Death of Guaranteed Student Loan Program to Hit Credit Unions Hard

Credit Union Journal
September 23, 2009 | COMMENTS

The House recently voted to eliminate the once-lucrative guaranteed student loan program, instead relying on direct government loans to fund the $150-billion-a-year needs of college students and delivering another major blow to credit unions and banks.

"That sound you heard was my breathing going out of me," said Gary Perez, president of $315-million University of Southern California Federal Credit Union, with a $150 million portfolio, the largest credit union provider of guaranteed student loans.

More than 1,000 credit unions participate in the guaranteed loan program, formally known as the Federal Family Education Loan Program, which provides a 97% federal guarantee and lucrative origination fees. "It was an incredibly profitable program for participating lenders, there's no doubt about it," said Perez.

The program, like other loans, have become much less profitable over the past two years, first with a new law lowering yields and fees, then with the fall in interest rates, lowering yields to 1.5% to 1.75%. But Perez and other credit union participants expected the spreads to widen when the historically low rates rise again. "We're not making money now, but it is an abnormal time," said Leo Ditchcreek, president of $450-million Notre Dame Federal Credit Union, which originates about $15 million to $20 million a year in guaranteed student loans.

Both executives worried about the bill's effects on credit unions like theirs that depend on the student loan program, and on students who will now have to get their loan directly from the federal government. "I disagree with the core premise that direct lending will be better for the student," said Perez.

The bill, which lawmakers project will save the government $85 billion over ten years, now goes over to the Senate for its consideration, but may be held up as the Senate Health, Education and Welfare Committee is occupied with their efforts at health care reform.

Meantime, credit union lobbyists are working with the banks and student loan companies to try to save the program in some shape as the bill heads to the Senate. "We're trying to educate members of Congress that it's not always about the money. Credit unions are about the service to their members," said Brad Thaler, senior lobbyist for NAFCU.

Perez said his credit union and others heavily invested in the guaranteed loan program will have to recast their business model to focus more resources on mortgages, member business and other types of loans. "We were a niche lender. Now that model is gone," he said.

The advancement of the bill comes as dozens of credit unions have launched their own private loan program for students. But those loans are not as profitable. "Some will stay in as a private lender, others will be driven out of the market," said NAFCU's Thaler.

This article appeared at www.cujournal.com and is reprinted with permission.