COLORADO SPRINGS, Colo. — The recent surge in student loan write-offs has industry analysts concerned that the student lending "bubble" may be ready to burst.
At the same time, a number of credit unions making private student loans say their stringent underwriting will protect them if the bottom falls out of the student lending market.
Between January and August of last year, lenders wrote off $13.6 billion in student loan debt, a 46% increase from the same period of 2012 and the highest amount for this period in any of the last eight years, according to data from Equifax.
"I'm not sure if we're experiencing a student loan bubble or a cost of education bubble," said Bill Vogeney, EVP/CLO at the $3.8 billion-asset Ent FCU, and chair of the CUNA Lending Council. "As funding for higher education has declined, the cost of a four-year degree has risen faster than personal incomes and higher than inflation. That certainly sounds like a bubble to me. It certainly is unsustainable."
The finding comes at a time when more CUs are stepping in to fill what they see as a void created by banks exiting the private student lending market. Credit Union Student Choice, a private student lending CUSO in Washington, reports that CU involvement in student lending is increasing, with the company's portfolio of student loans rising from $820 million in late 2012 to $1.2 billion today.
According to data from NCUA, student lending at credit unions rose by more than 10% during the third quarter of 2013 to hit $2.5 billion, a 32% increase over the same period in 2012.
Experts have been concerned for some time (Credit Union Journal, Nov. 28, 2011) over a mounting student debt crisis, and the potential for large-scale defaults, noting that many new graduates have a difficult time finding employment, or jobs at the salary levels needed to cover their bills and student loan debt.
But Michael Weber, chief marketing officer at Credit Union Student Choice, said the default rate on student loans in the company's portfolio are well below that of federal student loans. CU Student Choice works with 240 credit unions across the nation and collectively the charge-off rate is below .50%. and 60-day delinquencies hover slightly above 1%.
Weber compared those figures with a 2013 TransUnion study that showed between 2007 and 2012, 90-day-plus delinquencies for federal student loans were up 27% (12.31%) while private loan delinquencies came down 2% (5.33%).
CFPB Warns Of Potential Irresponsibility
Rohit Chopra, the Consumer Financial Protection Bureau's top official in charge of student lending, speaking before the Federal Reserve Bank of St. Louis late last year, said it would be "irresponsible for financial regulators" to avoid taking action now to shield the $1.2 trillion student loan debt market from a severe bust.
Equifax's tally of write-offs includes both private and federal student loans, and is the sum of loans that either have been sent to collections or belong to lenders who have filed for bankruptcy. Federally insured loans are rarely written off, but must be adjusted if the borrower cannot repay; lenders typically write off the portion by which a loan has been reduced only at the end of the loan's amortization period, usually 20 years.
Banks exiting the student lending market, due largely to concerns over profits, is the reason many credit unions have increased their participation in the arena, many saying someone needs to step in to meet members' higher education needs.
Industry analysts and experts note that the growing price of tuition often outstrips family resources, loans through federal programs, and scholarships and grants.
SavingForCollege.com found the average price for four years of tuition and fees — excluding room and board, books and transportation — at a private college today is $129,700; $38,000 for in-state residents at their public universities. The site also said the average 2013-14 tuition increase was 3.8% at private colleges, and 2.9% at public universities, figures substantially higher than the general inflation rate and above the average increase in personal incomes.
Jumping into student lending right now may not be the best idea, cautioned Vogeney, who also concurred with what experts have observed about students and families needing help beyond federal loans.
"Education costs are rising faster than the amount a student can borrow through the federal student loan program," said Vogeney. "That certainly has created a private student loan market that is expanding quickly."
Ent is not in the student lending business, but if it were, Vogeney said he'd have additional worries beyond rising write-offs.
"I'd be concerned that between the CFPB, and perhaps the bankruptcy laws, that the exemption for student loan discharge in bankruptcy will go away. For anyone holding large amounts of private student loans — and I realize most CUs have just started dipping their toes in here — this should be a real concern."
Tony Hale, CEO at Texell Credit Union in Temple, Texas, said his credit union considered getting into student lending a while back, with part of the attraction being most borrowers could not escape debt by filing bankruptcy. With the situation possibly reversing, Hale said the CU backed out.
"We were looking to possibly launch a major student lending effort a couple of years ago and have since decided against it," said the CEO of the $225 million shop. "I no longer believe contracts will be enforced by courts in situations that don't line up with the current government's social justice agenda."
Dale Verderano, CEO of the $144-million Matadors Community CU, Chatsworth, Calif., whose CU does not offer student loans, said, "Because of the bad economy and the lack of interest in the country's administration to create private sector jobs, the risk is climbing."
Gregg Stockdale, CEO of the $35 million 1st Valley CU in San Bernardino, Calif., places a great deal of the blame for rising student debt on a "broken" higher education system that relies on students to fuel their operations.
"What does having a high-ranking baseball, basketball or football program have to do with higher education?" asked Stockdale. "What would be wrong with requiring students to attend a junior college and prove their record, prior to sinking into untold amounts of debt at a university? What about students who keep going to school because if they quit, the payments will start and they just haven't managed to finish a major? With the wacky CFPB pushing for relief [for student borrowers], I'm glad our credit union has not gone down the student lending route."
Careful Underwriting Is Key
Weber contends the key to the low delinquencies is careful underwriting, saying that many of the federal and private student loans defaulting today are deals made right before the recession when lenders sold many of the loans to the secondary market, paying little attention to proper underwriting.
"Federal loans, too, don't always have the same stringent underwriting guidelines that private, CU-issued loans do," said Weber. "Our credit unions make loans that perform. The loans are certified by the schools, the borrower receives financial counseling, a co-borrower is required."
Vince Passione, CEO and founder of LendKey Technologies, New York City, agreed that student lending success or failure is all about the underwriting.
"We are servicing a $500 million private student loan and private student loan consolidation portfolio on behalf of our credit union clients, and our loans are performing well," said Passione. "Student loans are performing with 30-day delinquencies at 2.38%, 60-day 1.03%, and 90-day 0.62%, while student loan consolidations are performing at 30-day delinquencies of 0.86%, 60-day 0.43%, and 90-day 0.19%."
Mike Long, executive vice president and chief credit officer at the $1.8 billion UW CU in Madison, Wis., thinks CUs that make student loans have been not only much more careful than banks with their underwriting, but also look at whether the student taking out the loan will have a career that lets them repay.
