Student Loan Refinance: A Call to Arms
The time has come to help young adults saddled with onerous private student loan debt.
If these borrowers could refinance, their debt would be much more manageable. Given today's historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market.
- Richard Cordray, Director, Consumer Financial Protection Bureau
The "borrowers" CFPB Director Cordray is referring to are the millions who borrowed a private student loan in the past decade. As college costs began rising dramatically in the late 90s, private student lending boomed and became a necessity for many students and families as they searched for ways to fill educational funding gaps. Unfortunately, profit-motivated lenders were more than happy to dole out high-rate, low-value loans to students, emphasizing volume over risk and offloading the assets into Wall Street securities. The remnants of those boom years continue to drag some private student loan borrowers, causing potential delay in other investments such as homes and autos. Accordingly, many groups, including the CFPB, have called for private lenders to take the lead on refinancing and loan modification.
Although private lenders, including banks and credit unions, play a relatively small role in today's student lending marketplace, there is more than $150 billion in outstanding private student loans. Because of the unsecured nature of these loans, it is certainly understandable that they carry higher interest rates than standard home or auto loans. However, many of these loans were made during a time period that is not reflective of today’s rate and regulatory environment, leaving thousands of young adults, many of whom are employed college graduates, with high-rate debt.
"Most borrowers aren't looking to get off the hook," says Rohit Chopra, the CFPB's student loan ombudsman. "They just need a payment plan that works."
The Business Case
Assisting members by providing fair-value credit is a noble cause and a hallmark of the credit union industry. But it only works if the lending program also returns value to the cooperative. Credit unions who are considering a private student loan consolidation or refinance program must take several factors into consideration when evaluating the opportunity.
An Improving Sector
Risk is the No. 1 factor for credit unions to consider when looking at student loans. Many assume doom and gloom in this space, but that is not necessarily the case. According to September 2013 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," says report author Stephanie Fustar, Moody's AVP-Analyst.
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.
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.
Given the high rates that many student borrowers were socked with during the past several years, earning a strong return on asset while delivering fair value is achievable on a private consolidation loan. 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.
Over the past 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 the same effort to young adults saddled with onerous private student loan debt.
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