Lending Boost 101
A college education was historically limited to the wealthy. But after World War II and the G.I. bill, Americans of all income levels started to attend college. The escalating costs of education are threatening to limit college to the wealthy once again.
Student loans, guaranteed by the U.S. government, are making it possible for people of modest means to attend college.
Many credit unions have shied away from student loans because of experiences with burdensome regulations and procedures. Technology and suitable platforms were expensive and difficult to find. Credit unions that had programs lacked sufficient volume to earn a reasonable margin and outsourcing options were unavailable.
The student loan environment has changed dramatically since 2001 and has the potential to be a profitable asset, according to at least one CU. Outsourcing options are widely available and the technology has evolved to provide platforms that are available at reasonable cost. A sophisticated secondary market is available to resell student loans.
USC Credit Union has received national recognition for its program. Out of a loan portfolio of $210 million, $74 million is derived from student loans. The $260-million credit union is the No. 1 student loan provider for the University of Southern California with 40% of the market share.
"Our loan portfolio makes us unique; no other credit union has that high of a concentration of student loans," said CEO Gary Perez. "We work with the university to leverage our relationship to win the lion's share of the loan."
USC Credit Union retains the student loans during the in-school years and later sells them on the secondary market at fixed-forward purchase commitment premiums. The cost of attending the University of Southern California, a private school, is about $45,000, and most students need financial assistance.
The Department of Education charges an origination fee of 3% and most financial institutions pass this along to the consumer. USC Credit Union's origination fees range from no fees to 1.5%, with the credit union picking up the difference. If a student makes a timely payment for a period of 30 months, the interest rate charged is reduced up to two percentage points.
"Student loans are balance-sheet friendly, especially in a rising rate environment," said Perez. "All credit unions can participate in student loans-there are outsourcing opportunities."
Perez views the student loan market as similar to where mortgage lending was in the 1980s, when credit unions were first able to offer 30-year mortgages. Students can be profitable and student loans are USC Credit Union's most profitable sector, said Perez.