Federal Student Loan Concerns Not Reflective of CU Student Lending

Dear Editor,

A Bloomberg article, “America’s Student Loan Debt Crisis Is About to Get Much Worse,” published in CU Times Oct. 18 sounded the alarm regarding the challenges faced by many college graduates in dealing with mounting student loan debt. While no one would dispute that this is a serious matter, it is important to differentiate between the concerns associated with federal student loan programs and the private student loan market. A lack of understanding about private student loans is a major factor in the unfortunate reality that less than 13% of credit unions currently provide student loan financing, and private education loans represent only 0.31% of total credit union assets, SNL Financial reported.

As of Q1 2018, the total amount of private student loans outstanding was approximately $117 billion, a fraction (less than 8%) of the estimated $1.5 trillion in student loan debt nationwide, according to NerdWallet. Besides sheer volume, private student loans differ from federal loans in another important way: Credit quality is substantially better. Because they require a credit history or qualified co-signer, the default rate on private student loans has historically been about 1% per year, comparable to the default experience on residential mortgages and well below the 11%-plus three-year default rate on federal student loans. Private student loans are high-performing loans that allow credit unions to responsibly diversify their balance sheets, while also providing a vital service that allows their members to reduce the cost of their education loans. As with all student loan borrowing, it is important that individuals look at potential outcomes before taking on student loan debt by understanding what kind of income stream their future careers will generate. A rule of thumb is that total student loan debt should not exceed the borrower’s expected income in their first year out of school.

One important reason that private student loans tend to exhibit stronger credit quality than federal programs is the underwriting discipline of lenders, such as credit unions and community banks, who are able to apply their own standards in the private market. In addition, private student loans often carry more affordable interest rates (especially if the lender is using a cost-efficient digital lending platform), as well as more flexible payment terms. Private loans also offer fixed or variable rate options (federal loans are fixed only), and borrowers can structure monthly payments to be lower during the early post-college years when they are just starting out in their careers. Finally, many graduates have refinanced high-interest federal student loans along with private student loans as part of student loan refinancings over the last few years, which has actually reduced the amount of interest paid by borrowers an average of 2% versus what they were originally paying, according to LendKey portfolio data.

Many credit unions have found private student loans to be an important part of fulfilling their mission of serving their members and communities, while also adding a sound credit product to their portfolios. For borrowers, the lower cost of funds from a credit union often provides a lower interest rate for a private student loan than lenders that use the secondary market for funding, which is a benefit for a credit union member. A failure to understand the difference between private and federal student loans does a disservice to those credit unions that could otherwise use private student loans to serve their members – and to the many students and their families who could benefit from this source of education financing.

Vince Passione

Founder and CEO

LendKey

New York, N.Y.