Charter Schools’ Assignment: Start Own Credit Union

An educational nonprofit based in Washington, D.C. may soon launch a credit union for charter schools, and the organization’s unique access to potential start-up capital may give it an above-average chance of actually getting a credit union off the ground, according to a former credit union executive who is involved with the effort.

The Charter School Facility Center, is a project of the non-profit National Alliance for Public Charter Schools, is exploring opportunities around what Managing Director Mark Medema said could one day be a $4 billion credit union.

One of the first steps has been to commission a recent whitepaper on the topic.

“There are a number of charter school supporters who have wondered if there is a market for a charter school credit union, and nobody had ever done any research or looked into this topic before. And not a lot of people who work for charter schools know a lot about credit unions,” Medema told CU Times. “So the National Alliance commissioned the paper to ask that question to the field, to say, ‘Is it time for a credit union to serve the unique needs of charter schools, charter school employees and perhaps most importantly, charter school students and their families, many of whom just don’t have access to the financial services sector?’”

Raising capital is often one of the biggest hurdles involved in starting any kind of credit union, but the charter school idea has some particular advantages in this area, Linda Levy, former president/CEO of the New York, N.Y.-based Lower East Side People’s Federal Credit Union and the architect of the whitepaper, said. Levy, who helped start Lower East Side People’s, became its first manager and later took the helm as CEO, and also worked for several years with the National Federation of Community Development Credit Unions (now Inclusiv), giving technical assistance to credit union organizing groups. Lower East Side People’s currently has $56 million in assets and about 8,200 members.

“I think that in the case of the charter schools, they have access to more capital than a lot of sort of grassroots groups that are trying to start credit unions,” she explained. “They’re already working with very large nonprofits and foundations that are helping to fund the charter schools.”

Medema said it might take as much as $5 million to get started, and it could take years – maybe three, he guessed – to raise that capital, as well as write a business plan, get regulatory approval, open the doors and operate sustainably. Charter school foundations and high net worth people could be the first sources of start-up capital.

“Any investor who would be interested in this would have to have patient capital,” he said.

One big goal, however, would be a credit union for charter schools that could provide teachers, staff members, students and their families with credit, deposits, financial literacy help and even college loans. Also, because charter schools have created a marketplace for business services that are necessary to operate those schools, there is an opportunity to help schools capitalize on economies of scale, especially in financial services, according to an executive summary of Levy’s whitepaper.

“In addition to serving those with deposits like traditional credit unions, a charter school credit union could provide loans to charter schools. This would be a new, cheaper source of loan capital, especially for charter school facilities,” it added.

Deciding where and how to start is a big decision, however. One option, Levy said, is to begin with a regionally-based association of charter schools and then expand to include other regionally-based charter schools in other parts of the country.

“As a multiple common bond, they would be able to expand throughout the country more easily,” she said. “That’s a possibility where they’re working first in a specific region. Then they can kind of develop shared branching in that region that would be virtual. And then they would be able to use that model to expand.” Starting out as a virtual credit union or putting branches in schools are other options.

“I think if somebody wanted to create a credit union just serving the schools and the staff of the schools, that could probably be done maybe quicker and it’s a little easier to do,” Medema said. “But the social mission here would be to actually serve the students and their families who are the people who don’t have access to a lot of financial services, and that would probably just take longer to build out the network that could serve those constituents.”

“In the long term it’s a national approach,” he added. “It may be that the best way to do that is to start regionally and then add states or additional members over time.”

The vision isn’t to steal market share from credit unions that are already operating in charter school markets, Medema noted. The idea is to help generate capital for growing charter schools.

“The nice thing about having a credit union just focused on the charter schools is not only are they providing the services to the customers, but they also have loan capital that they can turn around and dedicate to help expand the charter school sector as a whole,” he explained. “Whereas existing credit unions that might be serving a small geography or some K-12 district are probably using their loan capitals for other purposes beyond supporting just the charter school sector.”

For now, though, the plan is to go on a road show and gauge the level of interest.

“If that all materialized, then we’d have to commission somebody to write a business plan and actually create that, and then take that business plan around to foundations and begin to put resources into it,” he said. California, Texas, Arizona and Florida may have more promise in terms of investor interest because they have more charter schools than other states, he noted.

“We’d love to learn lessons from others, and that’s why we wanted to share our process as we go along it with everybody, too,” he said.