Question:
Jim Holt, Chief Revenue Officer, CU Student Choice, Washington.
When looking at the issue of higher education and student debt, let’s first remember that college remains one of the best investments an individual can make in his/her future. The Bureau of Labor reports that unemployment rates for a college graduate are 4.5 percentage points lowerthan those with only a high school education (4.9% compared to 9.4%). And, the college grad will earn more than $1-million more over his/her lifetime! Believe me, with two sons in college, I need to keep reminding myself of these stats given the high cost of education.
Jim Holt, CU Student Choice
As far as student debt is concerned, many stories lack transparency and can be misleading. The Federal Reserve Bank of St. Louis explains that close to 70% of student loan borrowers have less than $25,000 in debt while 3.6% have greater than $100,000. “The average debt level is skewed by a small percentage of borrowers with a large amount of debt: 3.6% borrow more than $100,000, likely for expensive degrees, for example, in medicine or law.”
In regards to private student loans, it’s important to realize that they comprise just a small portion ($93B) of the $1-trillion student loan market. They are meant to fill the gap after other lower-cost sources of financial aid have been exhausted and are an important funding component for millions of American families. Overall performance of this asset is vastly superior to federal student loans (due in large part to stringent underwriting criteria). In fact, according to Moody’s, private student loan default rates “dropped to 3.4% in the fourth-quarter 2013, down from 4.5% in the fourth-quarter 2012”.
Responsibly managed private student lending is an excellent opportunity for credit unions to offer a strong-performing program that serves young members during a key point in their financial lives, leads to long-term growth with this important demographic, and positively impacts the bottom line.
Aswin Rajappa, SVP-Marketing, Lendkey Technologies, New York
With the passage of the Health Care and Education Reconciliation Act in 2010, financial institutions were no longer able to serve as intermediaries between the government and borrowers for federally guaranteed student loans. But the demand for student loans continues to increase and at the same time education costs are rising.
Students and their families have come to rely on private student loans to fill the gap between educational costs not covered by savings or government guaranteed loans. Private student loans are strong assets and are performing well.
Aswin Rajappa
Private student loans are vastly different from federally guaranteed loans. They have low delinquency ratios because of tight underwriting and most have co-signers. MeasureOne, a San Francisco research firm that follows the student loan market, found that 92% of undergraduate private student loans have a co-signer. According to MeasureOne, of the $1.1 trillion in student loan debt, only about 7.8% or about $92 billion is in private student loans. So this represents an untapped market that is ready to grow.
Private student loans are also a means of reaching young borrowers, especially Generation Y—the future of lending. These loans offer credit unions a way to reinforce their role in the community by providing funds for college, as well as being a source of education for one of the important financial decisions in young peoples’ lives.
A recent study by the Brookings Institute sifted through two decades of data that tracked educational debt levels and incomes of young households between 1989 and 2010. The authors conclude in their new paper that despite the widely held belief that households with student loan debt are growing worse over time, their findings reveal no support of this narrative as the monthly payment for student loan debt has also stayed close to the same or a bit less over the past two decades. The median borrower has consistently spent three to four percent of their monthly income on student loan payments since 1992.
Another compelling finding was that the media reports of those students with student loan debt of $100,000 or more were rare. In 2010, 7% of households had debt balances of more than $50,000 while only 2% of young households owed more than $100,000 on student loans, according to the authors of the report.
There are additional ways to participate in this market. Private student loan consolidations are offered post-graduation after students typically have established credit. Loan participation networks, like cuStudentLoans.org, diversify risk and allow small credit unions to participate through fractional ownership in a large pool of private student loans.
Private student loans are part of the calculus that helps to finance a college education along with federally guaranteed loans and savings. There are few better investments to make in the rebuilding of the United States than investing in our children and providing a vehicle for a college education.