Why Banks Shouldn't Write off the Student Loan Market
As I read "Worrisome Spike in Student Loan Write-Offs" in the January 2, 2014 American Banker, I realized this data rich account told only part of the story. There is another dimension worth telling.
The "stubbornly high rate of student loan delinquencies" and write-offs cited in the story combined both private and federal student loans, which is like throwing apples and oranges in the same bag. It may work at the grocery store, but it doesn't make for a useful comparison.
Private student loans are an asset class that has been a solid performer. According to a TransUnion study of private student loans from 2007 to 2012, 90-plus-day delinquencies declined at the height of the recession from about 6% in 2009, to 5.33% in 2012. Federal student loans delinquencies, though, jumped from 9% in 2009 to 12.31% in 2012.
This data set was echoed by a comprehensive study conducted by MeasureOne, a San Francisco company that specializes in student loan data. The study examined the nation's seven largest active private student lenders and found that private student loans with 90-plus-day delinquencies peaked at the 2008-2009 recession and steadily declined by 49% even as the loans in repayment doubled.
As of the third quarter of 2012, only 3.89% of private student loans were seriously delinquent as measured as a percent of loans in repayment, and have declined to 3% in the third quarter of 2013, according to MeasureOne.
Private student loans are a well-performing asset for a number of reasons. They are subject to rigorous underwriting, and the student and parents must reapply with the lenders for the loan each year. The serial nature of student lending requires new applications with fresh credit pulls each year. A borrower can have their new loan request denied if their credit has dropped dramatically, preventing bad loans from continuing to be originated.
Federal loans typically lack a credit check and don't undergo serious underwritingthey are a needs-based decision. It is difficult to be turned down for a federal loan and the results of this sad reality are played out in the media in a weekly litany.
Most private loans have co-signers. MeasureOne, for instance, found that during the last four academic years, more than 90% of undergraduate and 75% of graduate private student loans included a co-signer. School certification has become standard practice as student loansboth federal and privateare now disbursed directly to the school. There are no more trips to Europe or motorcycle purchases on Uncle Sam's dime.
Beyond the hard numbers, though, there is a hard rationale to provide financing for college expenses since the cost of college keeps escalating. Total costs for a public university can range from $20,000 to $40,000 annually. A private university can range from $30,000 to $100,000. Federal loans cover only a fraction of this expense.
For lenders, financing college costs can be a means of attracting Gen Y customersa demographic that has been cool to financial institutions in recent years. With a college degree they will earn considerably more than a high school graduate.
Gen Y born between the 1980s and the year 2000 is the largest generation in U.S. history and forms the future customer base for loans. This group will make up 50% of the workforce by 2020 and will have combined incomes estimated to reach $6.2 trillion by that same time period.
Lenders who ignore this age group do so at their peril. As there are many new entrants to the lending landscape. Affinity groups, alumni organizations, online lenders and other competitors promise quick and easy loans to their "members" and consumers who share interests and affiliations.
Many folks in this age group are still struggling to find jobs, pay off student debt and make their way in this post-recessionary world. A loan for a young adult can be a practical method to learn financial literacya life skill often not taught in our schools. The experience in applying for and paying off a loan is an invaluable skill, as is the discipline of establishing and maintaining good credit.
Finally, private student loans are part of the mix that helps finance college education, along with federal loans and savings. We shouldn't lose sight of the numbers that indicate private student loans are performing well. And there are few better ways to invest in the rebuilding of America than investing in our children and providing the means for a college education.
Vince Passione is CEO of LendKey Technologies. He can be reached at firstname.lastname@example.org.