Credit unions have certainly increased their presence in the private student loan marketplace over the past twelve months. As I have chronicled on this blog, credit unions have solved a specific need of several graduate institutions by providing funding for private loans for international students without a U.S. based cosigner. These partnerships that have recently been announced include (there are 3 other top 20 business schools that are soon to be announced also):
Several states have also announced partnerships with credit unions to meet the needs of their state residents for private and/or federal student loans:
- Connecticut credit unions launch $17.5 million loan program
- Iowa Alliance Private Student Loan Program pool $20 million for private loan program
- State Employees’ Credit Union (SECU) is pleased to announce its agreement with North Carolina State Education Assistance Authority (NCSEAA) and College Foundation, Inc. (CFI) to provide an additional $500 million in funding for student loans.
Finally, individual credit unions have also been active in developing networks to meet the needs of private student lenders. Credit Union Student Choice, a credit union service organization which enables credit unions to provide private student loans has been in existence for a little over a year (for complete description, click here). They currently have 44 credit unions (see complete list here: Download StudentChoice_CreditUnion_Partners_ByState) offering private loans in their local communities with an expectation that 72 credit unions will be signed up in time for the 2009/10 academic year.
Here are some additional details on the Credit Union Student Choice Product (thanks to Scott Patterson for these details):
- Loan processing: Credit Union Student Choice members utilize a third party servicer for their loans. They can electronically certify and disburse through ELM.
- Structure of loan: The loan is structured as a line of credit which the student can draw down throughout their college career
- Loan limits: Up to $75,000 cumulatively disbursed
- School certified loans only
- No origination fees
- Variable interest rate priced off 1-month LIBOR or Prime
- Individual credit union sets the pricing
- Individual credit union sets the pricing
- Repayment options
- In-school payment deferral allowed
- Graduated repayment option
- Undergraduate loans require a cosigner
- Minimum FICO score of 660 for cosigner
- Minimum FICO score of 660 for cosigner
- Currrent approval rate is currently around 70%
- Average funded rate on these loans is 5.5%
- For those of you keeping score at home that is about 1/2 of the 11% that SLA estimates is the average cost of a private student loan today.
- For those of you keeping score at home that is about 1/2 of the 11% that SLA estimates is the average cost of a private student loan today.
- Eligibility: Must be a credit union member or join the credit union in order to apply for the loan.
So, how can credit unions manage to offer such low rates? Quite simply, credit unions operate under a different business model with differing ROI expectations than publicly-held banks and financial service firms. While Sallie Mae has indicated a goal of earning a 4% pre-tax return on their private student loan business, credit unions enjoy lower return expectations (they might be happy with a 2% yield) and a lower cost of funds. As a start-up, credit unions also do not have the albatross of loan writeoffs that will peak sometime over the next two years for established student lenders.
This should provide you with a sense of the rates offered by several of the Credit Union Student Choice Partners:
- Affinity Plus FCU
- 3.50% ("floor rate") to 5.94%
- San Antonio FCU
- 6.00% is "floor rate"
- StarOne FCU
- Did not disclose range of interest rates. It appears that Credit Union Student Choice partner credit unions are provided with latitude about whether or not to post their interest rates. It seems counterintuitive that with these competitive rates that ALL of them would not splash this on their home page for student loans.
Other credit unions manage their own private student loan programs. These tend to be institutions that operate in large college towns that may have longstanding relationships with the universities they serve. Here are a few that I uncovered:
- USC Credit Union Collegiate Choice
- Rates from 3.309% to 6.809% (cosigned loans)
- I highlighted USC Credit Union's excellent transparency in an earlier post
- UW Credit Union Alternative Student Loans (Wisconsin)
- University Credit Union (Maine)
- Kudos to University Credit Union for a great table to demonstrate how their interest rates vary based on FICO score and repayment options. What a concept; reward borrowers with a lower interest rate if they choose immediate repayment. Note also that their FICO score range starts at 600. Here is the table (option A is deferral, option B is interest-only during in-school and option C is immediate repayment):
Bottom line: Students and families should consider credit unions among one of their private loan options. Their access to low-cost capital and lower ROI requirements provide them with a competitive edge vs. other student loan companies. Yes, in order to be eligible, you will need to join the credit union where you are applying for that private student loan, but frankly most have pretty open membership policies. The potential to save thousands of dollars should provide ample motivation. Ideally, find a credit union in the town/city where you will be attending college and ask them about their alternative student loan program (after you have exhausted all other financing options of course). While there are no guarantees in life, you may find that their rates are certainly competitive with the current rates offered by leading national lenders.
More evidence that a credit union is now a student's best private loan lender (http://www.collegeloanconsultant.com/private-loan-lender.html) is the benefits they offer. Rate reductions for good grades or for paying 10% of the loan or for automatic deductions, are some of these.
Posted by: collegeloanconsultant | January 24, 2010 at 11:37 AM