10 Lending
STUDENT LOANS
CU Student Loans May Dodge Asset Bubble, Delinquency Rates
HEATHER ANDERSON
handerson@cutimes.com
-backed security losses and loan
losses on their own books, shy
away from the private student
loan market in a time when the
loans are one of the few products
with consumer demand.
However, CUNA Chief Econo-
mist Bill Hampel said despite the
asset bubble talk,
student loans are
a good product for
credit unions.
“One might talk
about a bubble in
the cost of higher
education, that
the cost has been
pushed higher and
higher, and at some point, the
price has to burst,” Hampel said.
“But it’s different from the hous-
ing bubble because student debt
isn’t really tied to yesterday’s cost
of a college education.”
Instead, the ability to repay
depends upon the future earn-
ings of students. And, Hampel
said, despite higher than normal
unemployment and underem-
Hampel
rom the Wall Street
Journal to the activ-
ist blog Zero Hedge,
The chatter intensified April 25
when Sallie Mae, the country’s
largest originator of federally in-
sured student loans, scrapped a
$225 million debt offering. The
Wall Street Journal reported the
lender pulled the plug on the
deal because investors felt the
3.5% interest rate offered wasn’t
enough to offset risk. Included
with the article was a graph that
showed as of year-end 2012,
more than 31% of all borrowers
were 90 days or more past due on
their student loans.
Those numbers could make
credit unions, still smarting from
corporate credit union mortgage
ployment rates for recent college
graduates, the income differential between college grads and
those without a college education still compares favorably to
the average amount owed.
“Last year, the average to-
tal indebtedness of all students
who had some debt was $25,000.
That’s not huge,” Hampel said.
“However, if it were common for
most students to come out of col-
lege with $80,000 to $100,000 in
debt with an entry level salary of
$30,000 to $50,000, that would be
untenable.”
While Hampel did admit that
access to credit has inflat- Y16
GUEST OPINION
Should Policy be Used to Abate Student Lending Woes?
s of March 2013, 38.6
million Americans
have a combined
$869.9 billion of
student loan debt, which rep-
resents an increase of 16% from
the same time just one year ago
at $748.6 billion. Further, there
are currently more than 125
million student loans outstand-
ing, indicating the average stu-
dent takes out more than three
loans to cover the full cost of
their education.
A combination of economic
factors is driving the current
student lending trends of his-
torically high balances and re-
cord levels of delinquencies:
the wave of unemployed or un-
deremployed that are enroll-
ing or returning to universities
to gain additional training and
more marketable degrees; high
tuition costs require many stu-
dents to secure multiple loans
to cover college expenses; and
graduating students with out-
standing loans are entering a
weak labor mar-
ket, limiting their
ability to repay –
leading to higher
numbers of loan
defaults.
and credit card lending, the
collateral for a student loan is
the investment into the human
capital itself, which cannot be
repossessed later if a loan goes
into default. For this reason,
student loan debt is not discharged in bankruptcy except in
rare cases, such as for a severe
and permanent disability.
Recent regulations regarding
ability to pay have made it very
challenging for individuals under the age of 21 to open credit
in their own name if they are not
employed and have tightened
up on extending credit card offers with incentives such as free
merchandise due to consumer
protection concerns. As a result,
the standard rules of credit, collateral and capacity underwriting that apply for other credit
tradelines do not apply in the
same way to student loans.
Private student loan provid-
ers typically use stronger un-
derwriting criteria than those
demanded by federal student
loan programs, and students
can often get a better rate if
their parents are co-signers on
the loans. These loans perform
better on average as a result, but
are nonetheless affected by the
currently weak labor market af-
fecting graduating students.
