Industry News

Student Loan Flux Opens Doors for Credit Unions

April 06, 2015

Despite its best intentions, the Obama Administration may have taken one step forward and two steps back when it comes to student loans, but the shifting sands on which the president’s well-intentioned promises were built may provide a solid foundation for the growing private student loan industry, several student loan experts speculated.

On March 10, President Obama signed the Student Aid Bill of Rights, which was designed to provide greater access to a college education paired with a more economical approach to college financing. The bill directed federal agencies to take the necessary steps to make college more affordable and better protect student borrowers from unscrupulous lenders and usurious loan rates.

The future may be less bright, however, in light of earlier promises for student loan forgiveness. The federal budget, released in February, projected a $21 billion shortfall for federal student
loan programs due to greater-than-anticipated borrower demand, which is likely to lead to reductions in relief funds available, especially for undergraduate borrowers. Turmoil at the federal level bodes well for private student lenders, including credit unions that
work with borrowers to offer loans with better underwriting standards and more affordable terms. The industry is already enjoying significant growth and business will only increase as the
struggle for federal funds continues, according to Shoum Chakravarti, student loan product manager for New York City-based student loan processing platform LendKey. “A lot of talk about student lending pushes aside that fact that higher education is a sound investment when it finances a degree used to build a solid direction in life,” Chakravarti said. “There is a good chance there will be a very good return on borrowers’ investments.” Chakravarti noted that there has also been significantly less talk about the cost of federal student loan forgiveness. Depending on the loan, students may wind up having to declare the forgiven portion of the loan amount as income and pay taxes on that amount based on their
current income levels. “Borrowers could be paying 25% to 28% or more on loan amounts that were forgiven,” Chakravarti said. “Like many parts of the student loan market, these facts are not easily known to borrowers.”

What is known is that, although still a mere snippet of the $1.129 trillion student loan industry, private student loans are growing in volume and performance, according to data from MeasureOne, a San Francisco-based consulting firm that analyzes the financial impact of
student loans. The $92.8 billion private student loan portfolio, which comprises just 7.5% of the total student loan market, outperformed federally guaranteed loans and continues to show
improvement. According to MeasureOne data for the third quarter of 2014, the latest information available, early- and late-stage private student loan delinquency rates averaged 3% and 2.3% respectively,
marking a 20% year-over-year decline. Charge-off rates for the period were 2.4%, a 22% yearover-year decline. “Loan performance continues to improve with each subsequent origination vintage,”
MeasureOne researchers wrote. “Delinquencies and charge-offs have generally declined for each successive vintage in each quarter after origination.”

But the growth in private student loans has not been without its challenges. Private student loan complaints submitted by consumers to the CFPB from Oct. 1, 2013, through Sept. 30, 2014
totaled 5,300, an increase of approximately 38% compared to the previous year, according to “The Private Student Loan Landscape,” a March 19 presentation given by Arthur Rotatori, an attorney with Cleveland-based McGlinchey Stafford, at CU Campus Resources’ client forum in Sacramento, Calif.

The largest subset of private student loan complaints relates to the lack of repayment options and flexibility in times of distress, Rotatori told participants at the Madison, Wis.-based student lending CUSO’s annual meeting. The CFPB believes many borrowers are still struggling to repay the loans they borrowed during the 2005-2007 period. “The CFPB is concerned with high debt burden, troubles with servicing and the split between the ownership and servicing of the loans,” said Rotatori, who is a consumer finance lawyer specializing in financial education. “For truly distressed borrowers there aren’t many options to refinance the loans, since refis tend to go to borrowers who have had a more successful career launch.” The fact that student loans are still not dischargeable under bankruptcy also continues to be an
issue both for borrowers and lenders, Rotatori said. Borrowers must be able to show true hardship – something that is not clearly defined, thus difficult to prove. The CFPB has been discussing changing bankruptcy policies to allow more flexibility for student
loan borrowers. Sen. Richard Durbin (D-Ill.) also recently introduced a bill in the U.S. Senate that would remove a student loan’s exemption when borrowers file for bankruptcy, but Rotatori
remains skeptical of any future policy changes.

Astronomical growth in new student lending programs throws the ‘best of’ curve, but also reveals a successful new trend. “Every few years we go through the issue of whether we should revise bankruptcy laws,” Rotatori said. “Why is it that the ones that are never discussed are education loans? Someday something might come of it, but I am not predicting anything will.” Attempts to reach CFPB Student Loan Ombudsman Rohit Chopra to discuss these student loan issues and others were unsuccessful at press time.
The challenges notwithstanding, private student loans remain a valid asset class for credit unions, Rotatori said. The loan class will always have detractors, but credit unions remain uniquely positioned to offer these types of loans as benefits to members.
“I have never seen anybody take a negative position against private education loans made by credit unions,” Rotatori said. “We’re not talking about a huge amount of dollars, and credit unions benefit from their image and culture and are not seen as potentially predatory.”

CUSOs like CU Campus Resources and cuStudentLoan.org, the 300-credit union CUSO that LendKey supports, provide very viable alternatives to help credit unions grow their private student loan portfolios, Rotatori said. Management of the loans may be a little more complex given the changing market and the large amount of required disclosures, but it’s an effort most credit unions would benefit from making, he added. “As I understand the situation from my clients, credit unions should be involved in education
lending,” Rotatori said.