By Jon Wollman
January 29, 2021
Pick up any newspaper or turn on the TV, and the odds are you are going to hear a story about student
loans. We are
inundated with reports about the “burden of student loan debt” and talk of the government “forgiving
student loans.” It
is understandable why this creates so much uncertainty when a credit union considers offering student loan
options to
their members. Much of this confusion comes from grouping all student loans together. There are, however,
some
significant differences between federal student loans and private student loans. Understanding these
differences can
help take away the mystery and hesitancy around the student loan asset class.
Let’s start by putting these loans in perspective. As of Q1 in 2020, there were a total of $1.67 trillion
in student
loans outstanding. Most of this amount came from federal student loans that comprise $1.54 trillion or 92%
of the
volume. By comparison, private student loans comprised $132 billion or 8% of the total volume.
Approximately 56% of
recent college graduates had student loan debt.
Federal student loans are made directly by federal government and tend to have very limited, if any
underwriting. These
loans are the primary method for funding education costs used by most students. Private loans were
designed to fill the
gap between the overall cost of education and the amount available through federal loans. These loans are
made by credit
unions, banks and similar lending institutions following credit based underwriting criteria. This
typically includes
minimum FICO scores and income requirements.
Another contrast between the two loan types is the presence of a cosigner. While federal loans are not
cosigned, a
cosigner is common on private loans. According the MeasureOne, over 90% of private loans made to
undergraduate students
have a cosigner. The cosigner, frequently a parent or other relative, must also meet credit and debt to
income criteria
to qualify, bringing added security to the loan.
Given all these differences, it is not surprising there is a significant disparity in performance. The
September 2020
annual report from the Department of Education found the federal student loan cohort default rates were at
9.7%. By
comparison, MeasureOne reports an annual default rate of 1.75% on private student loans. The performance
for private
student loans has been on par or exceeded other major lending categories such as auto, credit card and
mortgages.
While private student loans may seem like an intimidating space at first, the more you learn the
increasingly attractive
the option becomes. Credit unions who have made the move to add a private student loan program have
discovered they are
a great vehicle for attracting new members, diversifying their portfolio, and generating solid returns on
a well
performing asset. Take a look at private student loans and learn how they can become a valued addition for
your credit
union.
Jon Wollman is the Chief Strategy Officer of CURevl®, a credit union service organization specializing
in connecting
families to credit unions by providing unique, low-cost education finance solutions.
