Credit unions could take a hit as pandemic alters college landscape
Changes in higher education as a result of the coronavirus could have a trickle-down effect that leads to a decrease in private student lending, including at credit unions.
There are concerns about credit quality as the employment rate remains high. More students are rethinking their college plans because of the coronavirus. And the pandemic could force some smaller colleges to shut their doors for good.
All of this could make student lending less attractive to credit unions.
“With people getting laid off and finances in general taking a hit, private student loan lenders are worried about this debt not getting repaid,” said Mike Brown, director of communications at LendEDU. “In response, they have drawn back on what they have loaned out.”
Student debt has been on the rise for years, exceeding $1.6 trillion in the second quarter, according to consumer credit data from the Federal Reserve. That’s an increase of about 27% from the end of 2015.
More than 100 private student loan lenders hold $131 billion in outstanding student loan debt, according to LendEDU, an online marketplace for student loans and other products. Credit unions have just $5.6 billion of that debt, according to first-quarter data from the National Credit Union Administration. Second-quarter data is not expected until later this month.
There are signs that private lenders are pulling back in this area. The average private student loan amount for this year was just over $11,200 for borrowers who used LendEDU. That’s the lowest amount since 2016, when the company started publishing its annual report on private student lending.
The average approved FICO credit score for borrowers who used LendEDU was 748, the highest since 2016, according to the report.
That could mean these lenders have been more selective in who they extend credit to this year, Brown said.
“Lenders have gotten more conservative with their lending behavior,” Brown said. “They are not trying to approve uncreditworthy borrowers. They want to approve people with high credit scores or those who have a cosigner.”
Vince Passione, CEO and founder of the online lending platform LendKey, said there could be a 15% to 20% decline in private student loan volumes because of uncertainty related to the coronavirus. There have been questions about whether colleges would open for in-person instruction or remain virtual.
However, Passione cautioned that it may be too early to get a full picture of what private student lending will look like for the school year. There have been delays related to schools opening up later than normal, students making decisions on whether they will return to college at the last minute and even financial-aid departments taking longer than usual to return important documents.
“Students are calling in and asking, If I made a decision to go, how quickly can I get the money?" Passione said. “Do you go back? There are a lot of things students are considering, like their health. Maybe they don’t want to do distance learning. There are a lot of big decisions being made.”
Still, there could be a permanent shift in post-secondary education related to the outbreak. Even before the coronavirus, dozens of colleges were under financial strain because of declining enrollment and tuition revenue.
From the 2008-9 to 2016-17 academic years, more than 300 “degree-granting higher education institutions” closed, according to a report from the think tank New America.
The pandemic has only made these conditions worse, and small private colleges could be the hardest hit, Brown said.
“If there is a wave of small private colleges closing permanently due to the pandemic as many have predicted, this should shrink the private student loan market, as there will be fewer colleges for students to attend and thus fewer loans that are being applied for,” Brown said. “Additionally, colleges that survive may [lower] tuition to remain in business and viable, which would also reduce the need for private student loans.”
At least in the short term some parents could decide to pull their children out of more expensive four-year programs if the instruction will only be online, said Bob Schroeder, executive vice president at Lending Solutions Consulting. Instead, these families may favor cheaper options such as community colleges.
Seventeen percent of students said they were considering changing their college plans of attending a four-year school this fall due to COVID-19, according to an April survey from Art & Science Group. Instead, those respondents were considering options such as enrolling in a bachelor’s program part time, delaying enrollment until the spring, taking a gap year or enrolling in an associate’s degree program or a community college.
Parents and student borrowers may wonder why they’re spending all that money for an experience so different from what college has traditionally been, Schroeder said.
He added, “I imagine that will probably be a big deal if parents throughout the country go as far as pulling them out of the typical classroom experience if they are just going to do e-learning. That will impact loan opportunities.”
But Passione isn’t convinced there will necessarily be long-term changes to the college experience and private student lending. He predicted some of the decline in private student lending this fall could be made up in the next semester. There are 18 million to 20 million people enrolled in college, and that “won’t change significantly, at least not overnight,” Passione added.
“If it wasn’t for this pandemic, do you think most students would like to sit around and go to school at their house?” he said. “The answer is no. College is an education and a social experience.”
Credit Union Student Choice, the nation’s largest credit union service organization for private student lending, has added three new credit unions in the last two months, President and CEO Scott Patterson said in an email. The CUSO has also seen increased interest from other lenders not currently doing student lending.
“Like our founding credit unions who launched during the uncertain times of the Great Recession, these credit unions are looking to serve member needs while building a high-quality loan portfolio that helps them establish long-term relationships with young adults — relationships that will pay dividends far into the future,” Patterson said.
At least in the near term, it’s likely that credit unions will continue to make student loans simply because they lack better alternatives to deploy their deposits, Schroeder said.
Credit unions are bracing for lower profits and slower loan demand for 2020. Total outstanding loans increased by 6.5% in the first quarter from a year earlier, and net income fell by 40%, according to data from NCUA.
“The alternative is what? Keep your money in investments that yield nothing?” Schroeder said. “Unless you are able to replace these loans with other types of loans, I don’t see credit unions exiting the space, because they can’t live on investments.”
Melissa Angell contributed to this story.