The Changing Landscape of Student Lending

October 8, 2007

In the 21st century, Americans still believe strongly that a college education is worth saving and sacrificing for. But credit unions interested in this market need to know that the student loan scene is undergoing some important changes.

To understand the current scene, it’s first important to know the makeup of the current student loan picture.

The federal student loan programs, the largest component of the student-lending world, consists of the Federal Guaranteed Student Loan Program, and its three major components: the Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Perkins Loan Program. Students also have other loan options, such as subsidized and unsubsidized Stafford Loans, Federal PLUS loans, and federal consolidation loans.

Interest rates for these loans are well under what a borrower with no credit history, collateral, or regular income would pay.

The private loan market is predicted to expand in the next few years, and should provide credit unions with growing opportunities. This paper looks at why private loans are used, who uses them, and how much the typical student borrows.

It’s important for credit unions to monitor activities from Congress, which is considering changing the interest rates on federal student loans. The College Student Relief of 2007, for example, proposes to phase in cuts in the interest rate charged to undergraduate student borrowers under the Federal Family Education Loan (FFEL) and Direct Loan (DL) programs, reducing the rate from 6.8 percent in July 2006 to 3.4 percent in July 2011. This would have a dramatic impact on credit unions participating in student loan programs.

There are several advantages for credit unions that operate student loan operations. Senior vice president Jim Henderson at Educators Credit Union in Racine, Wisconsin ($800 million assets) explains how running a student loan program can help a credit union, especially with building long-term relationships with students.

This is the executive summary to a white paper for the CUNA Lending Council by Neil Bartlett entitled “The Changing Landscape of Student Lending.” Read the complete paper in the white paper section of the CLC site.

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