Rising rates, DeVos proposals creating uncertainty for student borrowers

The prospect of rising rates from the Federal Reserve isn’t deterring students from hitting the books for another semester, though graduates should not be surprised when their loan refinancing options are affected. But all of that could be good news for credit unions.

It’s a well-known fact that student loan debt continues to rise each year. With total debt now nearing $1.5 trillion, loans tripled over the past decade while the per-semester cost of tuition at a four-year public university increased by 31% according to CollegeBoard.

As these metrics grow, the market for student loans follows suit, expanding to meet demand. Jim Holt, chief development officer at the student lending credit union service organization Credit Union Student Choice, attributes this growing market to the low-rate environment experienced in previous years along with the proliferation of outstanding student debt. In particular, Holt notes that credit unions “have carved out a strong presence in the market” despite strong competition from fintechs and other specialty finance companies.

In the last three years, rates underwent seven price hikes by the Fed, a decision that can impact refinancing for those holding loans with variable interest rates. But, it’s possible students are getting savvier and studying up on personal finance, because some credit unions – including Chicago-based Alliant CU – have seen an increased demand from members looking for student loan refinancing options.

“In the student loan refinance space, it’s important to offer fixed rates that are competitive with the rates that were offered on federal student and parent loans (PLUS),” said Holt. “Rising rates will make this more challenging, so it’s important that credit unions take advantage of this while the opportunity is there.”

Proliferation of student debt is a noticeable trend, but Brian Sharapata, product manager for consumer lending at Alliant Credit Union, points to another: demand shifting toward fixed-rate options.

“We’ve been in a rather benign rate environment for several years,” said Sharapata. “Now consumers are much more savvy and are actively exploring the stability and predictability with fixed-rate loan options.”

DOE proposals creating more uncertainty

As if the prospect of rising rates wasn’t enough to create an air of uncertainty, actions at the U.S. Department of Education have also raised concerns among some borrowers.

In late July, U.S. Secretary of Education Betsy DeVos announced a plan to curb student loan relief by $13 billion, a decision that impacts defrauded students seeking debt relief. She has also attempted to block state regulation of student loan debt collectors. These moves, however, have yet to filter into the operations of credit unions – for now, that is.

“For the most part, for-profit schools and colleges have not been a core focus area for refinance lenders so the impact [of Betsy DeVos’s newest proposal] will be limited,” said Nishith Krishna, senior director of unsecured loan products, of PenFed CU.

About 40 percent of borrowers are expected to default on their student loans by 2023, so if DeVos’s proposal is enacted, some analysts have suggested the student debt crisis would likely implode.

Despite the looming threat of loan defaults, more options are appearing for consumers. Alliant is now offering a refurbished loan program to its members, providing fixed- and variable-rate loans at terms of five, 10, 15 or 20 years. Consumers will also be permitted to refinance up to $100,000 in graduate or undergraduate loans, as well as consolidate federal and private student loans into a single low-rate loan, an option that Alliant says will save consumers on interest.

The credit union expects these changes to drive growth in that segment of the portfolio by 50 percent over the next year.