MADISON, Wis. — An end to the guaranteed student loan program will likely hurt a number of credit unions and cause them to re-evaluate their education lending practices. After passing that House of Representatives easily, a bill geared towards shuttering the $150-billion program and bringing all federal loans in-house is expected to sail through the Senate and be signed into law in short order.
"The air is being let out of the tires for sure right now," said UW Credit Union VP-lending Mike Long. "[But] the current model wasn't going to work anyway, so it's probably best that the government gets it over with."
Long noted that a similar measure was taken under President Bill Clinton, but the government reverted back to Federal Family Education Loan Program (FFELP). Long said he would not be surprised if the "pendulum swings the other way" once again.
For now, however, credit unions and other lenders in this space will have to figure out what they are going to do when it comes to student lending.
"We'll continue to do a lot of the financial education, but I think you'll see a big drop off in that with the banks," Long predicted. "Now I think what is going to happen is people will become much more aggressive with private loans."
Credit unions that are significant FFELP lenders such as Los Angeles based-USC FCU, which has a $150 million portfolio, and South Bend, Ind.-based Notre Dame FCU, which originates between $15-20 million in federal loans each year, stand to take big hits.
The demise of FFELP likely means the end of all student lending for the nation's largest credit union. Navy Federal Credit Union spokesperson Jennifer Sadler said the $40-billion Navy Federal, which originated $111 million in student loans last year, is not considering entering the private market.
The end of the federal program may not be such bad news if credit unions can figure out ways to make better use of the money they have been investing in the low interest rate loans, which, despite some lucrative origination feels, are "quite a drag" on the bottom line, according to Long. UW CU has underwritten $126 million in student loans just this year.
In Washington, Credit Union Student Choice, a CUSO that has seen strong growth since its relatively recent inception, notes the decision to continue making the loans will come down to each credit union.
"The margin compression has been pretty big, but those who stayed had a sense that they wanted to be serving young adults," said Mike Webster, VP-marketing. "I would think they would think about private student loans if they haven't already."
Credit unions may even be able to leverage this opportunity to build better relationships with their young members. While Student Choice client CUs always advise students to get as many scholarships and low-cost federal loans as they can, there frequently remains a gap between what those students can get for free or at a low price and what they have to pay for tuition and room and board.
"The way we can have an impact on young adults is to offer a better private student loan product because that is a strategic need that families have," Webster said.
UWCU, for instance, plans to get more involved in the private lending business, estimated to be a $12-billion to $15-billion market, by expanding the number of members who are eligible for such loans. Right now only members attending school in the University of Wisconsin system can get private loans from the credit union.
But given the volume of federal loans UWCU is processing, it will still be a challenge for the $1.17-billion institution to find ways to make up for the loss of the government program.
"We can take that capital and invest it in other programs, for those who are in [FFELP] right now it's definitely something we're adjusting to," said Long.
