Lenders: Lower Funding Costs by Attracting Student Loan Borrowers

A common theme of the 2018 fourth quarter reports of many U.S. financial institutions has been the rising cost of deposits. Quarter over quarter, deposit rates have accelerated at the fastest pace since the start of the current interest rate cycle, according to financial services analysts. A KBW research report in mid-January 2019 cited an increase of 60 bps in three-year CD offering rates, an increase of 53 bps in one-year CDs, a bump of 14 bps in money market rates and an increase of four bps for savings accounts.

This recent jump in deposit interest rates underscores the need for banks and credit unions to better control their costs of funding – an achievable goal with the help of student lending products. Not only do private student loans represent a quality asset class, but they have the potential to attract “sticky” account relationships that can be highly cost-effective for lending institutions.

Building High-Value Relationships

The link between student loans and cost-effective deposits arises from the strong tendency of student loan borrowers to seek out additional products from their financial institutions. A recent study from research firm Cornerstone Advisors and LendKey estimated that two-thirds of the borrowers who obtain student loans from their primary bank or credit union go on to add other products. Based on the consumer survey, 65% opened a checking account, 44% opened a savings account and 57% applied for a credit card through their education loan lender. Borrowers who received student loans from an institution other than their primary financial institution are 60% likely to open additional accounts through their student loan provider.

As student loan borrowers deepen their relationships with lenders, they may be less likely than other consumers to shop for lower rates. And, because student loan borrowers are introduced to the lender while they are still in college or graduate school, there is the potential to build a lifetime relationship. In fact, the Cornerstone study revealed that the lifetime value of a student loan borrower who uses five additional products, such as a checking account, mortgage, credit card or investment account, could be nearly $23,000. In addition, the vast majority of private student loans (over 90%) are co-signed by a parent, and the lender may have an opportunity to cross-sell products to multiple generations. Parents also carry Parent PLUS Loans to support their children throughout college. Parents provide financial advice adding an access point across multiple generations. The lifetime value of student loans, student loan refinancing and Parent PLUS Loans is substantial.

Retaining or Growing Accounts

Financial institutions may benefit their funding costs in two ways by offering education loans:

• A bank or credit union that already enjoys a low-cost deposit base can use student loan products to retain existing relationships and keep valuable customers or members “in the fold”; or

• A lender may use its student loan offering to attract new customers or members, who may then open up additional (and potentially less rate-sensitive) accounts.

In either case, lenders that venture into the private student loan marketplace will have the ability to add quality assets. And, because student loan programs may be offered through participation networks or forward sale programs, lenders can choose the liquidity option that best meets their needs and minimizes balance sheet exposure, while retaining the benefits of the lifelong consumer relationship.

The outstanding balances in the private student loan market currently total about $119 billion, and annual originations last year were approximately $8.6 billion. Clearly, private student loans represent a sizeable opportunity for lenders to offer an attractive asset class – and one that has the potential to attract and retain cost-effective consumer relationships.

Christian Widhalm is SVP for LendKey Technologies, Inc. He can be reached at christian.widhalm@lendkey.com.