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Why CUs are getting into private student loans
MADISON, Wis. (2/24/11)--Rising college education costs and an increase in students attending post-secondary institutions in the U.S. are fueling the demand for more private student loans, and credit unions reflect that trend. That assessment was made by Fynanz, a technology provider of custom private student lending programs and a CUNA Strategic Services provider. In the past two years, Fynanz garnered 4,600 new credit union member clients nationwide, Vince Passione, Fynanz CEO, told News Now. “We have seen since 2009 that this is a very good product for credit unions,” he said. “It’s a product that credit unions need and credit unions are using.” Last year, roughly $8 billion in private loans were issued in the U.S., with the average loan size being $12,000, and the typical student taking out two to three loans during an undergraduate college career, Fynanz said. There are three primary reasons why credits unions offer private student loans, Passione said:
* The loans fill members’ needs. In 2007, many lenders left the student financial-aid market because of the economic crisis. “Lots of capital left the market, so the supply went down while demand was going up,” he said. * The average age of a credit union member is 48 years old. Private student loans make it more likely that credit unions will attract younger members from Gen Y (19-24 year olds). * As credit unions start to look for new asset classes, this is a good product--a good return and a way to provide more service to members, Passione said.
What is sparking private student loan demand? “The main driver is the increase in college education costs,” Passione said. “The average cost for one year at a four-year private college is $35,460--with a 5.5 % compound annual rate of growth.” Also, the number of students going to colleges and universities is increasing, with about 19 million students enrolled nationwide last year. The enrollments don’t look like they are going down any time soon, Passione added. “Because more people are competing for grants and scholarships, there is more of gap between what is needed and what is available, which is driving private student loans,” he said. “Also, the unemployment rate is up and more people are in the market for higher education. More are going back to school because they are unemployed.” Passione sees two major trends in student lending: making payments while going to school and consolidation of student loans. The first trend is in-school loan servicing, in which a student makes a monthly while in school. Fynanz pioneered this concept, with a $25 monthly student payment, Passione said. There are three reasons for asking for a payment while the student is in school:
* It’s a reminder to the student they have a debt, and tells them what they borrowed and what it will cost to repay it at current interest rates. It tells them the conditions for paying off their debt. * A typical student is 19 years old and has no credit rating. The in-school payment helps the student build a credit rating. * Typically the loans are co-signed, so when the student makes a payment, then the co-signer gets a notice--which helps the co-signer remember the loan, so the co-signer (usually a parent) will help the student make payments.
Sallie Mae and First Marblehead, a bank and financial intermediary, recently adopted this concept, Passione said. The second trend is consolidation of student loans. Student loans are seasonal, issued at certain times of the year. Consolidation loans are cyclical, which helps create refinance opportunities to help students obtain better interest rates and helps them better manage their cash flow, just as a consumer would by refinancing a home, Passione said. What is the future of student lending? In addition to increasing educational costs and increasing enrollments, the U.S. economy is continuing to move from a manufacturing to a service economy, Passione said. “The unemployment rates of any people who hold college degrees--such as doctors and lawyers--will be less than for others who don’t in a full-fledged service economy,” he added. “The reason why is that most [U.S.] manufacturing jobs are gone.”
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