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Not All Student Loans Are Created Equal

Not All Student Loans Are Created Equal

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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.