NEW YORK—Credit unions need an education on one issue: student loans are safer than many CUs believe, advises one private student lending platform.
“Building assets to balance against deposits is critical for the financial health of a credit union. However, if those assets don’t perform and go delinquent, it can put a big strain on your balance sheet,” said Vince Passione, founder and CEO of LendKey. “The private student loan market is one of the best investments a credit union can make in 2018 when compared to other asset classes, and should be considered as a significant part of your lending portfolio.”
Sizing up the market opportunity, Passione pointed to statistics from Student Loan Hero.
“There is $1.48 trillion in total U.S. student loan debt outstanding today, making it the second-largest asset class after mortgages,” said Passione. “Approximately 44.2 million Americans have student loan debt, including many CU members, and that’s just the existing market. With over two-million students enrolling in college in fall 2016 and the numbers rising each year, the market opportunity is steadily increasing each year.”
Loan Safety
With all of the headlines regarding rising student loan debt, Passione acknowledged there are concerns among lenders about the safety of student loans as an asset class.
“But there are misconceptions in terms of delinquency rates and default risks,” he said. “While the federal student loan delinquency rate is over 11%, according to the Department of Education, the private student loan market has a much lower risk profile, with defaults less than 1% a year.”
Passione said the biggest difference between federal and private student loans is the latter are underwritten from a credit perspective to ensure the borrower and cosigner have a history of repaying their loans and have the capacity to repay.
“The second difference is the use of cosigners makes private student loans one of the safest assets for a credit union to hold, better than auto or unsecured loans,” Passione said.
Why is there such a significant difference between the two student loan products? The two key factors are cosigners and the refinance market, said Passione.
Vince Passione, LendKey
“Considering that the average student applying for a college loan is a teenager with typically little to no credit history, it makes sense that credit unions feel it’s too risky to provide loans to college students,” said Passione. “The biggest differentiator between how the government provides student loans and how credit unions can approach the market is through cosigners and truly underwriting the borrower.”
Ninety percent of private student loans are cosigned, while most federal loan programs don’t require a co-signer which results in a higher default rate, emphasized Passione.
“Parents are usually the cosigners on these loans, and they are highly motivated to ensure their child pays back their loan,” added Passione. “In addition, private student loans are underwritten, as borrower and co-signer have to be approved according to strict credit criteria. The loans are priced based on risk, which makes them similar to other lending assets in the credit union’s portfolio.”
Refi Opportunity
An even safer opportunity to take advantage of the growing student loan market is through refinancing, said Passione.
“Students who graduate with high GPAs and move on to well-paying jobs are paying the same rate on federal loans as those who drop out of college,” said Passione. “They can consolidate and replace their 6%-7% interest rate loans with a consolidated student loan refinancing, lowering their interest rate and monthly payments. These educated adults have also gotten a chance to establish their credit history, and are motivated to save money and refinance their loans.”
Refinancing is a prime opportunity for credit unions to enter the student loan market in a measurable, safe way to add high-performing, low-risk assets to their balance sheets, added Passione.
“And by leveraging participation networks where a credit union can share the loan with other lenders to diversify risk further they can make the portfolio even safer,” noted Passione. “To get into the student loan market cost effectively and quickly, credit unions should consider partnerships with technology companies and service providers who can leverage forward flow programs, white label customer solutions, and participation networks to get into the business with minimal investment in resources.”