Simplifying the College Financing Process: Student Loan Basics for Credit Unions

Credit unions have an opportunity to help guide their members through the increasingly complex and highly stressful college financing process, which begins with understanding the basics of student loans. Here, we’ll share an overview of what your credit union, and your members, need to know now about student lending before diving into a few of the latest industry trends.

Federal Vs. Private Loans

Federal student loans come with important borrower benefits not available from most private loans, such as income-driven repayment plans and loan forgiveness programs. For Direct Subsidized Loans (based on financial need), the U.S. Department of Education even pays the interest while the student is attending school and during a grace or deferment period.

Therefore, if students and families need additional funding after they’ve exhausted savings, scholarships and grants, they should first look to Federal Direct Subsidized & Unsubsidized Loans. Federal student loans are typically offered within the award letter from each college and are based on information submitted in the Free Application for Federal Student Aid (FAFSA).

However, Federal Direct Loans are limited each academic year and may not be enough to fill funding gaps. This is when members should carefully review their options and evaluate private student loans and Federal Direct PLUS loans, which are available to graduate or professional students and to parents of dependent undergraduate students.

Federal Direct PLUS Vs. Private Loans

Parent and Graduate PLUS loans have fixed interest rates and offer flexible repayment plans, making them a popular choice for many families. However, they do come with some downsides, such as a 4.228% origination fee. And, because PLUS rates are indexed to the yield on the 10-year Treasury note, they will be expensive this year with a rate of 9.08%. Between the origination fee and rate, it’s clear that credit unions have an opportunity to provide members with a better deal.

Private loans are made by private organizations such as credit unions, banks and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. Because offerings will vary, it’s important for members to review the rates, terms and conditions before applying for a private student loan.

It’s also vital to emphasize to members – especially students who may not have borrowed previously – that when they take out any type of loan, they are borrowing money that will have to be repaid. PLUS loans are issued to the parent of an undergraduate student (or to a graduate/professional student). Private student loans are issued in the student’s name but often require a co-borrower, such as a parent, to meet credit criteria and receive a lower interest rate.

When comparing PLUS loans and private student loans, it’s important to consider key factors such as interest rates, fees, repayment terms and eligibility requirements. If members have a good credit history and can qualify for a lower interest rate on a private student loan, it may be a better option for them. However, there are protections and benefits of federal loans that could be beneficial in some circumstances, so in that regard a Parent PLUS loan may be the better choice.

You can learn more about all the various types of federal student loans that may be available here.

Key Trends and Future Opportunity

FAFSA Issues and The Need for Flexibility: Offering flexible funding, such as a line of credit that allows students and families to establish their line at any time – even if they’re unsure of the amount they may need – and then return later to draw the necessary funds, is especially important this year. Delays in the new and improved FAFSA have caused funding confusion for many families and made the line of credit especially attractive to those entering college in the 2024-25 academic year.

Long-term Relationships: Based on a recent TransUnion analysis of borrower data from Student Choice client credit unions, a private student loan is typically the very first trade taken out by these young adults. And more importantly for credit unions looking to build long-term relationships with the next generation of members, within 13 years of opening their private education loans 81% of student loan borrowers took out an auto loan, 60% took out a credit card and 48% took out a mortgage.

Career Education: Lastly, we’re seeing significant growth in career education. In-demand career pathways such as aviation, nursing and energy trades often may not be eligible for traditional lending options, including federal student aid. This leads to a funding gap that credit unions are in a unique position to fill. Your cooperative could open new doors to high-paying jobs by offering financing for career education.

Jim Holt is Chief Development Officer for the Washington, D.C.-based CUSO CU Student Choice.