MADISON, Wis. - Recent changes to the federal student loan program has driven away a lot of the players in the student loan market, creating a void in the market that credit unions can leverage into a real opportunity, according to a number of student lending experts.
But while the potential opportunity to fill a real, social need in alignment with the people-helping-people philosophy and the loans also create a high-performing asset on the books, student lending isn’t likely to replace auto lending as the bread-and-butter of the CU movement.
On the public side, the federal student loan program is in full shake-out mode following changes that made it a much less lucrative opportunity for would-be lenders.
“It’s tricky because the government eliminated some of the incentives to do this,” said Michael Long, VP-lending at University of Wisconsin CU, Madison. “We have had to refine our benefits in order to maintain a margin we’re comfortable with.”
In Houston, Smart Financial CU’s Dana Rawlings agreed. “In today’s environment, there’s basically no profit margin to be made,” he said. “We’re still in it because we’re here to serve our members, and we believe that offering student loans helps us gain new members.”
While CUs in college towns have a vested interest in sticking with student loans despite the shaky environment, many in the for-profit financial sector have pulled out of the federal programs entirely.
“With the changes, it’s almost impossible to differentiate your federal student loan from anyone else’s,” said Long, who is also a member of the CUNA Lending Council. “We’ve refined our benefits, and we still have some of the richest benefits out there. Banks have really hacked away or eliminated it outright.”
Not everyone thinks that’s a bad thing. Indeed, some lawmakers have indicated that’s all part of the plan. “(Sen. Ted) Kennedy has said he wants to get back to direct lending [by the Department of Education] because of all the abuses. The CEO of Sallie Mae built a golf course at his residence. [Lawmakers] want to put an end to profiteers making that kind of money off the backs of students,” Long explained. “But my question for [the government] is, ‘How are you going to handle all this volume?’”
The answer may be that it can’t. “One school [in Houston] has gone to direct lending, and the Department of Education says they’re overwhelmed. It’s a struggle for them and they need us to take the burden off them,” said Rawlings, COO of the $341-milllion CU and a member of the CUNA Operations, Sales & Service Council. “They can’t process them fast enough. It’s taking six to eight weeks for students to get a response back. We do it in 48 hours–sometimes even same day.”
With more banks pulling out of or suspending their student loan programs, dumping volume on a federal system some suggest isn’t ready to handle, there’s a real opportunity for credit unions to polish up the old white hat.
“I do believe there is a great opportunity right now with student loans,” said Claire Ippoliti, VP-lending at $567-milllion Philadelphia FCU. “At PFCU we still offer the federal government loans and are still a zero-fee lender in a market where most have passed the origination fee on to the students. We made that decision, in light of very tight margins, as a way to attract our younger borrowers/members.”
Good philosophy and good PR aside, getting involved in the federal student lending program isn’t for everyone, those interviewed by Credit Union Journal agreed. “For credit unions who can, the government program still makes sense,” said Mike Kim, the architect for USC FCU’s student lending program. “The profit margin has gone down, but there’s still a positive return. As long as you can hold the loan, it’s a good deal. They are 97% guaranteed, and students are really scrambling right. And you really are investing in the future.”(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
