Private Student Lending

The cost of education continues to skyrocket, increasing more than health care and housing costs over the last 30 years. In fact, outstanding student debt as a category now exceeds credit cards and auto loans. So it’s not surprising that student lending gets in the papers. But when not all of the student lending news is good news, these stories can be especially worth a CU’s time to track.

Read all About It

News reports about problems with government-backed student lending have the potential to cloud consumer sentiment about all student lending, public and private.

For example, a July BusinessWeek article was headlined, “Record Student Loan Debt Prompts Treasury Push to Stem Defaults.”

“The U.S. Treasury, which finances more than 90 percent of new student loans, is exploring ways to make repayment more affordable as defaults by almost 7 million Americans and other strapped borrowers restrain economic growth,” the article leads.

“When you have headlines saying there’s a trillion dollars of student debt and people fear it’s the next housing bubble, it creates problems,” says Leo Stawiarski, president/CEO of LCS Financial Services Corp., a receivables management firm in Englewood, Colo. “I think one of the issues is that private student lending programs are getting lumped in with the government programs, but they are trying to distinguish themselves.”

Data has shown that private student loans are typically performing loans, as most have strong underwriting and co-signers. MeasureOne, a San Francisco research firm that tracks student loan data, found that during the last four academic years, more than 90 percent of undergraduate and 75 percent of graduate private student loans included a co-signer. 

“Government guaranteed loans have received a lot of attention because of their default rates,” says Brad Kime, chief revenue officer at Indianapolis-based LendKey. “Even though the guaranteed loans’ default rates are cause for concern, they do not threaten the financial system, as did mortgage-backed securities in 2008 and 2009.” Yet not every headline reader may realize that.

Another cluster of news stories has painted loans to students of for-profit schools as a potential reputation trouble spot for private student lenders.

“Many private student loan providers avoid lending to (students at) for-profit schools, as they (for-profit schools) have a checkered track record with excessive amounts of government-guaranteed loans and questionable graduation and employment numbers,” says Kime. In addition, “some for-profit colleges have been in the news lately with financial difficulties.”

Santa Ana, Calif.-based, for-profit Corinthian Colleges, for instance, will put 85 of its U.S. campuses up for sale and close the remaining 12. The problems occurred when the U.S. Department of Education asked for detailed records about job placement and attendance and the company failed to comply. This might not speak to the college’s students’ ability to repay loans, but a school failure doesn’t help the reputation of the student lending arena in general.

Other for-profit schools are experiencing difficulties directly related to student loans. In February, the Consumer Financial Protection Bureau filed a formal complaint against ITT Educational Services Inc., Carmel, Ind. The complaint alleged that ITT was targeting low-income students and then entrapping them in high-interest student loans. 

Notably, a CUSO and six member-owners got caught in the wake of this news because the CFPB complaint alleged that ITT had a hand in developing two networks to provide private student loans, one of which was the CUSO.

Market Potential

Student lending used to be dominated by government-backed loans, but today CUs are offering private student loans. Stawiarski feels private student loans are helping to boost student lending’s reputation because of their stringent underwriting criteria.

“I see an enormous opportunity for credit unions in this space,” he says. “Private student loans are a safe and (potentially) lucrative option for attracting and acquiring Millennials, who had an aggregate personal income of $2.4 trillion, or about 20 percent of the nation’s total in 2011.” By 2025, Gen Y will account for almost half of the nation’s income, 46 percent, according to a finding by Javelin Strategy & Research.

Kime says private student loans are a secure option because of their rigorous underwriting, as the student and parents must reapply for the loan each year.

“The serial nature of student lending requires new applications with fresh credit pulls each year,” says Kime, which has more than 230 CU partners that leverage its lending platform for private student loan origination and refinancing. “A borrower can have their new loan request denied if their credit has dropped dramatically, preventing bad loans from continuing to be originated.”

A challenge to CUs making private student loans is lack of public knowledge about such loans compared to mainstays like mortgages and auto loans. And the news reports about problems with government-backed loans and certain private student loans only add haze to a complicated offering. But Kime thinks doing private student lending is often worth a CU’s effort.

In the Market

As interest rates continue to linger at the bottom and CUs need access to new borrowers, private student loans could become an increasingly attractive option.

“Competition has been lessened with lenders worried about adverse headlines [not doing student loans],” Kime says. “Private student lending will be a great opportunity for those who understand the asset class.”

He predicts that more CUs will join student loan participation networks that allow sharing of expenses as well as risk with a number of organizations.

“Through competent underwriting and use of co-signers, credit unions can assure a safe and (potentially) lucrative option in private student loans,” Kime adds.

But loan revenue isn’t the only story here. Doing a great job offering private student loans can also contribute to excellent service and deepened member relationships.

“As self-help and educational institutions, there are few better financial products for credit unions to offer their members than loans for their children’s educations,” Kime says. “Gen Y members and their families will be grateful to their credit unions for offering consolidation loans, which can greatly reduce monthly payments and interest rates to a more manageable level. These members will likely look to their credit union for additional services and products.”

Keith Loria is a freelance writer based in Virginia.