Invest in Gen Y

Careful underwriting and due diligence can make private student loans a valuable asset.

January 24, 2014
KEYWORDS gen Y , student loans
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Loan performance

You don’t have to convince Mike Long that private student loans can perform well. Long, who is executive vice president/chief credit officer at $1.7 billion asset UW Credit Union in Madison, Wis., took part in a panel discussion on student lending during the 2013 CUNA Lending Council Conference. Long also heads up CU Campus Resources—a credit union service organization (CUSO).

Nearly half (45%) of UW Credit Union’s student loans are in repayment, with a charge-off ratio of only 0.2% and a return on assets in the 5.5% to 6% range. This level of performance prompts Long to ask his credit union colleagues, “What are you waiting for?”

Jon Jeffreys, president of Credit Union Student Choice and also a panelist at the conference, echoes Long’s enthusiasm. “We have about 42,000 private student loans right now and I’d say well more than half of those have brought in new members,” he says. Credit Union Student Choice, a CUSO, was formed in 2008.

Jeffreys points to a recent study by the credit reporting agency TransUnion that shows federal student loan balances jumped 97% between 2007 and 2012, while private loan balances increased only 4%. The TransUnion report also showed delinquencies on federal student loans rose 27% during that period while delinquency rates on private student loans actually dropped 2%.

“We believe the numbers show this is a reasonably safe asset class,” says Jeffreys. “You can price for risk, and it’s a way to serve existing members and attract new ones.”

Another credit union finding success with its private student loan portfolio is the $196 million asset First Financial Credit Union of Wall, N.J. First Financial is earning a 4.5% net return on its private student loan portfolio and charge-offs are at 0.2%, according to Alice Stevens, First Financial’s chief operating officer. The variable rates on these loans range from 4% to 7%.

“These loans are fully underwritten with consideration to members’ credit histories, income, ability to pay, and their year in school,” says Stevens. “We also take a close look at the federal repayment history of each school when creating our eligible school list. The three-year Federal Cohort Default Rule, published by the government, provides insight on risk by institution. Over 85% of these private school loans are co-signed.”

First Financial requires students who are still in school to make minimum monthly payments of $25 on their student loans. “This says to the student that you have to be responsible,” says Stevens. If the student borrower fails to meet the $25 monthly payment or if the loan is in forbearance, First Financial won’t lend the student any more money.

The monthly payments help students build their credit histories and establish the discipline of making monthly payments. It also gives young members practical experience in financial literacy. Students set up checking accounts, and they can apply for credit cards.

Stevens also serves as chair of Member Student Lending LLC. The CUSO uses LendKey’s underwriting and pricing platform.

To date, Member Student Lending has originated roughly 22,600 loans, totalling $440 million. About 98% of the portfolio is current, with only 1.01% more than 60 days delinquent. The portfolio’s default rate is just 0.34%.

One of the CUSO’s services matches graduates with participating credit unions so they can refinance their private student loan debt with a consolidation loan. This practice of consolidating debt into consolidation loans has become popular with both graduates and parents, according to Stevens.

Consolidation loans can help borrowers combine multiple student loans into one, often reducing the interest rate and monthly payments, making the consolidated loan much more manageable.

Like private student loans, consolidation loans perform well when underwritten correctly. UW Credit Union launched a student loan consolidation product in 2013 in response to member demand. “Regulators are open to this as long as borrowers understand they’ll be giving up some benefits as they switch from a federal to a private student loan,” says Mike Long.

NEXT: A Gen Y strategy

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