Why One CU Believes So Strongly In Student Lending
In a move that may seem counter-intuitive, one credit union is growing and prospering by putting its chips on one bet that others are shunning-the student loan market.
USC CU, which serves faculty members, other employees and students at the University of Southern California, has carved out a profitable niche in originating student loans just as dozens of other credit unions and other small players are pulling out of the market now dominated by a handful of giants, such as Sallie Mae, JP Morgan Chase and Citibank.
"We see this as a major opportunity for credit unions," USC CU CEO Gary Perez said last week during a presentation at the annual NACUSO convention. The strategy has quadrupled his credit union's assets over the past five years to $210 million, and helped it maintain a strong return-on-average assets (ROA) of 1.6% during that time.
The credit union has originated more than $300 million in student loans over the past five years and expects to originate as much as $100 million this year, alone. And it has not reported a single loss or delinquency on those student loans in all that time, according to Perez.
All this was done as the credit union share of the student loan market has shrunk to less than 1% while the total amount of students loans has doubled to more than $70 billion a year; and a greater portion of the market, as much as two-thirds is taken up by the big three.
"We're in the dream fulfillment business. But this is a dream that we have left totally unfilled," said Perez, whose credit union conducts its student lending through a wholly owned CUSO known as Education Learning Resources, or ELR. "We (the credit union movement) have failed to develop credit union solutions to finance young adults' dreams."
He cited several reasons why the abandonment of the student loan market could have dire long-term implications on credit unions. One is that studies show that young people tend to stay with a primary financial institution for an average of 15 years. Another is that young people stand to inherit $1.7 trillion and will be looking for institutions to help them manage that inheritance. And a third is that over 50% of young adults are involved in saving for or paying for college.
But besides the idea of competing with giants in this market, student loans have come to have a bad reputation within credit unions. That's because both guaranteed rates have slumped to all-time lows and origination fees are being eliminated as the big players ramp up the competition.
Still, Perez said, student loans can provide numerous benefits, beside the guaranteed stream of income-98% is guaranteed by the federal government. For one, they will bring in new members who will seek out other credit union products and services.
The product also helps broaden and diversify membership, especially for community charters or those credit unions with select groups that serve younger people.
"Attracting younger members is vital to the future of credit unions," Perez asserted.
The loans themselves, he explained, pay a good, riskless yield, tied to the Treasury and commercial paper yield indices. USC CU holds the loans while the students are in school, then sells them into the secondary market after graduation at a guaranteed price of a 2% to 4% premium based on forward contracts. Even with the virtual elimination of origination fees, the program is still profitable, said Perez.
In developing its strategy, USC CU has deepened and expanded its ties with the university, its main sponsor. That includes taking over the cashier function for student loans; taking over the entrance and exit counseling duties required of participants in the Federal Family Education Loan program; sponsoring university events; linking the credit union's website to the university's; and providing scholarships, as much as $400,000 worth over the past five years, for USC students.
The credit union has expanded its on-campus offices and been granted access to all incoming students at one of the largest universities in the nation. "This has enabled us to sing the credit union song to these kids," said Perez.
"Credit unions should embrace student lending in 2005," said Perez, "the same way we embraced mortgage lending in the 80s and indirect auto lending in the 90s, and as of late, are embracing member business lending."