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'Understanding Student Loans' In NCUA Monthly Report
ALEXANDRIA, Va. (3/13/13)--The March edition of "The NCUA Report" is now available and among this month's newsletter features is an article called, "Understanding the Risks of Private Student Lending."

The article says that, for the most part, credit unions have been in this market for a relatively short time-most have offered private student loans for less than five years. 

The article notes:

  • The Consumer Financial Protection Bureau reports that student loan debt just surpassed $1 trillion in 2012 and is now the largest form of consumer debt in the U.S., eclipsing credit cards;
  • Private student loans comprise 15% of total outstanding student loan debt. The remaining 85% is federally guaranteed loans; and
  • Total delinquencies (loans past due more than 60 days) in the private student loan market nationwide is 5.4% (according to CFPB), and total delinquency for credit unions in their portfolios is a much lower 1.46%.
As credit unions become more involved in providing these loans to their members, they must be aware that it is an attractive loan product but with rising delinquency rates. They also must consider all risks associated with private student loans before entering the market, the NCUA says.

The agency names some of the risks as:

  • An increasing reliance on parents as co-borrowers for private student loans, which has almost doubled since 2005. According to CFPB, 55% of private student loans had cosigners in 2005;
  • That number jumped to 91% in 2011;
  • The compounding of interest because of a deferral period can be quite large when the repayment period begins. A typical private student loan can have a deferral period up to five years while the borrower is in school. This results in the borrower owing much more than just the original principal; and
  • Unlike federal guaranteed student loans that have fixed rates, private student loans usually have adjustable rates. Although the current interest rate environment is at an all-time low, there is no guarantee that rates will remain that low three to four years out.
The NCUA states it expects credit unions to establish reasonable concentration limits for a private student loan portfolio to protect against risk.

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