In 2012, there was just one lender offering student loan refinancing for both federal and private student loans but since then, more than a dozen lenders (representing multiple financial institutions in some cases) have entered the market. From fin tech startups to big banks to credit unions, these lenders are bringing a growing refi boom to the student loan market.
Although private lenders play a relatively small role in the origination of student loans in today’s marketplace (approximately $8 billion in private student loans were originated in 2014), there is more than $1.2 trillion in total outstanding student loans. Couple this huge debt load with a historically low-rate environment, and lenders are finding themselves with a unique opportunity to help successful college graduates with innovative refinancing options.
The Business Opportunity
Assisting members by providing fair-value credit is a noble cause and a hallmark of the credit union industry. But it only works if the lending program also returns sustainable value to the cooperative. Credit unions who are considering joining this student loan refinance boom should consider several factors when evaluating the opportunity.
A Growing Market
According to Goldman Sach’s The Future of Finance report issued in March 2015, $211 billion in outstanding student loan debt is estimated to be addressable by lenders. This number, based on loans in repayment and credit-worthiness of borrowers, includes more than $90 billion in private student loans. Presently, it’s estimated that only $3 billion to $4 billion (less than 2% of the addressable market) has been refinanced, leaving a tremendous opportunity for lenders. With more and more students graduating and entering the workforce every year, the refinance market is likely to expand even further.
An Improving Sector
Many assume doom and gloom in this space, but that is not necessarily the case. According to a July 2016 report from Measure One that analyzes loan data from the nation’s six largest active private student lenders, year-over-year delinquencies on private student loans continue to exhibit a significant downward trend, falling to the lowest rates since before the 2008 economic crisis. In addition, loan performance continues to improve with each subsequent origination vintage, as more-stringent underwriting criteria was put into place following the 2008 economic crisis.
A consolidation program removes several of the biggest questions in student lending, such as whether the student will graduate and find a job. To be eligible for a consolidation loan, borrowers must have graduated and be gainfully employed. Lenders can further mitigate risk by layering in additional underwriting criteria, including debt-to-income and school quality. By removing the unknowns and leveraging proven underwriting criteria, these loans can perform very well.
Like all financial institutions, credit unions are eagerly searching for ways to grow relationships with young adults, a significant challenge in today’s digital world. As young adults look to gain control of their financial future and reduce their student debt, credit unions must be mindful of these consumers’ desire to streamline all aspects of their personal and financial worlds. Offering convenience in hopes of capturing these relationships is a driving force behind the efforts of many lenders currently in the market, exemplified by this quote from a recent New York Times article:
Mr. Craine, a 28-year-old tech support worker in Washington, D.C., uses Apple Pay at the stores and restaurants that accept it. About 20 times a month, he turns to Venmo, a digital wallet for transferring money from one person to another, to pay his share of rent, meals, groceries, and utility bills. To refinance his student loans last year, he went to an online lending start-up, Earnest.
Offering a student loan consolidation program can help credit unions get in the game for these highly sought-after young adults, who are prime candidates for future deposit and lending relationships.
Given the high rates that many student loan borrowers are stuck with, earning a strong return on asset while delivering fair value is achievable on a consolidation loan. Credit unions can create a true win-win situation by helping members refinance high-rate loans while bringing value to the bottom line and establishing the opportunity for long-term member relationships.
Over the past several years, millions of credit union members have dramatically lowered their monthly obligations by refinancing debt, such as mortgage and auto loans. The time has come to bring the same effort to young adults saddled with onerous student loan debt.