COLORADO SPRINGS, Colo.-As more credit unions expand into private student lending, others are cautioning that there is a need to proceed with care.
Rising student loan debt and default rates-at a time when the economy has made it tougher for college grads to find employment-are generating concern among industry watchers, credit unions, and the media there could be a bubble in student lending that may some day burst. Total outstanding student debt is nearing $1 trillion and may soon outstrip credit card debt. The Department of Education said the default rate on student loans rose to 8.8% from 7% last year, coming at the same time data show that during the past decade tuition and fees at public colleges have been increasing nearly 6% a year, significantly faster than the rate of inflation.
"You originate a lot of private student loans next year. It takes the students four or five years to graduate and then some are unemployed or underemployed and have a hard time making that loan payment," said Bill Vogeney, SVP at the $3.1-billion Ent FCU. "It may be six to seven years before you know you made a mistake on the underwriting. If you put on a lot of receivables now you could sink your credit union for a decade."
Credit Union Journal spoke with several credit unions and student lending CUSOs, and found opinions mixed on the future for private student lending. Some have little fear that sizeable defaults will occur in a market that is growing quickly for CUs, while others contend defaults will become much more likely as the earnings value of degrees falls due to economic problems.
There is consensus, however, that CUs need to pay attention to strict lending guidelines, carefully interview loan candidates to make sure they are borrowing only what they need, and ensure students are shopping schools for the best value. Credit unions also need to pay attention to their pricing as student loan defaults increase, but more importantly, they should closely evaluate the schools students choose to attend to make sure the institutions have low loan default rates and a strong track record for graduation and job placement.
All of those things, reminded Thomas O'Shea, chair of CU Student Lending, LLC, a private student lending CUSO working with 122 credit unions, will fit students into a loan they can afford and end up not saddled with debt they can't pay back. He also stated that now is the time to counsel borrowers to ensure they are paying for an education that will pay them back.
"We advocate that you look closely at the value of the education a student is paying for. A degree in business or sociology costs the same within a given school. But the value of those degrees will be dramatically different over time-that sociology degree will not earn what the business degree will," said O'Shea, also CEO of the $200-million Aspire FCU in Clark, N.J.
Ent's Vogeney told Credit Union Journal that his credit union plans to stay away from student lending not only due to the potential for high default, but because the loans do not build strong relationships with young adults.
"The decision to do private student loans could be justified by some credit unions as an effort to get younger," said the vice chair of the CUNA Lending Council. "However, our marketing department did research to see if there is any connection between making the student loan and having an ongoing account relationship after the student graduates, and they could not find any proven relationship. My gut tells me the student loan would not be looked upon favorably by the student after graduation once they start paying. It's not an asset for the credit union in building a relationship-it's an albatross."
Why 1 CU Got Out & Is Staying Out
The $460-million Mazuma CU in Kansas City, Mo., exited student lending several years ago because it was not very profitable, due largely to overhead and administrative costs, said CEO Rob Givens. While Mazuma would like to offer the service to members, Givens said "we have studied the matter and we are not yet convinced the demand and the profitability warrant a move back into the area."
Givens does believe there is potential for a bubble to build in student lending. "In the wake of the housing bubble, anything is possible. But I don't have enough perspective to assess how much risk or what the cost would be if it materialized," he said. "The rather rapid rise in total student loan balances could invite in brokers who would like to sell things off to Sallie Mae-sound familiar?"
Wright-Patt FCU in Fairborn, Ohio, has seen strong growth in private student lending and has no plans to change course, said Eric Bugger, VP of consumer lending. "We have over $22 million on the books today, dynamite for us. It's a fairly new program but is growing month-over-month by 3% to 5%. We are looking at year-over-year growth of 40%."
Doing It The Right Way
Wright-Patt partners with Credit Union Student Choice, a private student lending CUSO based in Washington. Through the program, Bugger said the $2.2-billion credit union is underwriting loans the "correct way, with guarantors-98% to 99% of the borrowers come to us with a qualified cosigner, which certainly helps address the issue of any bubble bursting. Not that we think it will happen, but even if the bubble bursts in the near future we feel we will not see any type of significant impact."
Interest in Credit Union Student Choice reflects the growing attention to private student lending. The CUSO has added 75 credit unions to its fold this year, bringing the number to 220 actively offering its program, said Jim Holt, VP of sales operations. "We have funded about $600 million in private student loans since we started in 2008, an excellent growth curve."
Driving the interest, offered Holt, is what student lending can do for the credit union across the organization. "If you are the CMO, you want to attract younger members. If you are the CLO, you want to increase loan-to-share. The CFO is looking for other options than parking money in low-paying overnights, and the CEO is always seeking new solutions to help serve the community."
Holt feels CU Student Choice's underwriting and program guidelines mitigate default risk. He also pointed out that the 8.8% student loan default rate being bandied around in the media should be examined.
"You need to get a bit more granular to understand what this number means. The default rate for a four-year private school is 4.5% and 5.2% for public," Holt said. "So the for-profit segment, which our solution does not support, carries a 15% cohort default rate, and according to the New York Times, that segment alone accounts for almost half of all the student loan defaults."
The other factor to consider, Holt said, is that federal Stafford Loans carry no credit underwriting guidelines. "Whereas CU Student Choice loans employ stringent underwriting that requires co-borrowers. We feel very good with the risk mitigation we have in place."
However, Holt, like many others, recommended that credit unions doing private student lending pay attention to educating the borrower. He emphasized making students and parents aware of all other options-such as scholarships, grants, and Stafford Loans-before granting the loan. He shared the importance of shopping colleges for the best price and education payback. "It's helping members understand what they are investing in and getting the most bang for their buck."
Mitigating The Risk
Sherry Nelson, director of operations for CU Campus Resources, does not foresee any sort of student loan bubble that might burst, nor would she fear it if such a thing were to occur. One of the reasons is that most of the six CUs that are part of the Madison, Wis.-based private student lending CUSO look closely at the schools members borrow for.
"Some limit loans for only schools they know," said Nelson. "Our opinion is that if you have checks and balances in place, such as co-borrowers, and you are lending responsibly and know your members, you are mitigating a great deal of the risk."
Nelson did not say adjusting pricing to hedge for higher defaults is necessary, however she did emphasize reserving at 4%. "Our credit unions have been doing this and it has been more than we have needed."
If any bubble eventually bursts, Aspire's O'Shea sees the cause stemming from the government taking over the guaranteed student loan program, giving students easier access to loans than when financial institutions controlled the process and carefully scrutinized borrowers. "It's supply and demand. The more money you make available for education the higher the cost of education gets."
The Department of Education said two-thirds of the graduates of four-year institutions have student loans. For those at public institutions, the average debt is $20,200, up 20% since 2004. The statistics are worse for graduates of private schools-$27,650 in debt, up 29% since 2004.
In Atlanta, Jason Osterhage, SVP, chief lending officer, for the $4.1-billion Delta Community CU, contended any time the government intervenes in a market there is higher risk of "market dislocation. Delta Community doesn't originate or otherwise participate in the private student loan market today. However, we are considering adding that loan type to our portfolio. As we think about that, we are worried about a 'bubble' and what may happen to student lending should it burst."
'Defaults Are Overstated'
Bubble or not, CU Campus Resources' Nelson, who also coordinates student lending for the $1.5-billion University of Wisconsin CU in Madison, said credit unions that serve colleges will always be there for their members. "Considering our credit union's field of membership, there is no way we could not have this product."
But Mike Weber, VP of marketing for Credit Union Student Choice, believes concerns about student loan defaults are overstated. He contended that college grads are finding work more easily than those without a higher-learning degree. "The unemployment rate is 9%. Breaking that down, the unemployment rate for those without a high school diploma is 13.8%, a high school graduate with no college is 9.6%, and college graduates are at 4.4%. Higher education is needed across the country and credit unions are here to help."
