Disclaimer: Private student loans should be considered as a "last resort" only. Students and parents should access all other available forms of aid, including scholarships, federal grants (e.g., Pell) and federal loans (with names like Stafford and PLUS) before considering a private student loan.
As I noted in a recent blog post "The Incredible Shrinking Private Loan Market," the outlook for private student loans for 2009-10 has a familiar ring to it: loans that are harder to get and those fortunate to get a loan will likely have a higher margin on the loan. The good news is that there are new choices popping up to meet the demand for private student loans with lower interest rates that may be easier to get also. After extensive research of credit unions offering private student loans, I have added these three credit unions to the SLA Private Student Loan Ratings List: Addison Avenue Federal Credit Union, NASA Federal Credit Union and Northwest Federal Credit Union. Each is a member of the Credit Union Student Choice network, the largest network of credit unions providing private student loans.
Here are some details on their variable-rate loan products, each of which were given a four-star rating (out of five) by SLA:
Here are some answers to common questions that borrowers may have about these loan products:
1. Do I need to be a member to get a loan from a credit union?
Yes. However, each of the lenders selected have a wide field of membership. Important: Be sure to also evaluate this list of other credit union participants in the Student Choice network to see if a credit union in your area might have even a better rate (Download Credit_Union_Private_Loans. Here are just a few ways that borrowers can become members at these credit unions (with links to their membership sites). Check the membership requirements closely as you may be eligible already based on your employer or other association that you are affiliated with:
- Addison Avenue FCU
- If you are not eligible to join through one of our sponsor groups, you can qualify for membership by joining the Financial Fitness Association. It’s only $5.00 to join this not-for-profit organization. To sign up, go to www.financialfitnessassociation.org, click “Join Now”, and follow the instructions.
- NASA FCU
- You can also become eligible for NASA Federal Credit Union membership
by joining one of our affiliated associations. Everyone can join.
- You can also become eligible for NASA Federal Credit Union membership by joining one of our affiliated associations. Everyone can join.
- Northwest FCU
- Indicates that members can also join through membership in the American Consumer Council: "If you find you are not eligible to join NWFCU via the relationships defined above, we can approve your membership with automatic enrollment in the American Consumer Council, an organization dedicated to consumer education, awareness, and economic growth. This nonprofit advocacy group was established in 1987 to ensure and protect consumers. There is no cost for you to join, nor additional paperwork. Simply select “I work for a member company or an organization” then choose “ACC” from the list of eligibility options on our membership form. It is that easy!
2. Why do all of these loans currently have a 6% interest rate? Aren't there loans from other lenders with lower starting interest rates?
Each of these specific credit unions has an interest rate floor in their structure. So, if you add the current 1 month LIBOR index (0.32%) to their Margin (e.g., 3.75% for Northwest), you get a rate that is less than 6%. In situations where the calculated rate (index + margin) is below 6%, the floor rate of 6% kicks in. While this floor limits the ability of borrowers to capitalize on today's historically low interest rates, the margins on the credit union loans are so significantly below other lenders on the SLA Private Lender Ratings that it will not be a handicap when rates return to more normalized levels.
Now, let's take a longer term perspective. In running a simulation using LIBOR rates over the last 20 years (which as we know may have nothing to do with the future rates but at least is a starting point), having a floor rate of 6.0% would have added at most 0.2% to the interest rate over the life of the loan. Of course, there a lot of hypotheticals here but at least you have a sense of the magnitude of the costs of having a floor in a normalized economic environment.
3. Do private loans from a credit union require a co-signer?
These loans may require a co-signer. Here are the current rules that recently went into effect:
The student-only option is now available to all future borrowers. This option will allow a student to apply on his or her own - without a co-borrower. To qualify, the student must meet all of the credit criteria currently attributed to the co-borrower:
- Minimum 660 FICO score
- Two years of continuous employment history
- Minimum gross monthly income of $1,500
- No foreclosure, lien, bankruptcy, student loan default and 24 months of credit history
If the student does not meet these requirements, a co-borrower will be necessary and the income, employment and credit conditions will pass to the co-borrower. The student will need to have a FICO of 0/620+ as well as no foreclosure, lien, bankruptcy, student loan default and 24 months of credit history.
4. How else do these loans vary from typical student loans offered by other lenders?
Here are a few other differences:
- Structure: Loan is structured as a line of credit that borrower can draw down during their college careers rather than a loan that they will need to reapply for each year. Maximum amount borrowed through this program is $75,000.
- Transparent underwriting standards: The three credit unions selected each provide the rates corresponding to FICO (credit) scores. This allows a borrower who knows his/her FICO score to have a good sense of what their margin will be. Here are the rates for these three lenders:
|FICO Scores||Addison FCU||NASA FCU||Northwest FCU|
|660-679||LIBOR + 5%||LIBOR + 4.43%||LIBOR + 3.5%|
|680-699||LIBOR + 4%||LIBOR + 4.17%||LIBOR + 3.5%|
|700-729||LIBOR + 3%||LIBOR + 3.94%||LIBOR + 3.5%|
|730+||LIBOR + 2.5%||LIBOR + 3.79%||LIBOR + 3.5%|
- Repayment options: Students have the following repayment options (first three are standard with most lenders):
- Full deferment while in school
- Elect to make interest-only payments while in school
- Pay full principal and interest payments while in school
- Also offer a graduated repayment schedule which reduces monthly payments over the first two years by amortizing loans over a 40 year vs. a standard 20 year schedule.
5. How do I know if the school I attend is one of the close to 2,000 schools eligible to participate in this program?
Search for your school on this site.
6. What are the risks in dealing with credit unions?
Here are two:
- Credit unions are relatively new to the private student loan market. The Credit Union Student Choice network has grown quickly with over 70 credit unions [an earlier version was incorrect in stating 70 schools were on the network] now on board. Given such fast-growth situations (I have seen them first hand in other businesses that I have been involved with), there is always execution risk. This might take the form of loan processing taking more time then expected, or issues with certification as your school may be less familiar with the process. If I knew that I could save thousands of dollars over the life of my loan, I would be more willing to take any execution hiccups in stride.
- Unclear about how much capital each credit union has dedicated to their student loan business. While I recognize that many of the credit unions in the Student Choice network have large asset bases, some may take a measured or conservative approach in the early innings of this program in deciding how much capital to allocate to this new asset class for them.
One of the frequent questions that I receive from financial aid administrators is how well are credit union networks such as Credit Union Student Choice managing the loan process. Here is the answer that I recently received from Brian Cox of Cology:
If any school wants more detail on how to set up a credit union in their FAMS system (ie. NCHELP codes) and/or to confirm their processing profile, they can contact Denise Eder at email@example.com
Cology also noted that over 450 schools currently have loans in process through Credit Union Student Choice.