As millions of college students head off to college this week, hundreds of credit unions will be supporting their educational dreams with a private student loan.
Meant to fill the funding gaps that are left behind after lower-cost sources of aid ? including grants, scholarships, and federal student loans ?have been exhausted, school-certified private student loans are a critically important educational funding mechanism for millions of American families.
For credit unions, these loans are not only a valuable product for connecting with college-bound young adults, but as the numbers show, they’ve also become a strong addition to the bottom line.
As the great recession descended upon America in 2008, many big banks and specialty finance companies retreated quickly from the student lending space, in large part due to the collapse of the securitization market.
While this may have been seen as the worst of times to enter a market that consisted of making unsecured loans to young adults and parents, it was also was the best of times. Credit unions, as member-focused balance sheet lenders, had a unique opportunity to step in and deliver fair-value loans without compromising quality.
In the ensuing years, hundreds of credit unions moved into the market, offering not only in-school loans but also student loan refinance options. As of March 31, 2017, more than 700 credit unions now offer a private student loan solution with outstanding loan balances growing to more than $4 billion.
When reading the headlines about rising student loan debt and delinquency, it’s important to understand that private student loans make up just 7% of overall student loan balances. All too often, these loans are mistakenly lumped in with the massive federal student loan portfolio when the issues of delinquency and default are discussed, even though their performance is drastically different.
According to industry analysis by Measure One, as of June 31, 2017, loan performance metrics have continued to improve for the nation’s largest active private student lenders and holders of student loan debt. The participants analyzed in the report account for the majority of both outstanding private student loans and new originations. Among the report’s highlights:
- The early-stage delinquency rate (30-89 days past due) remains stable at a low 2.5% of total loans in repayment. This is 47.6% lower at the end of the first quarter of 2017 compared with the same point five years ago.
- The late-stage delinquency rate (90 days or more past due) has also stabilized down to a low 1.9% of total loans in repayment in first quarter 2017. That’s 48.4% lower compared to five years ago. Both undergraduate and graduate late-stage delinquencies are at, or near, the lowest reported levels for a first quarter.
- Annualized gross charge-off rate declined by 4.0% year-over-year to 2.2% of loans in repayment by the end of the first quarter. This is the lowest first quarter charge-off rate since before the financial crisis ? 39.9% lower than the 3.7% charge-off rate of the first quarter of 2012.
While those numbers are strong and improving, what’s even more impressive is the performance of loans originated by credit unions. Unlike some of the largest private student lenders, credit unions are unburdened by legacy loans tied to the reckless heyday of private student lending, and have built sustainable lending portfolios by implementing several key principles, including:
- Educating prospective borrowers before the loan to ensure proper decisions are being made
- Risk-based pricing with minimum credit score requirements and criteria that strongly encourages a co-borrower
- School certification to verify enrollment, validate loan amount, and ensure funds go directly to the school
- Restricting loans to students who are attending traditional four-year public or private schools with a proven history of low student loan defaults
- Lending directly to students and families within the credit union’s existing field of membership to establish an opportunity for genuine, long-term relationships
Strong performance numbers seem to be validating this disciplined approach. More than 260 credit unions utilize the Credit Union Student Choice lending platform and, combined, have nearly $2.1 billion in outstanding private student loans. Of that total, 62% ($1.3 billion) is now in full repayment status.
- In reviewing a large subset of the most seasoned undergraduate loans in full repayment (as of Q1 2017):
- Less than 1% of loans in repayment were 90+ days past due
- Annualized charge off rates stood at less than 0.75%
- Early to mid-stage delinquencies (30-89 days past due) are stable among all seasoned origination vintages, remaining under 2%
- Credit unions, on average, are recognizing positive return for the cooperative (as defined by the credit union’s individual pricing) that is on par with other asset classes
- Borrowers, on average, are enjoying average interest rates of 6% with no origination or pre-payment fees and a relationship with a local lender they can trust
When credit unions first began offering private student loans through the Student Choice platform in 2008, they did so with a desire to help their members responsibly pay for college and with the belief that proper underwriting would yield solid performance and long-term member relationships.
Now, nearly a decade later, the numbers are telling a very promising story. More than 80,000 borrowers have now worked with a Student Choice partner credit union to fund the most important decision in their young financial lives. The rewards of that relationship are not only paying off in the short-term but will yield positive results for many years to come for both credit unions and their members.