defaults occurring at private, nonprofit, four-year institutions 7.0% default rate. Many credit unions have formed relationships with third-party loan insurers to further alleviate even lower-risk loans.

Elements Financial Credit Union ($1.13B, Indianapolis, IN) has been in the student lending business since the early 1980s with Federal Stafford and PLUS loan programs. The credit union formerly Eli Lilly Federal Credit Union moved to third-party processing with Student Choice in 2008 and since then has recorded only two charge-offs out of 1,919 loans. That’s less than $30,000 in charge-offs out of $53.2 million in loans, which Elements Financial’s default insurance carrier, Reliamax, paid off.

Teaming up with a default insurer has been a significant benefit, says Doug Sharkey, student lending manager at Elements Financial, which helps students attend colleges such as Indiana University in Bloomington, Ball State University in Muncie, and Butler University, Purdue University in West Lafayette, and IUPUI in Indianapolis. They set the underwriting guidelines and are greatly involved in the collections and servicing of the loans once the loans go into repayment.

Elements Financial recorded only nine accounts more than 60 days’ delinquent for accounts totaling $262,000 or 0.48% of the portfolio as of June 30, 2015. Elements Financial expects to generate $2.5 million in net income in 2015 from student loans.

We have $53 million in student loans outstanding with low rates of delinquency, virtually no losses, and little involvement on our part for servicing the portfolio, Sharkey says. It’s a significant contributor to our bottom line. It’s also a product a large percentage of our members need.

Loan Consolidations And More

To increase its ability to meet members’ needs, Affinity Plus Federal Credit Union ($1.72B, St. Paul, MN) introduced two lending products in 2013 to complement its undergraduate loan offerings: graduate business loans and private consolidation loans.

And the credit union uses these products to cross-sell opportunities, notes Levi Wilson, consumer lending software administrator at Affinity Plus, which helps students attend the University of Minnesota, University of St. Thomas, and Minnesota State University in Mankato as well as other institutions.

It can be as simple as hearing a parent express frustration over the FAFSA process or sharing excitement with us over their son or daughter going to college, says Levi Wilson, consumer lending software administrator at Affinity Plus. Working with members on other loans offers us an opportunity to review their credit report with them and highlight potential savings by consolidating private student loans they might have outstanding. In any situation, we are always looking to maximize members’ savings by reviewing what they have on their credit report.


Affinity Plus FCU
Data as of 06.30.15

  • HQ: St. Paul, MN
  • ASSETS: $1.71B
  • MEMBERS: 181,731
  • BRANCHES: 27
  • 12-MO Share Growth: 0.21%
  • 12-MO Loan Growth: -0.51%
  • ROA: 0.69%

Cross-selling aside, student lending offers the chance to form long-term relationships and become these young members’ preferred financial institution.

Approximately 2.8 million students are expected to attain two-year and four-year degrees in 2015-16. U.S. Department of Education trends show these students are more likely to earn more money and find full-time employment than those who don’t have those degrees, although on average their four-year college debt could equal 51% of their starting annual salaries. And that’s just the beginning.

This is a great time to help our student borrowers with more than just a loan, says Wilson at Affinity Plus. Often, students come to us after graduation looking for help buying their first car or home. They haven’t had the benefit of financial guidance, and we look forward to the opportunity to set them on the right path without having to repair credit or build savings before they can realize those goals.

Forming Relationships With Younger Members

Northern Credit Union in New York launched a product bundle aimed at young members in 2012. NEXT: Smart Banking for Young Adults includes deposit accounts, first-time buyer programs for auto and home, student loans, personalized debit cards, and micro loans. Many of the products have service or other product tie-ins. For example, NEXT checking offers up to five ATM refunds, members must have a checking account for a NEXT auto loan, and the first-time homebuyer grant of up to $7,500 toward closing costs requires a designated savings account.

Through our research we learned bundling was the way to go, so we created products that were attractive to young adults and their parents, explains Alexa Bennett, marketing manager at Northern. We reach out to all of the students who apply for our scholarship program with materials for our NEXT Banking. We present at schools. We market student loans to parents of college-age children, especially those looking at a HELOC to potentially pay for the costs of higher education. We also send information to school guidance counselors and teachers.

Since NEXT’s inception, Northern has lowered the average age of its member to the low 40s, increased its number of first-time homebuyers, opened nearly 4,000 checking and saving accounts with $1.85 million in deposits, and made 319 auto and micro loans for $1.94 million as of July 2015.

Four years ago, Elements Financial’s student loan team formed a community partnership with Outreach, Inc., a local charitable organization that serves homeless young adults. Under the program, the credit union works with these high school seniors to fill out the FAFSA online form that helps qualified students receive college grants and scholarships. Watch a video snapshot of this program at

Finally, although most credit union student lending goes toward four-year schools, community colleges are becoming popular for students in rural areas with limited higher education options. Northern faced this issue in Jefferson County, NY, and worked with Student Choice to introduce such options.

We were able make student loans available to students attending our local community college, says Woods. We anticipate this to grow in the coming years as many students attend Jefferson Community College prior to heading to a four-year school.

5 Tips For A Successful Student Loan Program

  1. To compete in the student lending space, credit unions need to offer flexibility and a range of services, advises Doug Sharkey, student lending manager at Elements Financial in Indianapolis, IN.

    If a credit union is committed, it must identify student lending as a core product and market and support it with appropriate resources, he says.

  2. Encourage a co-borrower by requiring a minimum income and using the highest score between the borrower and co-borrower to set the rate.

    A stable co-borrower is helpful in keeping track of your borrower, as students tend to move often, advises Levi Wilson, consumer lending software administrator at Affinity Plus in St. Paul, MN. And they aren’t as likely to be diligent in updating their providers when they do.

  3. Deferring payments for four to five years poses some inherent risk to liquidity, so monitor the portfolio and make adjustments to slow or accelerate growth depending upon the credit union’s goals.

    Adhere to your underwriting guidelines, Wilson advises. Although not currently dischargeable in bankruptcy, these are essentially large unsecured loans with a long term.

  4. Take the temptation of free money out of the equation.

    Go with a program that certifies all funds before disbursement and disburses directly to the school rather than to the student, Wilson advises.

  5. Finally, cultivate relationships with educational institutions.

    Engage with the schools to ensure you are on their preferred lender list at the financial aid office, Wilson says. This is where the students are likely asking for advice on where they can finance the gap between federal loans, grants, and scholarships so you want to be on the list.

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