The volume of private student loans has grown more than four-fold in the last seven years as students struggle to bridge the widening gap between college costs and federal loans.
The average yearly cost of attending a public four-year college was $18,110 from 2013 to 2014, nearly double the cost of tuition, fees, and room and board 20 years earlier after adjusting for inflation, according to the U.S. Department of Education.
Yet federal Stafford College Loans provide only about $5,500 to $7,500 per year to students who are dependents. Independent students can borrow more under the federal loans.
As a result, the average American under 35 now has $17,200 of student loan debt, 182% more than Americans of the same age had in 1995, the Fed data showed.
Private student loans earned a bad reputation in the mid-2000s when unscrupulous lenders hooked unwary youth into loans they could not pay. Like other securities bundled for investors seeking high profits in the mid-2000s, these loans melted down in the Great Recession.
In a climate of tighter regulation, credit unions stepped in more aggressively through two CUSOs: Credit Union Student Choice, based in Washington and founded in 2008, and CU Campus Resources, based in Madison, Wis., and founded in 2010. CUSOs allowed credit unions to manage the regulatory risk, and provide an easy entry into the market for credit unions with limited resources.
“A college degree has become a necessity for financial success, but it has become a real challenge to pay for education,” said Debbie Taverna, vice president of lending at Digital Federal Credit Union in Marlborough, Mass. ($7.2 billion in assets, 580,055 members).
DCU was one of the founding investors in Student Choice in 2008.
“We’re here to help them fill the gap,” she said.
Mike Long, president and COO for CU Campus Resources, said student debt is generally manageable – usually comparable to the cost of a new car – and provides an opportunity for credit unions to draw new, young members.
Long suggested credit unions should offer student loans and build a loan base that equals between 3% and 10% of their assets.
“I’m not saying credit unions should put all of their eggs in one basket, but they should definitely devote a certain percentage of their balance sheet to this product,” he said.
Experts shared the following other dos and don’ts in regard to student lending:
- Don’t go it alone. Find a partner (typically a CUSO) to help build a sustainable loan program.
- Do educate borrowers before loaning. Student Choice provides individual counseling to members before extending loans. “We actually set up appointments – including evening – to discuss member questions and unique situations so that we can properly counsel on best practices,” Jim Holt, chief development officer of CU Student Choice, said.
- Don’t lend to for-profit schools. Lend only to four-year, not-for-profit colleges with a proven history of low student loan default rates. Most defaults have come from students who borrowed more than they could pay at for-profit schools costing far more than they were worth.
- Do require loans to be “certified” by the college’s financial aid office (in order to validate enrollment and ensure the loan amount is not more than the cost of attendance minus other financial aid) and then disbursed directly to the school. Nearly all private student loans now follow this practice, which directly correlate to improved loan performance and repayment rates, according to MeasureOne, an industry data group.
- Don’t overdo it. Build student loans into your portfolio, but Long recommended limiting your exposure to less than 10%.
- Do employ prudent, risk-based underwriting that encourages use of a co-borrower. More than 90% of private student loans have co-borrowers, usually a parent or other close relative, according to MeasureOne, an industry data group.
- Do build long-term relationships with young borrowers. They are likely to need you again in the future. “We want to be there for each step when it comes to their financial needs, be it buying a car, starting a family or financing a home,” Debbie Taverna, DCU’s vice president of lending, said.
Read more about student lending best practices in the Aug. 31, 2016 print issue of CU Times.
