How CUs Can Leverage Alternative Data to Better Serve Students and Graduates

Traditionally, credit scores have been the industry standard for determining a potential borrower’s propensity to repay future loans. Although the historical data provided by traditional credit scores is important, it does not always tell the full story of a borrower’s current financial footing or risk profile. For example, currently enrolled students and recent college graduates who are starting their careers may not have had the chance to build credit. As a result, many of these potential borrowers have thin or no credit files, putting them at a disadvantage when applying for loans.

For lenders to gain a more holistic view of these applicants, they must leverage traditional credit scores layered with alternative data in their decision-making process. Students and graduates can benefit from many forms of alternative data, especially education data. Credit unions that incorporate education data can approve more loans faster, mitigate risk and drive growth.

Education Data Allows CUs to Expand Their Portfolios

It is no secret that alternative data brings great value to credit decisioning. Around four million Gen Zers, many of whom are current students and future college grads, are expected to open new bank accounts each year through 2026, according to an eMarketer report. This member segment represents an advantageous market for credit unions, especially in the lending and consumer finance spaces.

Alternative data enables credit unions to expand their portfolios by saying “yes” to more consumers and expanding opportunities to create and foster long-term relationships. Currently, 97% of students in public and private institutions are available for verification, according to Equifax.

Education data like university trends, majors and graduation data help credit unions to predict a member’s future ability to make loan payments. Depending on a student’s major, lenders can also look at average graduate salaries to predict loan affordability.

In the current economic landscape, credit unions are seeing signs pointing towards today’s students becoming credit adverse. Before the Biden administration implemented student loan forbearance, around 40% of borrowers missed their first student loan payment in 2023, according to the Department of Education. This observation coupled with a growing trend of loan applicants holding non-traditional employment, like sole proprietor and freelance gigs, may cause credit unions to perceive these borrowers as high-risk.

Credit unions may feel apprehensive due to the perceived risk and uncertainty associated with this group. However, leveraging alternative data can lead to bigger returns and portfolio growth. Third-party solutions that can verify an applicant’s education data can help lenders expand financial inclusion and credit application decisions for Gen Z applicants, thin or no-file borrowers, credit rebuilders, low- and middle-income earners, and sub and near-prime applicants.

Offering the Right Loans for the Right Members

Providing access to the right credit products and terms that fit within a member’s lifestyle and budget should be a mission-critical objective for any credit union. Alternative data can give credit unions a more reliable and broader perspective that creates a seamless lending experience and increases opportunities for growth.

Members coming from younger generations expect instant gratification and are accustomed to getting what they need fast and in a frictionless manner. Far too many credit unions task borrowers with providing documentation, such as W-2s, proof of residency and pay stubs, as part of the loan decisioning process. Placing this burden on members causes friction and only leads to a slowed lending process and a potential loss of opportunities.

Leveraging education data in addition to traditional credit data allows credit unions to expand their portfolios and create long lasting relationships with borrowers. It could also be helpful for credit unions to add employment data to assess payment capability. Forward thinking institutions that incorporate alternative data can increase financial inclusion and mitigate risk by providing a more accurate assessment of a borrower’s ability to repay loans.

As recent graduates continue to enter the workforce and begin seeking out financial products, this is an opportunity for credit unions to meet the unique needs of this market by offering custom credit products and providing a streamlined lending process to attract and retain lifelong members.

Alison Heller is the Sales Director for Consumer Finance, Verification Services at the St. Louis, Mo.-based Equifax Workforce Solutions.