Student lenders brace for 'significant shakeout' from coronavirus
The coronavirus crisis is increasing the pressures on student borrowers and the credit unions that serve them.
The U.S. Department of Education put relief measures in place for borrowers last month by automatically placing all federally held loans in forbearance. Some private lenders are following suit by slashing rates as they attempt to salvage their student loan portfolios and fend off delinquencies.
Loan growth across the industry has slowed in recent years and privately held student loans are no exception. Credit unions had a total of $5.5 billion in student loans at the end of 2019, according to data from the National Credit Union Administration. That’s a 7.8% lift from where things stood at the end of 2018, but a drop from the 15.9% growth rate seen between 2017 and 2018.
“This year [student lending] has been significantly down,” said Adam Ennett, chief lending officer at USC Credit Union. “It’s more situational than anything. A lot of what’s going on with the world is in flux, with a lot of universities going online in the COVID-19 world.”
The $592 million-asset credit union usually does between $2 million and $3 million in student loans per month. But the coronavirus crisis has impacted its student lending pipeline, which makes up roughly 14% of the credit union’s total loan portfolio. Right now, it is doing roughly $600,000 in student loans per month, but is looking for ways to increase that dollar amount.
Part of that process involves offering borrowers the chance to refinance their loans at rates as low as 1.6%. After putting student loan marketing on hold while it focused on more pressing matter such as the Paycheck Protection Program, the Los Angeles-based credit union plans to relaunch those efforts next week in the hopes of seeing loan amounts rising again by June.
But USC anticipates challenges ahead as college students assess their options. A new survey from Art & Science Group foundthat one in six college-bound respondents are close to giving up on the idea of attending a four-year institution as a full-time student this fall. The same survey found that two-thirds of graduating from high school seniors are concerned they may have to change their first-choice college because of financial concerns brought on by the coronavirus.
“There’s a definitely different sentiment with returning to college, and USC has a large international student population and that’s in flux because of a lot of travel restrictions,” Ennett said.
COVID-19 has dramatically changed the learning model for colleges and universities as schools learn to comply with social distancing measures. Many students are not thrilled with the pivot to remote-learning models and some have sued their schools for coronavirus-related refunds on the premise that the quality of virtual education is not on par with the standard in-person college experience. The students allege that they paid for services that they no longer receive, such as access to a university’s facilities and extracurricular activities.
The move to remote learning, coupled with record-high unemployment and grim economic forecasts, could have a stark impact on college enrollment in the upcoming academic year. The number of students interested in attending college in the fall has dropped 20%, said Robert Farrington, founder of the College Investor, while data from the National Clearinghouse Research Center shows overall postsecondary enrollment was already down 1.3% in fall 2019.
“We have students wondering if they’ll be able to go away to college,” said Erna Laielli, marketing manager at Jersey Shore FCU. “Some of the colleges start in August for new students, and they have concerns even about that but they’re moving forward.”
Though the Northfield, N.J.-based institution partnered with Sallie Mae for its student loan program, the credit union does offer the option for members to take out a home equity loan to help finance a child’s education. This can be risky, however, if a home loses its value over time – a prospect that could get worse if the housing market turns south as a result of the pandemic’s economic fallout. And the stakes are much higher for borrowers when it comes to missed payments if their house is on the line.
The price of college was already an obstacle for many students before the coronavirus. Tuition costs and student debt rates have soared, and the nation’s total student debt now exceeds $1.6 trillion. Private student loans aren’t eligible for the same relief measures in the CARES Act as federally held loans, but private loans make up a slim piece of the overall market. Federally held loans account for $1.5 trillion of the $1.6 trillion total student loan debt.
The move to online courses could also change how students select which schools they attend and where they turn for funding – and they may not be as willing to take out high-cost loans if they’re not going to actually be on campus.
“If we don’t go back to normal campus life, if we start the next semester in distance-learning mode, then there’s not going to be necessarily as many parents who are going to be forking out for that kind of private-college, on-campus experience and we could have a significant shakeout in education in general,” said Steve Reider, president of the Alabama-based consultancy Bancography.
Offering low rates means that credit unions must tread a fine line between attractive rates and sound business decisions, Reider added.
USC Credit Union implemented a deferral program in March that allows members to put off payments for up to three months. The credit union has received 971 inquiries since implementing the program and has granted 560 deferrals, though Ennett said that all deferrals are expected be granted and the credit union has allocated more employees to work through the requests.
Offering loans at such low rates is a win for borrowers, but it can be risky for credit unions. Still, there are measures CUs can put in place to help those members while also protecting the bottom line. Reider suggested credit unions could mitigate some of those pressures by taking steps to bring in additional business, including trying to entice student borrowers and their parents to migrate their primary checking relationships to the credit union if they do their banking elsewhere.
Deferral programs also allow credit unions to work directly with borrowers and help improve relationships with members, particularly during financially stressful times.
“Institutions are going to see delinquencies go up – and not just on the student loan side but in lending portfolios as a whole,” Ennett said. “It’s likely that delinquencies will continue to go up, but if you have a good deferral program in place and you’re working to help out your members, then I think that your delinquencies will likely be less than institutions that are not implementing anything.”