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Stemming the Student Debt Crisis

Private student loans could benefit students and banks.

By Alaina Webster

There’s a reason the current student debt conundrum in the U.S. is often referred to as a “crisis.” According to data from the Washington, D.C.-based Consumer Bankers Association, student loan debt has risen from $600 billion in 2008 to $1.5 trillion in 2018. Moreover, the New York Fed found that one in five borrowers in repayment is seriously delinquent or has defaulted on their student loans, and a recent chart from Raddon Research Insights shows that millennials who are shouldering student loan debt have higher levels of credit card and consumer loan debt but lower levels of real estate loan principle and lower deposit balances.

If you’re wondering where student loan forgiveness programs come in, the long and short is they’re not as effective as one might hope. A December 2018 article in The Wall Street Journal noted that of the approximately 28,000 people who filed for debt forgiveness as of June of last year, only 96 had their loans forgiven. The application process is rigorous, the article stated, and many students take on debt assuming they will qualify for forgiveness programs they, in fact, do not.

So what about private student loans, those funded by banks, credit unions or specialty lenders? Per the CBA, one advantage of private loans is robust underwriting, which helps ensure students do not borrow more than they can afford to repay. Private loans also offer borrowers several options, ranging from fixed and variable interest rates to various repayment terms and multiple repayment options. Because there are numerous lenders in the field, they also provide competitive refinancing and loan rehabilitation alternatives.

However, in its report, 2018’s CFPB Student Loan Complaints, New Jersey-headquartered LendEDU found one complaint category for private student loans that doesn’t exist for federal loans: “getting a loan.” The report showed that loans are being issued and interest rates determined based on the borrower’s credit history and earnings potential (conversely, federal loan interest rates are determined yearly by Congress), and this can make securing a private student loan difficult, particularly for those in underserved and low-income communities.

Mike Brown, research analyst at LendEDU and author of the CFPB complaint report, shared some ideas for banks looking to increase student lending without increasing risk or shutting out potential customers.

“We now see financial institutions use more advanced data than ever before,” he said. “We see many lenders moving away from traditional determinants of qualifications like FICO credit scores. Today, banks and lenders are using things like free cash flow and bill payment history to evaluate customers.”

As an example, he offered Funding U, a student lender that uses data points like GPA, major, school and test scores to evaluate repayment likelihood for students who have not yet had time to build credit.

Brown also offered pointers for FIs seeking entry into the student loan field. In addition to adequate capital, such institutions will need a consumer lending license at the state level for any or all states in which they wish to conduct business. They will also need an insurance policy or bonds to back their loans and a service provider to process and collect payments and handle customer service. He suggested Googling “how to apply for a consumer lending license” to determine what is needed state by state.

As banks seek ways to attract and retain a younger customer base as well as continue to positively impact their communities, expanding aid to those who require assistance in attaining a college education seems like a win-win.

Alaina Webster, Managing Editor, awebster@banknews.com

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