Student loan debt has increased nearly four times the amount it was a decade ago, according to the Federal Reserve, while the U.S. Census Bureau reports pay for new graduates has steadily declined.
There is a lack of education and information concerning workout programs and payback plans, leaving 7 million of the 39 million total student loan borrowers in default, according to the Consumer Financial Protection Bureau. With 44% of all student loans in forbearances or deferments, there will soon be a further spike in student loan delinquency and negative impacts on borrowers credit scores.
While the statistics seem grim, there are many reasons why banks should still enter the student loan market. Delinquency rates for private student loans are only 2.4%, according to Moody's Investor Service, compared to the delinquency rate of overall student loans at 11.2%.
Furthermore, there is a need for private student loans as federal loans do not cover the increasing costs of college tuition.
Entering the student lending market will increase brand awareness which, in turn, will lower the attainment cost of new customers and increase customer loyalty. Banks can then use the relationship established with student loans as an anchor product for their brand by cross-selling future lending needs: mortgage, auto loan, credit cards.
Joining the Student Loan Game
If banks enter the student loan market, there are certain actions that can be taken to mitigate the risks of borrower default.
Financial Stability: Evaluate whether a borrower will be financially sound on additional criteria: high school GPA, volunteer hours, and college credits in high school. Analytics have long been used by FSIs to determine a potential borrowers creditworthiness and ability to repay, and by incorporating non-traditional types of metrics in an industry wrought with delinquency it will help FSIs alleviate risk of non-repayment .
Success Planning: Partner with and educate borrowers from the start, gaining the emotional buy-in from the borrowers. Then deepen this buy-in with continued communication and service offerings. Getting this buy-in, coupled with a positive customer experience, will make the repayment process easier for the borrower. This will also create a better foundation and knowledge base for those borrowers with future lending needs outside of student loans. Borrowers with an understanding of credit will comprehend how it can shape their life when it comes to future lending, thus creating a more valuable borrower for FSIs.
Establishing Corporate Payback Partnerships: FSIs need to reach out and partner with corporations to offer specialized payback plans to entry-level employees who have student loans with that particular FSI. By creating this partnership, FSIs are securing future borrowers by building brand loyalty and making repayment a viable option for these borrowers. The benefit to participating companies will be acquiring a new tool to attract and retain top talent with student loans.
While the student lending market has been a focus in the media over recent months, there are many positives of entering this market and ways to mitigate the risks for both banks, and borrowers. The new normal in todays lending society goes beyond educating borrower, but adding partnerships could be the key to gaining full wallet share.
Doug Hautop is Lending Practice Lead at Carlisle & Gallagher Consulting Group.