Private Student Loans – The Truth about Delinquency

Private vs Federal Private Student LoansIt’s the dirty word of any lending program – “default.” And it’s particularly scary when it comes to student lending, given all the negative press surrounding record student loan debt in America. If you’ve read articles about the student debt crisis and default rates, you may be leery of instituting or expanding a program at your credit union. However, a closer examination of the data shows that private student loans are not at the heart of the problem.

Fact or Fiction?

When you see headlines about rising debt and delinquency, you need to keep in mind that private student loans make up only 7.5% of overall student loan balances. This small percentage often gets lumped into the bigger picture with Federal loans, which come with very different guidelines and results. In fact, according to Measure One in a December 2014 report, loan performance metrics have continued to improve for the nation’s largest active private student lenders and holders of student loan debt.

The six participants analyzed in the report represent approximately 70% of the entire private student loan market. Among the report’s highlights:

  • Year-over-year delinquencies continued a significant downward trend.
  • 2014 delinquency rates were the lowest since before the 2008 economic crisis.
  • Annualized charge-off rates declined to post credit-crisis lows; falling to 2.4%, a 22% positive change in Q3 2014 compared with Q3 2013.

In other words, while student loan delinquencies are a problem, credit unions and responsible private lenders are not seeing the high default rates other lenders have in recent years. The bulk of the student loan problem has come from irresponsible private lenders and Federal loans with no underwriting.

Why Families Need You

Credit unions first began offering private student loans through Student Choice in 2008 to help members pay for college responsibly. Seven years later, more than 60,000 borrowers have worked with a credit union to finance their education. These members turned to a trusted financial institution to provide a solution they couldn’t find elsewhere.

When members and their families forge these ties, it creates a foundation for a continued, mutually beneficial relationship. Graduates who hold student loans with their credit union are likely to turn to the same institution for an auto loan or mortgage down the road. And they’re more likely to make on-time payments if your program focuses on the following:

  • Educating prospective borrowers before the loan to ensure proper decisions are being made
  • Risk-based pricing with minimum credit score requirements and criteria that strongly encourages a co-borrower
  • School certification to verify enrollment, validate loan amount, and determine fund disbursement
  • Restricting loans to students who are attending traditional four-year public or private schools with a proven history of low student loan defaults
  • Lending directly to students and families within the credit union’s existing field of membership to establish an opportunity for genuine, long-term relationships

The Student Choice Solution

Today 250 credit unions utilize the Credit Union Student Choice lending platform and, combined, have more than $1.7 billion in outstanding private student loans. Of that total, nearly 50% ($733M) is now in full repayment status.

In reviewing undergraduate loans only, which make up more than half of that total (as of Q3 2014):

  • Less than 1% of loans in repayment were 90+ days past due
  • Annualized charge off rates stood at only 0.73%, down 10 basis points from one year earlier
  • Credit unions, on average, are recognizing positive return for the cooperative (as defined by the credit union’s individual pricing) that is on par with other asset classes
  • Borrowers, on average, are enjoying average interest rates of 6% with no origination or pre-payment fees and a relationship with a local lender they can trust

Don’t let negative press influence your decisions; the truth is that credit unions continue to provide a better, safer solution for their members at a time when they need it most.

Find out how you can offer your members a private student lending product with the help of Credit Union Student Choice.


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