Weekly Update

Student Lending Isn’t Just for Large Credit Unions

(From Credit Union Journal) – There’s a moment when we’re sitting around the table with a student and her parents where it just seems to click. She understands that this is her student loan. It’s her responsibility. No one else’s.

And that’s why our small credit union, at only $22 million in assets, can run a lucrative, in-house student loan program for the past decade and never have a single charge-off, nor, amazingly, have one of those loans even reach 30 days of delinquency. Not one.

As vice chair of the CUNA small credit union committee, I’ve been part of the Credit Union National Association’s work to raise awareness of the importance of having a strategic focus as a small credit union.

At Manchester Municipal Federal Credit Union, located in Manchester, Conn., where I’ve served as CEO for the past 19 years, certainly our focus is on city employees. But more specifically, our focus is on truly serving their needs.

That’s how our student loan program was created.

Up until 2009, when we launched the program, we were turning away countless members who wanted to send their kids to college but didn’t know how to pay for it. We heard many stories from members who had student loans they’d been paying off for years without being able to make a dent in the principal. Or they’d been hit with fees. Or they were paying interest rates of 10% or more.

It broke my heart, and I knew we had to step in.

The biggest concern, of course, was the risk. Anyone we consulted with on a potential program warned of that next big bubble, of the possibility of exposing the credit union to massive charge-offs.

But we knew our members. We knew we could create a successful program. And once we received legal sign-off that bankruptcy law would not preclude us from collecting on these loans if they ever went bad, we dove in.

Launching the program

In 2009, we began offering five- to 15-year loans at a maximum of $20,000, generally enough for tuition and housing for in-state colleges. For each loan we made, the borrower—the student—and his or her parent would come in to the credit union and we would teach them exactly how the loan would work.

The student would fill out the loan application and the self-certification detailing where they planned to go to school and how much it would cost. The parent would co-sign and would have to pay the loan while the student was in college—unless the student had a job and helped with the payments themselves.

And once the student graduated and had made on-time payments for 12 months, the parent could then be removed from the loan.

That approach has been the reason for the success of the program. We make sure the students and parents know what it means to have this loan, that it needs to be paid every month, so that it stays front of their minds. It’s an approach quite different from the typical student loan, which don’t need to be paid until after graduation.

With our program, rather than taking out a $10,000 loan that balloons to $22,000 by the end of college, our borrowers pay down the principal from day one, which saves our members and their families thousands of dollars.

Educating our members about how it works is the best underwriting we can do. And that’s why we have $2.2 million in student loans with no outstanding delinquencies, much less a charge-off.

Student loan consolidation

Unfortunately, typical student loan debt climbs even higher when we don’t catch these individuals until after college — when they have borrowed, at times, more than $40,000 and haven’t made a single payment in 54 months. It’s likely that they now owe $60,000 or more on that $40,000 debt.

So, we’ve now launched a student loan consolidation program.

Given the larger amounts of debt we’re looking to consolidate, we certainly did our due diligence before investing in this program. With student loan consolidation, we’d be buying nearly $100,000 in debt in some cases.

But again our attorneys found that when we bought out a Sally Mae or other type of student loan, bankruptcy protection followed the loan, meaning we were covered. So we jumped in.

The gratification our members share with us is just amazing. When they see that they’ve been making payments on their original student loan debt for years and have not made a dent in the debt, in many cases it’s still growing because of the accrued interest on the amount they owe.

But then they consolidate the loan with us and lower the loan amount after two payments, and they’re through the roof. They know how much money they’ll save. They can see a light at the end of the tunnel.

Just as with the original student loan program, we have zero delinquencies or charge-offs.

I certainly would encourage anyone to consider this program for their credit union. It’s clearly a need across the country. But for me, it’s not really even about the student loans. It’s about our original purpose, our original focus as a credit union – serving the needs of our members.

For small credit unions, for all credit unions, it’s really as simple as that.