The demand for student loans is growing as college costs soar and federal assistance fails to keep up, creating a window of opportunity for credit unions to spur loan growth and reach out to the youth market, according to a trio of student loan experts.
Mike Long, VP-lending for UW Credit Union in Madison, Wis., said UW CU's average membership age is 36, thanks to a host of student - and Gen Y-oriented products introduced in the past 18 months. These products include: alternative student loans, a student Visa card, and a no-money-down, no-PMI mortgage. The credit union serves those with an affinity with the University of Wisconsin, and 54% of new members are students. Long said the first three weeks of school brings lines 20 to 25 deep of students waiting to join the CU.
Unprofitable At The Start
"They are unprofitable, to start with," he said. "Most student members become more profitable than core members after they graduate. The key differentiation that makes them profitable is lending, especially student loans."
The alternative student loan product has a $20,000 annual limit and a $100,000 lifetime cap, with a 12-year repayment term. Long said it is not guaranteed by the government, "but we think it's a good gamble. If we're not going to do this, who will?"
To qualify for the alternative student loan, borrowers must have a minimum 660 credit score with two years' credit history, and $18,000 minimum income. Pricing is risk based. Most of these loans have co-signers, Long said.
The student Visa card carries a limit that grows with the member. It starts at $1,500 for the first year, and increases by $1,000 annually if payments are prompt. Long said the student cards have performed better than credit cards aimed at the general population.
UW CU sees a 30% penetration rate on the student Visa cards, which Long said equals about 1,200 cards issued each year. New this fall: the CU placed applications by the registers at the student bookstore, and paid the bookstore $10 for each signup during registration.
Gary Perez, CEO of USC CU in Los Angeles, said credit unions are "dream makers, but we haven't done much for the 18-to-24 segment." A mere .66% of students get their education loans from CUs, he said.
Most CUs do not have colleges and universities in their fields of membership, Perez acknowledged, but "one hundred percent of us have members who are students, and they are buying financial products from other lenders. Credit unions are missing the boat on a critical demographic segment. The credit union movement has failed to develop credit union solutions to finance young adults' most important dream: a college education."
Education Loan Resources
Education Loan Resources is a wholly-owned subsidiary of USC CU. It originates more than $85 million per year in student loans. The credit union's philosophy, Perez said, is students must be profitable from the time they join, and student lending is a key driver. Student loans represent 44% of its balance sheet.
USC CU has made more than $400 million in student loan originations since 1997, and has yet to suffer a loss or a delinquency, he reported. Perez argued credit unions should pursue student lending in the same manner they pursued mortgage lending in the 1980s, indirect auto lending in the 1990s and member business lending in the past five years.
"Most of us put our toe in the water for these programs, and they turned into fantastic programs," he said.
And if CUs do not seize the opportunity, other lenders will, Perez warned. He has two children in college, and the family's mailbox is full of student loan offers. "This didn't happen five years ago. There is intense competition for student loans. Credit unions are not aggressive enough. They must fight for them."
The ROA Connection
Mark Meyer, director of innovation at the Filene Research Institute and i3, said in the past 15 years, CUs have seen a significant decline in return on average assets (ROA), especially ROA less fees and other income. During the same period, credit unions have yet to have a year in which they added 2.5 million members, including last year's mark of 1.5 million members. In addition, the average age of CU members has crept up to 47 from 40, and satisfaction ratings of credit unions are lowest among those 18 to 34 years old.
"These are all very important issues," he declared. "Is adding 1.5 million members satisfying? That is less than 2%."
According to Meyer, serving Gen Y is not going to be the answer for all problems in the CU movement, but it is a key.
"To reach Gen Y, we need creativity and commitment," he said. "We can avoid risk altogether, or we can manage the risk. We need a commitment from the board, from senior managers and from the frontline staff."
