How Will Changes to Federal Student Loan Programs Affect Credit Unions?

Earlier in 2009, President Obama introduced his 2010 budget overview, which included plans to dramatically overhaul the current student loan financing system. To understand the impact of this proposed change on natural person credit unions involved in FFELP lending, Callahan's Dane Coalson interviewed Mike Long, EVP& CCO of University of Wisconsin CU (UWCU).

Earlier in 2009, President Obama introduced his 2010 budget overview, which included plans to dramatically overhaul the current student loan financing system. The plan calls for the elimination of the Federal Family Education Loan Program (FFELP), and for the federal government to only participate in direct lending going forward. The measure would also expand the existing Pell Grant program and Federal Perkins loans. The government estimates that the country will save $94 billion over the nextdecade if the proposal is enacted.

The University of Wisconsin Credit Union ($1.20B, Madison, WI) has been offering student loans through the FFEL program for over 30 years. They implemented their own complementary private student loanprogram in 2006. As of April 30th, 33% of their total loan portfolio was comprised of student loans – $290 million in FFELP loans and $24 million in private student loans.

To understand the impact of this proposed change on natural personcredit unions involved in FFELP lending, Callahan’s Dane Coalson interviewed Mike Long, EVP& CCO of University of Wisconsin CU (UWCU).

If the plan laid out by Obama goes through as is, what will that mean for your student lending program?

We would simply be taken out of the FFELP business, and would no longer grant Stafford loans, PLUS loans, or Graduate PLUS loans. It would certainly hurt from a loan production standpoint. We are projecting demand for $200 million in studentloan originations for the 2009-2010 school year, due to turmoil in the credit markets, and the retreat of many student lenders. Student loan borrowing has also increased due to the economy. Families that have been saving for college have found theydo not have the funds they had planned on to cover post-secondary education costs.

How important is student lending to UWCU?

Student lending is core to our mission as a university-based credit union. Theseare products that students and members need, and we work to provide them in an efficient manner. Last year, we assisted 19,000 members with student loans. If this proposal is enacted, we will not be able to deliver a desired service to a large groupof our members. These loans help bring in many member relationships, and we work to grow these relationships over time.

How have you worked on building school relationships?

We’ve really focused buildingstudent lending relationships in the last four years. We are now a preferred lender with 23 University of Wisconsin system schools that participate in the FFEL program, a sizable technical college, and a small private college. This is a claim thatwe couldn’t make four years ago.

How has the FFELP changed in recently? This new proposal will be the final nail in the coffin for FFELP. The program has changed drastically in the past 18 months, as the federal government graduallyremoved support in the form of subsidies. Many lenders have been squeezed out of the business. The economics of these federal student loans have become so unattractive that we have to sell the loans back to the Department of Education after we originatethem.

Regardless of politics, it is the students who have benefited most from the FFEL program over the years. As the federal government has reduced subsidies for originating the loans, borrower benefits have been reduced, and studentshave ultimately paid the price.

Do you feel that this proposal will ultimately be enacted?

The opportunity for a member of Congress to go back to their constituents and say I just passed a bill thatwill help students get financing, cut out the middleman, and save the government nearly $100 billion in the process, is just too tempting to pass up. Even though $94 billion in projected government savings has been widely disputed, there isan emphasis on restructuring government programs right now, and consumer sentiment towards financial institutions is decidedly negative. This proposal will most likely get enacted.

Will credit unions continue to play a role in the market for student loans?

The cost of education keeps going up, and federal loans have historically failed to keep pace, so credit unions will be able to step in to bridge the gap with their own private loan offerings or a CUSO solution, especially since so manystudent lenders have either retracted from the business or reduced the competitiveness of their offerings. I think that credit unions will have a place in the market, and that will be in the private student loan space. These student loans are a greatway to initiate relationships with younger members.

We will never be able to generate enough private student loan volume to make up for the loss of FFELP loan volume, but we don’t necessarily want to either. We have $24 millionin private student loans on our books right now, and are estimating another $7 million by the end of the year. Our current policy limits private student loans to no more that 5% of the total loan portfolio. Since our private offering is a fairly newprogram, we want to monitor the performance of these loans over time before we would revise that policy.

Nearly 80% of all student loans are federal, what will the market transition be like if this change goes into effect in July 2010 as proposed?

This will be a massive transition in a very short amount of time, especially since definitive action on the measure will most likely not occur until fall 2009. The federal government will have to build infrastructure, relationships, anda massive customer service operation in order to catch up to the systems that already exist at financial institutions. It could be a painful adjustment for consumers as well as higher education institutions, if the process is hurried.

The Federal Direct Loan program has existed since 1993 and looks good on paper, but has not really caught on for a variety of reasons. Schools have experienced issues with system updates, getting loans processed on time, and many were simply not satisfiedwith the service. Unless the Direct Loan program gets restructured, these issues could continue to pose a real problem.

Our credit union will continue to do the right thing, counseling students to obtain all the federal money they canbefore taking out a private student loan to cover the difference. Many financial institutions will have an incentive to push their private student loans, and are under no obligation to encourage students to explore all options and pick the one intheir best interest. This is a legitimate concern.

How will you work to initiate relationships with students if you lose the ability to offer FFELP loans?

Since we have a strong, established relationshipwith the university system, we will always have new sources of opportunity. There will always be an incoming class of students each fall, and we really feel that we offer something different from our competitors – such as a very competitive fee structureand popular student product and services package. We will continue to be very active in campus outreach and providing student financial education opportunities.

Each year, we hold a very successful registration drive at our college campuseswhere we educate incoming students. We typically sign up 8,000 new members each fall, and retain more than half of them well after they graduate. Not being able to offer federal student loans will hurt us, but the fundamentals of our business arestrong and we positively feel that we will be able to attract and serve plenty of new members in the future.

April 26, 2016

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