WASHINGTON — Recent remarks from Rohit Chopra, the Consumer Financial Protection Bureau's top official in charge of student lending, have warned that the trillion-dollar student loan market is missing key data and regulations necessary to head off another financial crisis.
But at least one credit union economist isn't buying it.
"If credit unions are lending in the way that they typically lend, they err on the side of cautious and conservative and friendly to members," said Bill Hampel, chief economist at CUNA. "A credit union is really, really unlikely to make a student loan where they think there isn't a chance of repayment."
According to data from NCUA, student lending at credit unions rose by more than 10% during Q3 to hit $2.5 billion, a 32% increase since Q3 of 2012. But Hampel reminded that that growth is a small portion of the total portfolio of credit union lending.
"If credit unions had half their assets in student loans and had grown 10% in the third quarter, I'd say it's something to be concerned about," he said.
Speaking before the Federal Reserve Bank of St. Louis last month, Chopra said it would be "irresponsible for financial regulators" to avoid taking action now to shield the $1.2 trillion student loan debt market from a severe bust. Chopra said regulators could act on a range of options without waiting for Congressional intervention, including requiring lenders to disclose more data and instating policies that encourage the refinancing of student loans.
Chopra's concerns stem from similarities to the housing market collapse, including a significant growth in student debt coupled with "heavy use" of government guarantees through federal loan programs. Roughly 40 million Americans have $1.2 trillion in student debt outstanding, according to the CFPB with each borrower holding an average of $30,000 in debt.
Debt Up, Wages Down
While student debt is increasing, the wages for recent graduates are decreasing. Real wages for a young college graduate dropped by 5.4% while they fell 11.1% for high school graduates between the years of 2000 and 2011, according to the CFPB's analysis of the Current Population Survey.
Chopra said that as younger graduates struggle to pay down higher student debt with lower wages, it will become more difficult for them to get approved for a mortgage and further impede the housing recovery.
"Student loans depend on how you do them," reminded Hampel. "Some of the stories on problems with student loans and the level of college indebtedness can be somewhat overstated. You hear stories about students coming out of college with $150,000... but that's not typical."
More typical, said Hampel, is an average of about $25,000. "That's like a new car; that's not really a life-threatening event. So I actually don't think that the level of student indebtedness is excessive for the vast majority of people who borrow to go to college when compared to the lifetime earnings differential for those that go to college and those that don't."
Michael Weber, chief marketing officer at CU Student Choice, noted that much of the concern over a potential student lending bubble is built around federal student loans and not the private student loans CUs deal in. Federal loans, he pointed out, don't always have the same stringent underwriting guidelines that private, CU-issued loans do.
"It's not necessarily a student loan problem — it's a student loan repayment problem" said Weber.
Hampel said that the current crisis over student debt is just the latest in a long line of "next big financial crisis" stories in the media.
"A few years ago, credit cards were the next big crisis," he reminded. "The subprime mortgage crisis was the first crisis in mortgage lending that we'd had since the 1930s.... For some reason, the press got excited because it was interesting to report on the mortgage crisis, so what's the next one going to be that we can write stories about?
"These things are rare," he continued. "The fact that we've had one and it's over doesn't mean we're due for one in another market."
One CU's View
Rick Thornburg, SVP of lending at Indianapolis-based Eli Lilly FCU, said that the situation may not be quite as bad as Chopra has forecasted, "but there is a potential" for an eventual crisis, especially if the economy turns south again.
Eli Lilly has been in the private student lending market since 2007 and currently has a portfolio of about $40 million in student loans. Thornburg noted that his CU hasn't seen the 32% year-over-year growth in this market that NCUA reported, and in fact growth was down this year from 25% year-over-year to only about 10%, in part because some banks have gotten back into the market.
The $1 billion-asset CU has three full-time employees working on student lending, and in many cases requires co-signers on student loans, along with a rigorous process to make sure borrowers and co-signers understand the debt. The CU also certifies each deal with universities "so that it's not just a random cash advance" to the student, and only works with non-for-profit, accredited four-year universities.
Despite all that, Thornburg said he agrees with Chopra that more regulation may be needed in this market.
"Having gone through the whole mortgage stuff we're going through now, it's hard to say we need more regulations, but I would support additional regulations on this student loan market," said Thornburg. "I think there needs to be additional disclosures and requirements to make sure people truly understand the liability. Not just 'I've got to get into college in August,' but that there's a potential impact of 20, 30 or 40 years. I wouldn't like to see some monstrous regulations, but I would be in support of anything that would make the student and parents really aware of what they're getting themselves into."
