Credit unions grab more of student loan market
As prospective college students and their families hit their limit for federally-guaranteed loans and turn to the private market to pay for school, they will encounter a new and increasingly popular lending source: credit unions.
Credit unions began to enter the market in 2008 as investor demand for student loans, supported by asset-backed securities, cooled. That prompted major commercial lenders to scale back their presence in the market.
As a result, Central Massachusetts-based credit unions increased their student loan origination business 42 percent in two years, from $99.4 million (on 2,940 loans) in December 2011 to $141.2 million (4,123 loans) in December 2013, according to the National Credit Union Administration (NCUA).
During that span, the number of local credit unions offering student loans grew from six to 10, as Shrewsbury-based Central One and Fitchburg-based IC entered the market in 2012, followed last year by Webster First, based in Worcester, and Shrewsbury Federal.
As larger banks cut back on their activity, Digital Federal Credit Union of Marlborough saw an opening in 2008 and wanted to establish relationships with younger people entering their prime borrowing years.
“Investing in private student lending is investing in the future,” DCU spokesman John LaHair said.
This activity mirrors national trends. As of December, credit unions had $2.6 million in student loans on their books, up from $1.5 billion in December 2011, according to the NCUA. That's just a small, but growing, piece of the $78 billion private student loan market.
The private market operates in the shadows of the much larger federally guaranteed loan program, where the balance on government-issued student loans grew from $577 billion in 2008 to $1.04 trillion in 2013 because of the Great Recession and skyrocketing college prices, according to MeasureOne, a student loan data company.
Students are urged to meet as much of their need as possible through federal loans since — unlike private loans — they're always awarded at a fixed interest rate and allow for deferred repayment based on financial status, said Rohit Chopra, student loan ombudsman for the federal Consumer Financial Protection Bureau (CFPB).
Increased education about federal student loans has caused the share of undergraduate students taking them out to grow from 35 percent during the 2007-08 academic year to 40 percent in 2011-12, while the share of students using private loans fell from 14 to 6 percent, according to MeasureOne.
But with college tuition now comprising 38 percent of median household income, up from 14 percent three decades ago, according to the NCUA, students often need whatever money they can get.
For starters, Komyathy said credit unions can't evaluate a college student's current ability to pay since they're in school and instead have to focus on future earnings potential. Student loans also have a very long repayment period, with 62 percent of borrowers in the 2012-13 academic year having deferred payments until after graduation, according to MeasureOne.
“These are loans being made to people that don't have a typical income,” Komyathy said.
For that reason, student loans are often perceived as riskier. The default rate on federal loans is 10 percent nationally, but just 6.2 percent in Massachusetts, according to the U.S. Department of Education.
But the default rate for private lenders — who, unlike the government, can take credit history into account when making lending decisions — is only 3.4 percent, according to Moody's Investors Service. For credit unions, the rate is much smaller, 1.19 percent, according to the NCUA.
And total delinquency (loans at least 60 days past due) for all private student loans is 5.4 percent, according to the CFPB, but just 1.37 percent for credit unions, the NCUA found.
Thus far, Komyathy hasn't seen many credit unions run into regulatory issues with their student lending programs.
“A well-managed program is not going to have any more risks than any other type of lending,” she said.
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