PEORIA, Ill. — An increasingly in-demand product at Citizens Equity First CU here is one that members themselves demanded: a student debt consolidation loan.
The $5.2 billion credit union first entered the private student lending market in 2011. In May it launched its Consolidation Student Loan (CSL), according to Katie Mueller, private student loan manager.
CEFCU's policy for student loans has always been to require a new loan for each year, so a college freshman would graduate with four or more private student loans from the credit union, Mueller explained.
CEFCU rolled out the new product due to member demand. "We got calls from people saying 'I have loans with Sallie Mae, Wells Fargo, and I'd really like to bring them to my credit union — do you have anything you can offer us?' At the time we didn't have anything," said Mueller. "It was a really unique situation in that members demanded this product."
CSL pricing is similar to how CEFCU prices its in-school student loans, with rates varying from 4% to 11.25%. The difference between these loans and other consolidation loans, noted Mueller, is that student loans can't be discharged in bankruptcy.
These loans carry a minimum of $5,000 and a maximum of $80,000, with no origination fees, a 0.5% rate reduction for automatic payments and up to 12 years to repay. Many loans of up to $80,000 often have some sort of tangible collateral, such as a car — but a CU can't repossess a college education.
Mueller said CEFCU did extensive cost-benefit analysis on the CSLs and the underwriting is very conservative. "It's kind of difficult to get one, to be honest," she said. "Our appetite is not big on these. We don't want this to be a heavy portfolio product, so I don't think that we're going to get into a dangerous arena. with this product."
The credit union currently has $34 million in student loans on its books and just over $1 million in consolidated student loans. The goal for the first year offering CSLs is to grow that portfolio to about $5 million.
Cherry Pick
Student loan consolidation at credit unions has grown rapidly in recent years, noted Jon Jeffreys, managing partner at Callahan & Associates. That's in part because CFPB Ombudsman Rohit Chopra effectively gave institutions the agency's blessing to pursue that market. "That sort of opened people's eyes," said Jeffreys. "Because if you look at the overall student loan market... from a lender perspective, what that said was we can now go cherry pick good credit borrowers. It dramatically expanded the market potential."
The struggle, he added, is how to find those borrowers. While some CUs may find these loans organically, Jeffreys said he hasn't seen many that have found successful ways to widely market and grow these programs to their membership or the community. "I don't know that many credit unions have cracked that nut yet on finding members with a good job, reasonable credit score and that they could save money," he said.
CU Student Choice Chief Revenue Officer Jim Holt noted the boom in student lending has also helped push CUs into this arena, as student debt grew from $450 billion in 2005 to nearly $1 trillion in 2012. Today, he said, it stands at $1.3 trillion. "Credit unions are recognizing this as a true, genuine need many of their members face, and they want to meet all of the needs of their members," Holt said. "This is a very significant one that they feel it's wise to step up and support in a fashion that is affordable and helpful."
Consolidations are oftentimes safer loans than those made to students in school, he said, noting that all consolidation loans require the borrower to have graduated, be employed and have strong repayment history on all outstanding consumer debt.
But Jeffreys pointed out that CUs will also want to be sure their underwriting policies are sound and that — even though they can be picky about who they write these loans to — they aren't discriminating or breaking any lending laws. Regardless, he said, for students who have graduated, consolidation loans are often a safer bet than many other standard credit union products like credit cards, cars or mortgages. "You're going to see 75% to 80% of your defaults within the first three years [after graduation]," he said. "The reason for that is that if someone gets out of school and they can't get a job, they can't pay their loan and they default. You generally don't see 30- to 35-year-olds defaulting on their student loans."
What Bubble?
Harvard University Employees CU launched its own consolidation product earlier this year, marketing it exclusively to the Harvard University Clerical Union.
But plans are underway to roll the product out to the rest of the membership within the next few months, according to VP of Student and Alumni Services Tom Murphy.
HUECU's pricing starts at 5.5% for fixed rates, with variable rates indexed off of prime. Loans are amortized over a 15-year term and can range from $10,000 to $50,000.
Murphy said his CU is careful to remind students they may be giving up "a lot of forbearance and potential interest-rate reductions or forgiveness if it comes down to it when consolidating federal loans."
One advantage: consolidated student loans are still not dischargeable in bankruptcy. CFPB Ombudsman Rohit Chopra made news a few years ago when he voiced concerns over the possibility of a student lending bubble, but many CU analysts quashed that notion. Murphy said his credit union doesn't believe there's anything to worry about — at least as far as their portfolio is concerned.
"I don't think there's a bubble," he said. "I think there's been higher borrowing levels than there were 15 years ago, but that also correlates to higher federal loan limits and higher costs of college."
Similarly, Jeffreys said that fears of a student lending bubble — if it exists at all — shouldn't keep too many VPs of lending awake at night. Student lending constitutes such a small part of the overall consumer finance sector, he said, that "even if there were challenges in that sector, the implications would be nowhere near the same as the mortgage crisis of 2007-08."
