By Michael VanErdewyk
There’s a high-profile lender that’s struggling to turn its ship around. Some 42 million borrowers owe this lender $1.3 trillion and its debt load continues to rise.
This lender has a near monopoly in this industry, yet more than 1 million of its borrowers entered or re-entered default last year. On average, more than 3,000 of their borrowers default on a loan every day. That’s about $137 billion in unpaid bills.
I’m talking about the U.S. government and the federal student loan programs they offer to college students.
Higher education financing is approaching a tipping point. Many full-time workers with student debt are delaying decisions to buy a home, get married, have children, and save for retirement, according to PwC’s 2017 Employee Financial Wellness Survey. Meanwhile, the cost of tuition continues to escalate, according to CollegeBoard.
There has to be a better way to prepare future workers to be globally competitive and financially healthy.
The Trump administration and most members of Congress are of the same mindset. A cornerstone of President Trump’s election campaign was that he would remove the government from the student loan system and have private banks lend money to college students instead.
The private student loan industry is heeding this call. We can provide better ways for student borrowers to finance their investment in higher education.
Here’s how we can do it, together.
Private lenders make responsible student loans by bringing time-tested underwriting controls into the process. Banks and credit unions make loans based on a borrower’s ability to repay. They use data and analytics to identify risk to offer a loan rate commensurate with that risk. This is the right way to lend. The result is that today’s private student loans have significantly lower default rates than federal student loans., according to data from MeasureOne, which tracks private student loans.
Responsible underwriting includes evaluating risk at a minimum of three levels:
- What college or university the student is attending
- The individual borrower’s credit
- The co-signer’s credit
These proven risk evaluators could be further augmented by including the student’s program or major since not all majors offer the same levels of future employment and income potential.
Privatize Student Loans.
The federal government should be a lender of last resort, not of first resort. By privatizing student loans, banks and credit unions can do what they do best — efficiently meet the needs of borrowers in a safe, secure and highly regulated environment. Our government has the opportunity to get banks and credit unions lending again.
Private lenders can help and have huge amounts of ready capital. With the loan-to-deposit ratio so low for many banks and credit unions — with some below 50 percent utilization — they need to start making loans or stop taking deposits. Banks and credit unions are ready to step in and acquire student loan portfolios from private lenders, and a few are already doing so: In February, for example, MetaBank announced the purchase of a $151 billion portfolio of private student loans in order to put its working capital to a more effective use.
In lending, your borrower is an asset, not a liability.
We’ve heard the stories about the complexity of loan repayment and the frequent missteps of federal student loan servicers. That’s because the customer relationship in the federal student loan equation is wrong. Neither the government nor the servicers have a long-term stake in the relationship because college graduates don’t need additional student loans.
For banks and credit unions, graduates are their future customer base. These institutions have a vested long-term interest in making sure millennial and Gen Z customers repay their loans and have a trusted partner who can help them with consolidated/refinanced student loans, financial advice, and future needs like car loans and mortgages. The quality of the customer relationship matters a lot to everyone involved.
As a private student loan servicer and insurer, our company relates to borrowers the way an experienced financial advisor might. We provide a single point of contact for the lifetime of the loan, make credit counseling a fixture of our business, work with borrowers to make better decisions during difficult and good times, and look to prevent the harm of non-payment.
We believe it’s our duty to support the financial well-being of a borrower, and this is the best pathway to also help lenders preserve the long-term value of their customers.
The more private student loan lenders, the lower the cost of borrowing capital.
I love when I see private student loan offers that are more affordable and have lower interest rates than federal student loans, with rates starting below 3 percent for refinance variable loans, for example. This is happening because private lenders are starting to retake more of the overall student loan pie.
There’s a large addressable market of $172 billion in annual higher education costs that are not covered by public funding sources and are left to family contributions. Currently, only $10 billion of higher education costs each year are covered by private student loans, according to Sallie Mae, a private student loans provider.
With more lenders in the game, the incentives grow for better pricing and terms, which is what has already happened in the student loan consolidation/refinancing market.
The private market innovation that can be brought forward to solve this public debt problem are limitless and imaginable.
Many of these ideas follow the tenet that students, and the loans provided to them, are investable assets. Look no farther than SixUp, a company that invests in high-achieving, low-income students. Or, Gradify, and how they let employers offer student loan repayment assistance—now one of the hottest employee benefits to attract and keep millennials. And Vemo Education, with its Back a Boiler—Income Share Agreement Fund with Purdue University, where 160 juniors and seniors received nearly $2.2 million in education funding during the 2016-17 academic year.
At the end of the day, private student loans help students and their families bridge the gap in financing the increasing cost of their education. Whether college-bound or refinancing a loan after graduating, accessible financing is pivotal to helping students realize their personal and professional goals, ambitions and dreams. We know firsthand, as we’ve helped over 450 community banks and credit unions become student lenders, typically for the first time.
The private lending industry can and should lead the nation in finding the best and most innovative higher education financing solutions for the success of our students.
NOTE: Michael VanErdewyk is the founder and CEO of ReliaMax, a financial technology company that works with more than 450 community banks, credit unions and alternative lenders to help them participate in the private student loan asset class and help student borrowers realize their education goals. ReliaMax has insured more than $3 billion in private student loans since 2009 and is the fourth-largest provider measured in terms of facilitating private student loan volume. Follow Michael on Twitter at @mzvanerdewyk.