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:
“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.