The Growing Student-Debt Burden
Student loan debt is increasing, and students are spiraling into delinquency and default.
The statistics on national student loan debt are alarming:
- Student loan debt surpassed credit card debt for the first time last year. Today it’s up to $930 billion and rising, reports FinAid.org.
- Student debt is expected to top $1 trillion this year, according to The New York Times. The average 2009 college graduate owed $24,000 upon graduation.
- For each student borrower who defaults on a federal student loan, at least two more fall behind in their payments, according to the Institute for Higher Education Policy.
As college tuition costs rise and federal financial aid declines, students are desperately looking for other financing options and financial management solutions. Many credit unions are moving to meet this need.
Private student loans are expected to be a strong growth area for credit unions, according to CUNA’s 2011-2012 Credit Union Environmental Scan. In the past two years, about 500 credit unions started offering private student loans, says Vince Passione, CEO of Fynanz Inc., a technology provider of custom private student lending programs. Fynanz is a CUNA Strategic Services alliance provider.
Banks are offering fewer loans than before the financial crisis, according to Reuters, citing recent Federal Reserve consumer credit data. Some trimmed or eliminated their student lending programs, particularly those highly dependent on securitization markets, Passione adds. Many of these banks still haven’t returned to previous lending levels.
The elimination of the Federal Family Education Loan Program (FFELP), part of The Health Care and Education Reconciliation Act of 2010, opens the market even further for private student lending options. FFELP offered federal student loans through government subsidies at private financial institutions. During the 2007-2008 academic year, more than 6.4 million students and parents at 5,000 higher education institutions originated $55.3 billion through FFELP, or 78% of all new federal student loans, reports America’s Student Loan Providers.
Today, direct loans are the only type of federal student loans offered. But whether these government-backed loans will remain available to all students is in doubt. Among the changes in the deficit reduction legislation President Obama signed last month were cuts to federal loan programs for graduate students, increasing costs for these students by about $18 billion over 10 years, the Congressional Budget Office estimates. The government’s Pell Grant program remains fully funded for now.
The $335 million asset Belco Community Credit Union, Harrisburg, Pa., is one of many that offered FFELP student loans. When the program was cut, the credit union explored new options.
“We had good success with the FFELP program, but when that went away we had a void that we needed to fill,” says Amey Walker, vice president of lending. “It did force us to take a long, hard look at a private student loan program.”
Next: Mutual need
Credit unions and college students are in desperate need of each other. Today, only 9% of credit union members are ages 18 to 24, and a disturbing 70% of nonmembers in that age group are “not at all familiar” with credit unions, according to CUNA’s 2011-2012 Survey of Potential Members (“Young & unaware,” p. 42).
“Credit unions must not sleep on generation Y,” says Shawn Gilfedder, president/CEO of McGraw-Hill Federal Credit Union, East Windsor, N.J. The
$240 million asset credit union began its student lending program in July 2010. “If credit unions don’t pick up the student lending ball, banks and larger financial institutions will.”
Students’ lack of financial knowledge can be an obstacle to understanding the details of their loans, making a credit union partner even more important. McGraw-Hill FCU instituted educational programs to teach students, parents, and grandparents how to finance college economically, so they can limit student loan debt.
The credit union uses educational blogs, personal consultations, and family-focused seminars providing extensive student loan information. Its Financial Literacy Series also presents an accredited program and real-life examples from financial professionals.
“Our goal is to offer more than a loan product—we offer guidance to help optimize success,” Gilfedder emphasizes. “We not only sell student loan financing, but we educate students and their families on the entire process, while making sure education expenses match postgraduate income potential.”
Belco Community believes in educating students on financial matters as they’re in school and while they’re growing into their careers. “If we’ve done a good job, then we’ll have a better educated student that’s better prepared to enter the work force, be productive, and repay their loans,” Walker notes.
NEFCU, Westbury, N.Y., with nearly $1.6 billion in assets, offers financial aid and financial literacy classes for students. It’s also expanding its on-site financial literacy support with Web-enabled tools.
“Showing students how to plan, how to save, and how to manage their funds sets them up for long-term financial success,” says Valerie Garguilo, NEFCU’s vice president of marketing and community relations. “We provide education, resources, and hands-on assistance to students that give them the tools and knowledge that encourage and reward financial responsibility.”
Sharing risk and resources
Belco Community offers its student members the EdAccess Private Student Loan within the cuStudentLoans program. CuStudentLoans allows students to finance the education while they’re in school, explains Walker.
CU Student Lending LLC—a credit union service organization (CUSO) of more than 100 credit unions—developed cuStudentLoans. Participants offer the same loan to students with the same rate, no matter which credit union the student goes through, according to Fynanz’s Passione. Credit unions share the risk by pooling their capital.
Passione says there are several reasons these credit unions offer this loan, despite the fact they could be competitors with each other. First, by joining together, the credit unions in the CUSO have a greater lending capacity, making it attractive to higher education institutions. Second, the credit unions receive a participation in the loan, regardless of which credit union originates it. Third, it’s a way for credit unions to offer a needed service to members with mitigated risk, and the credit unions diversify their loan portfolios.
The CUSO also offers the EdSucceed Private Student Loan Consolidation option, which allows students to refinance and consolidate their loans after they graduate. Graduates who originated loans at higher rates than those available now can lower their interest rates, often two to three percentage points, says Passione.
Besides offering financial education seminars, Belco Community is developing a product package for students. It will include a student loan, checking account with debit card access, and an option for a low-balance and reasonably priced credit card. They also will make depositing money into student accounts simple for parents.
“Our hope in creating this package for them is that we’re going to be able to help students reach their financial goals in a responsible way,” says Walker. “Our solution, in trying to mitigate potential losses, is to be very proactive on the front end.”
Next: Delinquencies and defaults
Delinquencies and defaults
Getting students through college is just part of the student loan equation. Ensuring they stay current on their loans is the other half. Consider this: Two out of five federal student loan borrowers were delinquent at some point in the first five years of student loan repayment, according to the Institute for Higher Education Policy. Also:
- Most federal student loan borrowers at two- and four-year for-profit schools, and those at two-year public institutions, were delinquent or defaulted; and
- Delinquency and default rates were much higher for borrowers who didn’t graduate than for those who did.
“I think a lot of the problems you see right now are a result of degree-to-debt mismatch or career-to-debt mismatch,” says Ken O’Connor, director of student advocacy at Fynanz Inc. and cuStudentLoans. He suggests
advising students and their families that the best way to manage loan repayment is to take on a reasonable amount of debt based on the student’s major and career path.
Deciding on a major late in the game can add years to students’ college education, Passione adds. Tuition today is too high for students to spend much time undecided on a career path.
Because gen Y is taking longer today to pay back their student loan debt, they’re delaying normal life events such as getting married, having children, buying homes, starting businesses, and saving for children’s education, according to The New York Times. As peak borrowers stop borrowing—and gen Y has yet to start—a period without borrowing might occur, which could hurt financial institutions.
Credit unions say financial counseling and planning are critical for these members.
“I believe credit unions really do go above and beyond to try to work things out with members that fall on hard times,” says Walker.
“We’re committed to serving postgraduate members, listening to their needs, and serving as passionate advocates to reach their goals sooner than later,” echoes Gilfedder, adding credit unions like McGraw-Hill FCU deliver better financial counseling than larger, profit-driven financial institutions.
Yet many see the delay in borrowers’ life cycles as an opportunity. “The extension of this financial life cycle provides our credit union with an opportunity to take a more proactive and earlier approach to helping our young members build a solid financial future,” says NEFCU’s Garguilo. “Our outreach extends to all generations, beginning in grade school to postgraduate studies. It’s our mission to help our members—whatever their station in life—appreciate the value of planning and using the resources available to set them up for long-term financial success.”
Credit unions say now they have time to teach money management skills to graduates with student loans, before they take out additional loans.
“We work with graduates on their financial responsibility, to get them to the point that they’ve budgeted and saved, and are ready to enter into home ownership with the benefits of an education and a strong career,” says Belco Community’s Walker. “The benefits outweigh that delayed start because they’re better prepared to reach higher potential in the future.”
This strategy gives credit unions time to boost these borrowers’ credit scores, too. Credit scores essentially determine students’ cost of education, says Passione, because they determine loan interest rates.
To help students establish good credit, credit unions have included provisions to build solid credit scores for student borrowers. For example, McGraw-Hill FCU requires a co-signer for students to take out a loan.
“This protects the student and his or her credit rating,” says Gilfedder. “The last thing we want to see is a student unable to purchase a car or a home postgraduation because they’re unable to repay their student loan.”
Credit unions with student lending programs through Fynanz Inc. require small monthly payments throughout college. This gets students in the habit of paying back loans and reminds them how much money they owe, says Passione.
A lasting benefit of lending services for students, say credit unions, is the chance to foster loyalty. So long as you actively work to meet student borrowers’ needs, credit unions will be “top of mind” when these members are ready to take out future loans, Walker says.
The Higher Education Dilemma
Student loan debt surpassed credit card debt last year, totaling $833 billion compared with $826.5 billion, reports FinAid.org.
Total student loan debt continues to increase at a rate of about $2,853.88 per second, FinAid.org states, and totaling $930 billion in August 2011, it most certainly will top $1 trillion this year.
Since 1978, the average cost of tuition, books, and lodging at a four-year university has increased by 694%, from $2,289 in the 1978-1979 academic year to $15,875 in 2008-2009, according to CUNA’s 2011-2012 Credit Union Environmental Scan.
Family income has not kept pace, however. A comparison of middle-class average incomes in 1988 and in 2008 shows income was actually about $400 lower in 2008, at $33,000 when adjusted for inflation, CNN Money reports. If income had kept up with tuition, the average American today would make $77,000 annually.
Additionally, the aggregate amount of government-backed Stafford loans a dependent undergraduate student can take out has been capped at a total of $31,000.
The gap between tuition and funding available through scholarships, grants, and federal loans grows. It can typically run from $7,500 to $12,000 annually, according to Vince
To limit financial need, and thus debt, many students are selecting two-year colleges over four-year ones, experts say.
Still, to fill this financial gap, two-thirds of students turned to private loans in 2008, reports The New York Times. This is up from less than half in 1993.
- 2011-2012 Credit Union Environmental Scan
- 2011-2012 National Member Survey and Survey of Potential Members
- Member financial literacy resources,