Credit unions' student lending gets back on track

Now that students have returned to campuses following COVID-19 lockdowns, credit unions are seeing loan volumes return to more normal levels. 

Nonfederally guaranteed loans at U.S. credit unions increased nearly 13% year over year in the second quarter, according to the latest data from S&P Global Market Intelligence. Credit unions had $7.25 billion in non-federally-guaranteed student loans in the most recent quarter, up from $7.01 billion in the first quarter and $6.42 billion a year earlier. 

Wright-Patt Credit Union in Beavercreek, Ohio, had $64.2 million in student loans on its books at the end of the second quarter, making it the 14th-largest credit union lender in that space.

Eric Bugger, chief lending officer for the $7.6 billion-asset Wright-Patt, said the pandemic forced some undergraduates to the sidelines, and that dropped the credit union's student lending portfolio to the lowest levels in several years. 

A return to in-person classes reversed that effect. So far in 2022, Wright-Patt has made 178 loans to students, compared with 135 in 2021 and 108 in 2020. 

"We're pretty happy to see students using our program more, and we expect that to continue as college campuses continue to return to pre-pandemic normal," Bugger said.

Not only had COVID-19 hindered student-loan growth as many potential students reconsidered their educational plans due to the transition to remote study, but at the same time, larger financial institutions have been aggressive with rates, according to Tanya Tanaro, vice president of education and consumer lending for the $1.1 billion-asset Harvard University Employees Credit Union in Cambridge, Massachusetts.

Harvard University Employees had $191.7 million in student loans on its books at the end of the second quarter, representing more than 20% of its lending portfolio. But student lending has been flat for the credit union on a year over year basis.

"We've definitely experienced an increase and change in competition, which continues to have an impact on our business," Tanaro said. "As a smaller financial institution, we work hard to keep our rates competitive, but it can be a challenge when competing against larger financial institutions that primarily compete on price and drive down interest rates to retain and pull in new business."

Vincent Hui, managing director at Cornerstone Advisors, agreed that student lending is a tough market for credit unions to be in considering the competition from the federal government and large bank lenders.  

Roughly $1.62 trillion, or 93% of all student loan debt, is from federal student loans. The remaining $131 billion, or 7%, is owed to private lenders, according to MeasureOne, a data and analytics firm.

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"And many credit unions are loaned out, and if they have limited appetite for additional loans," student lending "is not one of the markets that they would allocate much volume," Hui said. 

Jeff Ernst, chief lending officer for Members 1st Federal Credit Union in Enola, Pennsylvania, said the upward trend of credit union lending is a result ofthe continued increase in tuition costs and from a greater need on the part of the students.  

"With parents being pushed harder by inflation and the general cost of life, there are less savings allocated to helping their kids pay for college," Ernst said. 

Members 1st, which has $6.8 billion of assets today, had $61 million in student loans on its books at the end of the second quarter, making it the 15th-largest credit union lender in that space, according to S&P Global. 

Headwinds persist, including the federal government providing access to loans with little or no underwriting, according to Ernst. He added that colleges continue to increase tuition and provide degrees at a higher cost than the job market can justify.

"Until students and parents do the math of the cost of the degree versus the job prospects associated with that particular degree, it is likely that many students will come out of college underwater," he said. 

That could change if President Biden's proposed forgiveness for federal loans is ultimately approved. 

But Bugger said the only thing that plan has done so far is create confusion for students and their parents. 

"The government needs to do this or don't do it, so students know what they can expect and then get things to a place where those needing financial help … can concentrate on their education and less on how to pay for it," Bugger said. 

Harvard Employees' Tanaro said the largest impact from the loan forgiveness plan has been on student loan refinancing. Most students with federal loans — because payments weren't required and forgiveness was being considered — didn't have a need to reduce their costs or simplify their loan payments. 

"Over the last few years, we've pulled back on promoting our refinance program, and when we have, we've primarily focused on private-loan refinance, and we are very transparent that members should carefully consider their federal loan benefits," Tanaro said. 

Borrowers are confused about the difference between their federal and private loans, perhaps leading to increased delinquencies, according to Ernst.

S&P Global data showed student loan delinquencies at U.S. credit unions jumped to $90.0 million in the second quarter, compared with $72.1 million in last year's second quarter.

"The one positive about the forgiveness program is that it brings the entire program and the financing of these loans into focus," Ernst said. "That might lead to colleges being held more accountable for the debt they incur on their students."