A new partnership between a state agency and Maine credit unions aims to help increase access to affordable student loans.
Maine Savings Federal Credit Union, a $309-million institution based in Hampden, Maine, has partnered with the Finance Authority of Maine (FAME) in a program to help with student loan debt. Maine Savings FCU is one of eight community lenders participating in the project under the auspices of FAME's "Loan For ME" initiative. The other lenders in the program also include some Maine-based credit unions, including Maine State CU, a $376-million institution based in Augusta; and University CU, a $267-million institution based in Orono.
Under "Loan For ME," borrowers can become informed about student loans and link to participating local lenders. "With college costs quickly outpacing federal education borrowing limits, many are forced to bridge the funding gap through a variety of loans at varying interest rates and terms," the parties stated in a joint statement. "Student loan consolidation combines multiple existing loans into a single monthly payment, often at a lower interest rate, to help simplify repayment and reduce the overall cost of borrowing."
Looking for 'FAME'
"We have two programs through FAME," said Rick Moore, vice president of lending at Maine Savings FCU. "One is for former students/graduates paying off their student loans and another program is for current students that helps bridge the gap between financial aid and federal student loans and the cost of attending college."
Maine Savings also offers student loan consolidation, which Moore called a "great option" for anyone who borrowed when student loan rates were higher than they are at present.
In 2015, FAME – a quasi-independent state agency – was authorized by the Maine legislature to provide loan insurance to local lenders for student loan consolidation purposes.
To be eligible for the student loan consolidation program at Maine Savings FCU, an applicant must be a resident of Maine or have graduated from a Maine high school, have attended a Maine college or university, or have been a prior borrower with a lender in the Maine Private Education Loan Network (which comprises the aforementioned eight lenders, including Maine Savings FCU itself).
The eligible applicant also has to be a member of Maine Savings FCU with a current credit score of at least 680 (for both borrower and co-signer, if necessary), have a maximum debt ratio of 40%, have a minimum annual income of $24,000, and have a total student debt load between $10,000 and $240,000.
Additionally, applicants must undergo a mandatory financial education component online to ensure they "borrow wisely and are aware of the implications of their debt," according to FAME.
'Focus on What We Do Best'
Moore of Maine Savings explained that the impetus behind the loan program came partly from certain credit union members with student loan debt who had been looking for a consolidation solution for a long time.
"[But] it is difficult… to properly administer student loan programs of any sort due to the complicated and ever-changing regulatory landscape for this type of lending," Moore said. "The FAME program takes some of that burden off of us and allows us to focus on what we do best—helping our members."
Martha Johnston, the director of education at FAME, explained to CU Journal that her agency wanted to help Maine residents make "informed decisions" about borrowing and consolidating higher education loans. She added that many Mainers would like a "trusted local lender" to help them with their student loan debt – indeed, nearly 40% of those surveyed by FAME said they would seek consolidation from their existing lending institution. Consequently, local lenders were approached and asked if they would like to join a network of Maine lenders who want to help build up Maine's economy by offering student loans and refinancing student loans to help Maine residents.
Moore further noted that Maine Savings FCU has nearly 30,000 members, "many of whom have attended college and carry some student loan debt." The credit union commenced its private educational loan program (for current students) with FAME in 2014.
Moore also commented that without a partner like FAME, it would be "difficult for credit unions to offer this type of lending." This is because, as he explained, regulations are difficult to stay on top of with student loan servicing.
"However, many credit unions have simply offered them as an unsecured loan without the need to follow strict student loan servicing needs that are inherent with federal programs," he said. "The biggest reason for the need for a partner like FAME is the regulatory scrutiny around unsecured student loan programs within our industry. They have a default stigma that makes the NCUA [National Credit Union Administration] concerned with safety and soundness."
The problem of high student loan debt is particularly acute in Maine.
Citing data from Institute of College Access and Success, FAME's Johnston noted that college graduates in Maine had an average student loan debt of $30,908 in 2014 (versus a national figure of $28,950), Additionally, some 68% of the college graduates from Maine institutions have some debt.
For those borrowers who choose to reconsolidate their student loans with Maine Savings FCU, their new interest rates depend on a variety of factors, including the type of original loans as well as when the funds were initially disbursed. "Our current [interest] rates [are at] around 4.5%-5.5%," Moore said. "Some older loans of certain types might carry a rate of 6-9%. And for some borrowers, even if the rate is about the same as what they are currently paying, they see an advantage to having a single loan payment to manage."
Current interest rates on loans issued by the federal government vary widely, but can be as high as 7.2%.
Student Loans: A New Frontier For CUs?
However, data indicates that a distinct minority of credit unions across the country currently offer student loans.
One group working to boost the number of credit unions offering student loans is CU Student Choice, a credit union service organization (CUSO) focused on the education finance market and which works with more than 250 credit unions across the country. Approximately 700 credit unions currently offer student loans (a total of $3.7 billion outstanding), and Student Choice members comprise 49% of the total.
According to Sam Taft, director of industry analysis at Callahan & Associates, only 11.5% of all U.S. credit unions reported student loan balances in their loan portfolio, as of the first quarter of 2016. The $3.7 billion in student loans issued by credit unions accounts for only 0.5% of the entire industry's loan portfolio. According to CU Student Choice, 69% of that $3.7 billion outstanding is currently in repayment, meaning the students have exited school and are now actively repaying their loans.
In addition, larger credit unions tend to disproportionately offer student loan products. Taft indicated that 194 (or 38.6%) of the 503 credit unions with assets of more than $500-million reported student loans on their balance sheets at the end of first quarter 2016. Among credit unions exceeding $1 billion in assets, 116 (or 43.6%) of the 266 such credit unions reported student loans on their books
But Taft commented that the overall trend of credit unions offering student loans is "definitely growing" and "it is clear this is an area of future member financing needs that credit unions are working to address."
Indeed, Taft said of the 11.5% of all credit unions offering private student loans, most only began offering that product within the last ten years. "So, while they are a small percentage of the overall portfolio today, it is definitely an area of growing lending assistance that credit unions are stepping up to adopt," he added. "Typically, that has been through CUSOs that specialize in this kind of lending."
Michael Weber, chief marketing officer at Student Choice, noted that when Student Choice initially launched in 2008, there were just a handful of credit unions offering any type of private student loan.
"Over the last eight years, credit unions have become a critically important funding component for hundreds of thousands of college students and graduates," Weber stated. "When the education finance market was disrupted in 2008 because of the economic crisis, forcing many non-balance-sheet lenders out of the market, credit unions stepped in and offered great value during a time of great need."
Weber said that as the student lending market has evolved and traditional lenders have returned to the market along with other new players, credit unions have remained a growing portion of the sector.
"We feel there is tremendous opportunity to not only help those who are heading off to college, but also to assist college graduates refinance and consolidate outstanding student loans, in turn, creating a wonderful opening for credit unions to build meaningful relationships with these young adults," he added.
At the moment, about one-third of Student Choice's clients offer a refinance option to their members.
"We anticipate that number to grow significantly in the coming months," Weber predicted. "There is a significant need in the marketplace for this type of product and we feel credit unions are extremely well positioned to offer a compelling program to members and potential members."
The Next Credit Card?
One selling point that may help boost participation across the industry is that student loans offered by credit unions have significantly lower default rates compared with more prominent loan products. Weber said that outstanding credit union student loans currently have a 0.34% annualized net charge-off ratio as a percentage of balances in active repayment. This figure compares favorably with other unsecured consumer loan portfolios such as new and used auto loans (default rate of 0.62%), indirect loans (0.68%) and credit cards (2.20%).
"By helping students and families during one of the most critically important periods of their financial life, credit unions are delivering value while returning a strong-performing asset to their balance sheet," Weber said.
According to Callahan's Taft, there are also some similarities between where student lending stands today and where credit card lending stood just over 20 years ago.
"Back then, card lending was seen as a niche area of lending and potentially risky," he noted. "But, today it is a core performance driver of the overall diversified credit union balance sheet. Underwriting and effective servicing matters a lot in all types of lending. If you know how to engage in these areas, you can be effective in student lending too."
