CUs Can Help Mind The Gap In Students' College Financing

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WASHINGTON-Students preparing for college next fall have just received notices from their schools letting them know the gap they need to cover between their federal loan, scholarship, or financial aid, and the price of tuition.

For many students, that amount is getting bigger, as is the opportunity for credit unions, according to several people who spoke to Credit Union Journal. Those analysts said credit unions are now not just stepping into private student lending just as a business opportunity, they are also doing so to provide students and their families with a lower-cost alternative to other private lenders.

Sources also stated that a credit union jumping into private student lending on its own is not the best option.

Credit Union Student Choice, a private student lending CUSO here, is helping credit unions enter the private student lending market and navigate the intricacies of making the loans. Mike Weber, VP of marketing for Credit Union Student Choice, said interest in the CUSO is increasing because CU members' needs for paying for college are expanding.

"Families and students have to figure out how they will pay for the schooling because federal loans often do not cover the entire amount," he reminded. "The gap between what they receive from government loans, scholarships, work-study programs-or any combination of these things-has gotten bigger because the cost of education has been going up at a very fast clip."

The rising cost of education is reflected by the number of credit unions participating in Student Choice to meet members' needs, said Weber. When the CUSO was formed in 2008 it served six credit unions. Now it supports 185. "We have come a long way quickly."

Overall, $9 billion in private student loans were funded by all providers in 2010. Student Choice originated $200-million in its first two years, and more than $200 million last year. "You can see we have doubled our output," Weber said.

The Student Choice product that credit unions fund is a line of credit members open once and then draw on each semester. Prices vary by credit union, but Weber said the average of all Student Choice loans is 6.5% with no origination fees, well below the 8.5% average charged by non-CU lenders, he said. Credit unions keep the loans on their own books.

Tremendous Need 'Obvious'

The $2-billion Wright-Patt CU in Fairborn, Ohio, was one of the first to sign on with Student Choice, and today has funded more than $19 million in private student loans. "Judging by the response of borrowers, it is obvious there is a tremendous need out there for a high-quality private student loan," said Linda Stephens, VP of consumer lending.

While the availability of federal loans has come under intense scrutiny, Stephens stated, consumers who are forced to rely on private student loans may actually feel the biggest pinch. She explained the gap between what scholarships and federal loans cover and the actual cost of attendance is more than $30,000 for a college student attending a public school for four years. "For those attending a private school, the gap jumps to well over $100,000."

Problems also exist within the private student loan marketplace, noted Stephens, such as unscrupulous lenders and much higher-rate products. That is one reason WPCU entered the market. "We're thrilled to offer a better solution. Credit unions exist first and foremost to meet the needs of their membership, not to maximize profits by selling off loans to Wall Street. We are very proud to offer a private student loan that will deliver real value and meet a pressing need."

Stephens also pointed out that many lenders take advantage of consumers' lack of knowledge about education financing options. "Students deserve an honest, cost-effective solution to financing their education. In fact, the website (www.wpcu.studentchoice.org) we've built helps consumers make better decisions by providing in-depth information on all of the ways to finance a college education as well as calculators that will actually show them the numbers."

Wright-Patt's Student Choice Loan rate starts at 6%, a competitive advantage in a market in which other financial institutions offer an average of 10%, and some federal loans are 8.5%, Stephens said. The loan offers a flexible payback schedule and depending on the total loan amount, students can also elect to make payments for up to 25 years.

A 'Growth Product'

Eric Stegner, student service coordinator for the $1.3-billion Apple FCU in Fairfax, Va., said after this second year with Student Choice the credit union has $15 million in lines of credit for private student loans and has funded $3 million.

"It's provided a needed benefit for our members and it gets younger folks into the credit union," Stegner said, adding that the CU hopes the arrangement leads to the first car loans for some of the students and a lifetime relationship. "So we see this as a growth product, as well."

Weber explained that many of the credit unions partnering with Credit Union Student Choice view private student lending as a means to expand their membership-but not just with Gen Y. "That is the misconception here. Private student lending is not just a Gen Y play. Paying for college is a family decision, and as we know, one of the biggest out-of-pocket expenses for parents ages 45 top 54. This not only is the chance to build a relationship with a young adult, but serve the needs of an entire family."

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