RALEIGH, N.C. - One credit union that has come to the rescue of a state student lending program has found a way to make up for other lenders’ decisions to pull out of student lending in a significant way–but it won’t be making a single loan itself.
As reported June 27 by Credit Union Journal, State Employees CU, here, has committed to investing $1.1 billion to refinance and provide funding for student loans made College Foundation, Inc., a state agency that provides funding for federally guaranteed student loans. SECU’s investment will provide a portion of the funding for the 2008-2009 program, which is guaranteed by the North Carolina State Education Assistance Authority.
“We’ve been a provider of funds and a purchaser of student loans for 25 years or so,” said SECU’s Mike Lord. “The North Carolina State Education Assistance Authority, which is a subdivision of the state of North Carolina, got so good at [providing the principal funding for federal Stafford Loans in the state] that we saw no need to reinvent the wheel, so we participated in the program. But with the implosion of the options market, they had a problem.”
So SECU decided to see how it could be part of the solution, working out a purchase of the bonds for $1.1 billion. And while other credit unions may not be able to make that type of investment–after all, at nearly $16 billion in assets, SECU is the nation’s second largest credit union–it’s still a model other credit unions are examining closely.
“We received a phone call from the Illinois Credit Union League asking about what we did,” Lord said. “They were approached by the Illinois Education Assistance Authority after that agency learned that a $5 million line of credit from CitiGroup won’t be renewed. I have to believe there are a number of states that are in a similar situation.”
And that, he said, provides a real opportunity for credit unions. “You can meet a great social need and get a good performing asset on the book but eliminate the challenge of being an originator in the federal student loan program.”
Over the last 20-odd years, SECU has occasionally looked into getting into the federal student loan program itself but concluded it made more sense to work with the state agency and its non-profit partner, College Foundation Inc.
“The non-profit organization’s philosophy aligns with the credit union philosophy,” Lord explained. “When a student comes in, they first see if the student qualifies for any grants–they try to help students get the free money first. We were fortunate that this structure existed. We didn’t feel we could do it as effectively as the College Foundation could, so we chose to work with them instead.”
It’s a model Lord believes could work well elsewhere, and he urged credit unions to look into it in their markets. “Talk to the financial aid authority in your state and do the due diligence,” he said. “The state education assistance authorities in many states are struggling to figure out how to find the funding right now. We contacted ours to see whether there was an opportunity for us to assist, and we came up with a good earning asset for us.”
Lord offered his top reasons for getting involved in the federal student lending program via a state agency:
* It’s a great investment at a variable rate.
* It’s a safe investment because the bulk of it–97%–is guaranteed.
* The bonds are overcollaterlized at 103%.
* It’s for a great purpose: “We’re helping our state and investing in our future leaders.”
* No negative impact on members. Done correctly, there’s still plenty of credit for members; and in fact, as part of the deal for SECU’s investment, SECU members will actually see a positive benefit: the North Carolina program offers an interest rate reduction to members of SECU and Local Government FCU. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
