Lending

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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A Gen Y strategy

More than 80 million strong, Gen Y (born between 1982 and 2002) represents about 25% of the U.S. population. In seven years, Gen Y consumers will represent 40% of the U.S. workforce.

Gen Y also represents the future of your credit union’s loan portfolio. These young people are coming to the conclusion they’ll need college degrees and graduate degrees to find their way in this postrecession economy. And they’ll need help paying for those degrees.

Student loans help credit unions achieve their mission of educating members, and they help college students and their parents meet a financing need. Most parents understand the importance of a college education and won’t hesitate to co-sign loan documents to help their children get that diploma.

And many credit unions see student lending as an opportunity to meet a host of future borrowing and investment needs from students and their parents.

“If you expect to have a relationship with Gen Yers,” says Passione, “you’re going to have to deal with some part of their student loan debt.”

Regulator’s concerns

NCUA advises credit unions to consider all risks associated with private student loans before entering the market. And, with delinquency rates expected to increase in the years ahead, NCUA cautions credit unions engaged in private student lending to be aware of various risks.

Those risks include loan concentration and repayment risk. NCUA advises credit unions to maintain proper concentration limits. In response to repayment risk, more borrowers now require co-signers. Only about 55% of private student loans had co-signers in 2005. By 2011, 91% had co-signers, according to the Consumer Financial Protection Bureau.

Another consideration is the compounding interest that occurs during the deferral period, which results in the borrower owing more than the original principal amount. The variable rate can also inflate loan payments, making it more difficult for borrowers to make those monthly payments.

NCUA also encourages credit unions to mitigate some of the risk associated with these loans by including private insurance. And the agency requires credit unions to perform due diligence on all parties involved in their private student lending programs. Consult NCUA’s Supervisory Letter No. 13-13 for all the details.

For more from Jeffreys, Long, and Stevens—recent panelists at the 2013 CUNA Lending Council Conference—see “Student loan CUSOs exhibit class,” p. 44.

CUs have only a sliver of the private student loan market—$2.3 billion of the entire $150 billion in private student loans outstanding.

By 2011, the percentage of private student loans with co-signers had grown to 91%.

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