FORT LAUDERDALE, Fla.–Student loans, and especially refi’s, were at the front of the class as a loan opportunity for credit unions, offering low defaults, large balances and attractive margins, according to three people.
Offering insights into the issue of “Noise vs. Reality” during the CUNA Lending Council annual meeting here were Jim Holt, chief revenue officer with Washington-based CU Student Choice; Mike Long, EVP/chief credit officer with UW Credit Union in Madison, Wis., and Jason Hills, SVP-sales and account management with New York-based LendKey.
Here’s a look at what each of them had to say about student lending and the opportunities for credit unions.
Jim Holt, CU Student Choice
Holt pointed to the number that has become all too noticeable, the huge growth in student loan debt. In Q2 2005 there was $370-billion in such debt; in Q2 of this year the tab was $1.19 trillion.
While multiple factors have driven that debt figure, Holt reminded, “Still, getting an education is one of the most empowering things you can do. The benefits are sustaining and predictable. It offers a 15% return (via improved income). Since the 1990s BA recipients have seen 50% higher earnings than those with a high school diploma.”
But that empowerment, coupled with costs north of $50,000 annually at some private schools, has more people “having kitchen table talks and really starting to think through these decisions. A lot of families are thirsty for information on how can they best afford college.”
Holt said the average student debt per borrower is $31,252; 40% owe less than $10,000. What may surprise some, he said, is that default rates are actually higher among borrowers with less than $5,000 outstanding than those with $100,000 or more. A chief reason is the ability to leverage the education, said Holt. “Those under $5000 often didn’t graduate and couldn’t effectively leverage their degree,” he said. Many of those with debt of $100,000-plus are doctors or dentists.
“There is a need for modern, Millennial-focused financial literacy,” according to Holt. “I find it funny everybody knows how to buy a car; it’s like a blueprint passed down from your grandfather. But when it comes down to financial aid, that’s not the case. It’s a mystery, but it shouldn’t be.”
Holt said CU Student Choice has put a lot of emphasis on video content and to speaking to members individually. It adds content daily.
The education piece also applies to credit unions, he said, especially those not in the market because they misunderstand the risk.
“We’ve all heard that student loans are a heavy weight on members and affecting their ability to take out mortgages or auto loans,” said Holt. “Overall performance of student loans is high. This is a very high earning asset with low delinquencies.”
Using data drawn from nine credit unions with 8,000 student loan borrowers, Holt said the CUs averaged 58% average checking penetration; 18% average card penetration; 9% average auto loan penetration, and 6% average deposit penetration. “This is a real opportunity to leverage this relationship. This is a great way to invite these new young, promising faces to create loyalty with you.”
Mike Long, UW Credit Union
FORT LAUDERDALE, Fla.–The University of Wisconsin Credit Union is the number-one student loan-maker in the U.S., with a $110-million portfolio. So it knows a little something about the value and risk of the loans.
“I feel confident now in saying these are great loans for your credit union,” said Long. “There are a lot of misconceptions around student loans, most of which is about risk.”
The $2.3-billion UWCU “gives away” everything to students while they are in school, with Long acknowledging those accounts lose money. Its goal is to retain those students upon graduation and to make other loans. UWCU’s success in student loans is obvious in the average age of its members: 35.
Long said the credit union entered the market after the financial aid director at the University of Wisconsin asked why it didn’t make private student loans, since government loans provided just $5,500, insufficient to cover most students’ costs. It designed its product in response.
There is no shortage of skeptics around student loans, said Long, noting he has heard all of them.
“I know the belief is all these kids are ne’er do wells, they’re never going to get a job, they’re going to live with parents, and they will never pay you back. Thankfully, that’s not the case,” he said.
UWCU’s program allows students to borrow up to $12,500 annually and $40,000 over the lifetime of the loan. There are deferred payments while the student is in school, with a 12-year repayment plan. There is a six-month grace period after graduation, no fees, and a co-signer release after 36 months if payments have been made on time. The average debt in its program is $13,000.
Fixed rates range from 6.74% to 12.49% depending on FICO score, with about a 50/50 mix in fixed in variable rates. Variable rates from 2.50% to 9.25% tied to three-month LIBOR, with pricing also dependent upon the FICO.
“The vast majority of these loans are co-signed, which may not be the secret sauce, but it does explain why so many of our loans performed for us,” said Long.
“Student loan finance, I think, is the big opportunity for credit unions right now,” said Long. “ For the life of me I don’t know why we haven’t risen to this occasion. How many of you train your staff to do through credit bureaus looking for opportunities? (Many in the audience said they do) I’m telling you your members have student loans. Twenty-four percent of the population has a student loan, with average debt of $24,000.”
Three years ago UWCU rolled out a student loan refi product with amounts ranging from $5,000 to $60,000. Terms include immediate repayment, terms to 15 years, and the same rates as its other products. Borrowers need to have a 660-and above FICO and at least $25,000 in annual income. There is also a co-signer release o the product.
“What we find with student loan refinance is the average borrower is not the 22 or 23 year old who just graduated from college, it’s actually 31. They are now thinking about reorganizing their finances,” said Long.
To date UWCU has processed more than 42,000 applications, with a 50% approval rate. Denials are usually the result of not being able to find a co-signer rather than not meeting FICO minimums.
Of UWCU’s $110-million balance, $63.1 million is in repayment; 89% of the loans have cosigners; the average credit score is 747; the 60+ delinquency rate is 1.05%, and the charge-off-rate is 0.20%.
“How many of you would give a $15,000 credit card for someone with a 747 credit score? Everyone!” said Long. “These loans just keep performing better and better.
UWCU also offers another feature: borrowers are given two opportunities to call and request a three-month grace period at any point during the term.
“I would highly recommend if you do a refinance program that you find some help,” advised Long. “We use CU Campus Resources. For servicing, we use Great Lakes. Most of your core processing systems don’t do things like deferments very well.”
The use of those third parties has helped UWCU to build its $110-million portfolio with just 1.5 staff members. That has only helped to boost margins on that portfolio.
Long said the gross yield on the portfolio is 5.5% and the net margin is 3.5%.
“So let me ask you, what kind of auto loan rates are you offering? You’re not making a lot of money on that portfolio,” said Long.
Jason Hills, LendKey
FORT LAUDERDALE, Fla.–Count Jason Hills among those who see a strong opportunity for credit unions in student loan refinancing.
While the high default rate on federal student loans—13.7%--gets headlines, Hills said the current default rate on private student loans is 0.45%, and on refinanced loans its 0.15%, although LendKey projects that will eventually rise to 1.5%.
“About 42% of 18-24 year olds are now in college. The average debt when they graduate is about $35,000,” he said. “There is $1.2 trillion in student debit; we believe there is $836 billion in student debt that could be refinanced. It’s a huge opportunity. There is a lot of debt out there it’s overpriced.”
LendKey has originated about $500 million in student loans, according to Hills. Its performance metrics show:
- Average yield 5.85%.
- Average FICO: 751.
- Percentage cosigned: 52.91%.
- 60+ delinquencies: 0.69%
- Average loan amount: $49,000.
- Average age of the borrower: 28.5
“I find this to be a really good match for credit unions,” he said. “On the member side, members need a lot of help with student debt. These are people who are either looking or don’t know they should be looking. If you’re looking for ways to get younger, one way is to help Millennials with the problems they are having, which is student debt. Only 7% of credit union members are between the ages of 18-24, and the peak borrowing ages are 24-44. You can be the trusted advisor and they are more likely to come back to you for other loans in the future.”