Top 5 Reasons to Offer Private Student Loan Consolidation
The Business Case
Assisting members by providing fair-value credit is a hallmark of the credit union industry. But it only works if the lending program also returns value to the cooperative.
An Improving Sector– Risk is certainly the number one factor for credit unions to consider when looking at student loans. While many would assume doom and gloom in this space, that is not necessarily the case. According to a recent report from Moody’s Investor Services, the private student loan default rate index on $40 billion of securitized balances dropped to 3.6% in second-quarter 2013, the first time it has dipped below 4.0% since 2007. This is less than half of the 7.9% peak in third-quarter 2009. The 90-plus delinquency rate for second quarter 2013 was 2.1%, down from 2.4% in second-quarter 2012. "Ninety-plus delinquencies will continue to decline slowly, continuing their downward trend since peaking in mid-2009," said Moody's AVP-Analyst Stephanie Fustar, author of the report.
Managing Risk– With a consolidation program, several of the biggest questions in student lending are removed from the equation. Will the student graduate from college? Will he or she find a job? To be eligible for a consolidation loan, all borrowers must have graduated and be gainfully employed. Credit unions can further mitigate risk by layering in additional underwriting criteria, including debt-to-income and school quality. By removing common questions and leveraging proven underwriting criteria, these loans can perform very well.
New Relationships – Credit unions are eagerly searching for ways to grow relationships with young adults and expand their lending portfolios. Offering a private student loan consolidation program brings together these goals. PSL consolidation borrowers are prime candidates for future deposit and lending relationships, including auto and mortgage.
Earnings – Given the high rates that many student borrowers were socked with during the last several years, earning a strong return on asset while delivering fair-value is very achievable on a private consolidation loan. In fact, a member with $40,000 of private student loans (at 9% over 15yrs) can potentially save $12,000 of interest (by consolidating at 6%) while the cooperative enjoys a 4% ROA. By helping members get out from underneath high rates while bringing value to the bottom line and establishing the opportunity for long-term member relationships, credit unions can create a true win-win situation.
Immediate Cash Flow - While traditional private student loans often enter a period of deferment and grace before borrowers begin to repay their loans, a private consolidation loan enters repayment immediately. This immediate cash flow makes this type of student lending product very attractive.
Over the last several years, millions of credit union members have dramatically lowered their monthly obligations by wisely refinancing debt, such as mortgages and even auto loans. This has been accomplished through a broad public awareness of these traditional refinancing tools coupled with targeted campaigns and helpful credit union staff. The time has come to bring this same effort to young adults saddled with onerous private student loan debt.