Consolidating Student Loans:
Taming the High Cost of Higher Education
Vince Passione
October 2013
Table of Contents
Executive Summary ...3
Introduction: Wow, That’s a Lot of Money ...4
Student Loans in the US ... 5
A Case for Consolidation ... 5
Creating Opportunities for Success ...7
The Future of Student Loans ... 9
LendKey Technologies, Inc.
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Executive Summary
The cost of higher education has left many graduates burdened with multiple student loans carrying large balances, oftentimes at high interest rates. It can be difficult for young graduates starting out in their new careers to manage their finances with student debt, in addition to all of the other financial challenges they will face being independent for the first time. Consolidation loans, a relatively new product that allows borrowers to roll multiple student loans into one, thereby reducing interest, reducing monthly payments and making student loan debt easier to manage, have become a true light at the end of what has been a long and costly tunnel for many borrowers.
Financial institutions have begun to realize significant success in consolidation loans, which like private student loans rank among many portfolios’ top performers. The loans provide a vital consumer service, allowing student borrowers to free up funds otherwise earmarked for paying higher interest levels and use them to finance the next level of consumer purchases, including autos and home mortgages. Banks and credit unions that embrace their student borrowers and provide this new product also have a greater ability to acquire these consumers for much longer periods and perhaps a lifetime, gaining much greater wallet share over the years.
The loans have to be well-structured, clearly understood with the potential to share among a number of lenders possibly through a participation or syndication structure, since single loan amounts can range literally into the hundreds of thousands of dollars. But a well-crafted consolidation loan, with proper underwriting, has a better chance at payback for the careful lender with their borrower’s best interests in mind.
The future looks bright for student loans, one made more so by the option of consolidation loans that leave both lender and borrower on better footing. Student lending is an investment in the future of the nation’s economy, and an investment financial institutions can easily and safely make to the benefit of all concerned.
Introduction: Wow, That’s a Lot of Money
Shelby Jenkins was always taught that higher education – defined as any education or training pursued after high school – was a good thing. The more levels of education a person pursued, the more successful she would be in life. Jenkins knew higher learning was the road to greater financial and professional success, and the young woman lost no time in pursuing her professional dream through education.
Unfortunately, the Cleveland-area native never considered the high cost of higher education as she pursued her pharmacy degree at Ohio Northern University, a private college located in Ada, Ohio. Understanding debt and coming to terms with the amount she would owe when her education was complete was not a high priority for the young woman as a student, and it ultimately resulted in a costly life lesson.
Jenkins concentrated on her studies, working hard at her discipline. She spent eight years in college pursuing a six-year degree, with two of those years devoted to caring for a father suffering from health issues. She eventually graduated with a doctorate in pharmacy – a “Pharm.D.” as it is called in the health care industry – and today works as a fill-in pharmacist for Cleveland-area Walmart stores.
Jenkins also graduated with $300,000 in student loan debt. Her monthly payments to service the interest-only portion of her 25 different student loans amounted to $2,800, about half her monthly income. Interest rates on the loans ranged from 9% to 13%.
“I’m not even sure what the full payment would have been once it kicked in,” says Jenkins, now 27. “It was doable, but I felt like the payments were taking everything I had. I was still living at home with my dad.” Jenkins knew there had to be a better way and one day happened upon www.custudentloans.org, the student loan program powered by LendKey Technologies, Inc., designed to educate borrowers and match them to participating credit unions to refinance private student loan debt.
Eventually she secured a loan to consolidate the $120,000 of her private student loan debt, which charged more than 9% interest from her initial lender, with Aspire Federal Credit Union in Clark, N.J. The loan’s 5.5% interest rate helped bring her payments down to $1,950 per month, freeing up an extra $850. Jenkins says a huge weight has been lifted off her shoulders.
“I am paying more toward my student loans, I was able to move out of my dad’s house and am finally living on my own,” Jenkins says. “When I look back to when I started, I realize that I really didn’t know anything.
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Student Loans in the US
The Higher Education Act of 1965 authorized most financial federal student aid programs, including the Educational Opportunity Grant Program (a precursor to Pell Grants) and the Guaranteed Student Loan Program, which evolved into the Stafford Student Loan Program.
One of the key initiatives created under the Higher Education Act was the Federal Family Education Loan Program (FFELP), an enterprise supported by a public/private partnership administered at the federal and state levels. Under FFELP, banks and credit unions granted student loans that were guaranteed by the federal government. Since 1965, 60 million Americans have used FFELP loans to pay for education expenses.I
But thanks largely to the economic recession of 2008, conditions changed. With the passage of the Health Care and Education Reconciliation Act of 2010, the program of private student loans guaranteed by the U.S. government was eliminated, and many student lending efforts began grinding to a halt. Student debt continued to rise, today totaling more than $1 trillion, second only to mortgages in its percentage of U.S. consumer debt. According to the Pew Research Institute, one in five U.S. families are paying off student loans, which average $27,500 per student. In the case of students like Shelby Jenkins, more time spent in school pursuing higher-level degrees has increased individual student loan debt significantly.
A Case for Consolidation
As Shelby Jenkins’ situation and that of thousands of other student borrowers indicate, there is value in offering consolidation loans to student borrowers. In addition to making philosophical and financial sense for the credit union or bank, it can help build customer loyalty and open the door to additional consumer loans for products the new grad might otherwise not be able to afford. Some financial institutions think of consolidations as an investment in future business, one that starts yielding benefits almost immediately. LendKey Technologies is a cloud-based technology company that provides lending infrastructure for financial institutions to quickly, securely, efficiently and profitably make loans to credit union members and bank customers. The firm, based in New York City, services 263 lending clients that hold more than $500 million in lending capacity. Of that amount, more than $250 million account for private student loan consolidations.
A consolidation loan properly constructed and efficiently serviced can become an exceptional asset to a balance sheet, explains Kenneth O’Connor, LendKey’s director of student advocacy. Banks and credit unions that administer the program correctly may wind up with a new, well-performing asset on their books that will continue to grow over time.
“First and foremost, consolidation loans are important to the financial wellbeing of the borrower,” O’Connor says. “Former students can organize multiple loans into one monthly payment, often at a lower interest rate. This saves them money, helps them manage their payments and frees up funds for other purchases.”
For the parents of students, who often cosign for the loan, it’s easier to keep track of payments priced at a more affordable level. This can be especially critical for families with multiple students at various levels in their college careers. For the lenders themselves, the consolidation loan can open the door to many advantages, O’Connor says.
“Young people aren’t committing to car and home loans largely due to student loan debt. Some people will get approved and some people won’t, but at least you have something to offer new borrowers who can now afford it thanks to consolidation loans,” O’Connor explains.
LendKey’s secure web portal allows members of partner financial institutions to apply for loans online 24/7, with more than 90% of applicants receiving an instant decision. Depending on the lender, who controls the underwriting through LendKey’s platform, proof of income, graduation certification and other documents may be required to process the loan application.
LendKey is also developing response capabilities based on the SMAC model, an acronym that stands for social, mobile, analytic and cloud technology. As the upcoming approach for current and future generations of students, SMAC is a capability that businesses that want to do business with Generation Y and beyond will need, he adds.
LendKey, a preferred partner organization for Credit Union National Association (CUNA) Strategic Services, already has an impressive consolidation loan portfolio, accounting for most of the consolidation activity among credit unions. Specifics of that portfolio include the following highlights:
• The consolidation portfolio has over 4,000 loans and is nearing $500 million in total financing • The average FICO score for the portfolio is 745
• More than 98% of the portfolio is current
• Only 0.33% account for 60-day or greater delinquency, a solid performance • Only 2 loans out of a total 4,153 have defaulted
Borrowers need to have clear objectives and goals for financing any loan. O’Connor offers the following advice to both borrowers and lenders:
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Lender, embrace your new, young borrowers by truly understanding their needs. They’re young, of course,
and many don’t yet know what they need. But they’re well educated with the potential for higher earnings. If you don’t embrace them, somewhere else will.
Co-signer rights and responsibilities need to be clearly understood. No one wants to be overextended by a consolidation loan without realizing the level of his or her financial commitment.
Creating Opportunities for Success
Among credit unions, the best solutions generally result in joint efforts. Few financial cooperatives operate as effectively individually as they do when part of a larger group able to tap broader thinking, a greater depth of resources and sharing risk. Few understand that as well as Alice Stevens, chief operating officer at First Financial Federal Credit Union, a $200 million asset community credit union in Wall, N.J., and chair of Member Student Lending LLC, a Credit Union Service Organization (CUSO) devoted to supporting private student loan efforts.
Formed in 2010, the CUSO offers a member-responsive private student loan program using a common underwriting and pricing platform. The program, which consists of both the cuScholar Private Student Loan and cuGrad Private Student Loan Consolidation, includes loan participations to enhance and mitigate risk. Both the need and opportunity for such a CUSO is out there for credit unions that understand how to manage private student loan portfolios, Steven says.
“Student loans have gotten tough press in recent times talking about the burden put on the student. The approach that credit unions take is very borrower-friendly,” says Stevens, who began her credit union career in 1989 at Sharonview Credit Union in Charlotte, N.C. “Our portal is designed to provide a tremendous amount of education and we want to make sure they know the lowest possible way to finance the loan. We want to create opportunities for success.”
Discussions began in 2009 between LendKey and 20 progressive New Jersey credit unions about opportunities in private student loans, which already were gaining notoriety for high balances and
questionable servicing. LendKey had the software to support not only all aspects of student loan origination, but also the ability for loan participations, something that participating credit unions knew they’d need to spread the risk.
The group also knew there was a pent-up demand among New Jersey students, who were having difficulty finding funding for higher education, and that building relationships with schools – and exhibiting a sufficient pool of capital – would be required to become a go-to resource for students seeking loans. “I had experience (with Bellwether Community Credit Union) in Manchester, N.H., to find financing to support multi-family housing,” Stevens says. “Because of the model, it appeared to me that if we were to
all pool money we’d make a much bigger splash in the market, get into more schools and make more of a difference.”
That knowledge led to the founding of Member Student Lending LLC, formed by 17 New Jersey credit unions that committed a total of $50 million to underwrite the original 2009-2010 program. Potential borrowers applied on the LendKey platform through one of the participating credit unions, which became the lender of record holding 1/10 of the loan, with the remaining portion being equally divided among 9 other credit unions in the network. LendKey software drove the participation loans.
“We started with an operating network, not a CUSO,” Stevens says. “In 2010 the program went national through CUNA’s sponsorship and national marketing. We decided to create a CUSO that would allow us to get bonded and put more structure around the group to protect participating credit unions, which has grown to more than 150 today.”
In addition to in-school loans for current students, the CUSO participants also offer consolidation loans, a field Stevens says is growing. It’s also a smart move because, in addition to saving the students money, the loans also are written for people who now have jobs and can immediately begin paying the loans back. The following chart from Members Student Lending LLC illustrates how consolidation loans can save consumers significant funds when it comes to paying back student loans:
Member’s Existing Private Student Loans
Loan Type Loan Balance
(current) Interest Rate (Remaining Loan Term Months)
Monthly
Payment PaymentsAnnual Cumulative Payments Total Interest Paid
Loan 1 $15,000 9.00% 120 $190 $2,280 $22,802 $7,802 Loan 2 $15,000 10.00% 120 $98 $2,379 $23,787 $8,787 Loan 3 $20,000 11.00% 120 $276 $3,306 $33,060 $13,060
Total $50,000 10.00% - $664 $7,965 $79,649 $29,649
cuStudentLoans Private Student Loan Consolidation
Loan Balance
(current) Interest Rate (Remaining Loan Term Months)
Monthly
Payment PaymentsAnnual Cumulative Payments Total Interest Paid
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The CUSO currently has 16,000 in-school loans among its members and 3,900 consolidation loans. The consolidation portfolio, which first launched in 2011, accounts for more than $200 million in loans. “I think the growth level shows just how attractive a loan product this is,” Stevens says.
The Future of Student Loans
Consolidation loans may represent the future of the U.S. student loan program. In any event, they add a dimension of immeasurable benefit to those who qualify, savings millions of dollars in repayment amounts that can be parlayed into supporting the economy in other ways. They also add a new high-performing asset to loan portfolios, one in which the reward well outweighs the risk.
According to data from the National Credit Union Administration, student loans are on the rise once again as more credit unions become involved with student loans.
Currently 607 federally insured credit unions offer some type of student loan program, each with an average 2.0 CAMEL rating. Student loans totaled more than $2 billion at the end of 2012, up 36% from less than $1.5 billion the year before. By June 2013, the total had risen another 13% to about $2.3 billion and continues to climb. During the same 18-month period, delinquency rates hovered around an average 1.25%, and charge-offs were half again as much.
All trends point in a positive direction for bank and credit union involvement in student loans, with sound underwriting criteria and technological advancement keys to helping set the stage for more growth.
Consolidation loans and expanding the definition of “student” to include adult learners and other nontraditional students may also help the discipline grow, making credit unions and banks even more significant players in this exciting new area.
Acknowledgements
LendKey would like to thank all the financial institutions that have helped make student lending viable in the face of challenging odds. Special thanks go to Alice Stevens and the credit unions that are members of Member Student Lending LLC, the National Credit Union Administration and CUNA Strategic Services for providing data and input for this publication, and former student Shelby Jenkins for proving the validity and availability of consolidation loans for making life after college just that much more manageable.
About the Author
Vince is chief executive officer and founder of LendKey, driving the vision and strategy for the company while overseeing the executive management team. Vince has extensive experience running successful financial services and high tech companies nationwide. Before founding LendKey, Vince was the COO of DealerTrack, which built the nation’s first and largest credit portal connecting automotive dealerships to banks and credit unions. DealerTrack had a successful public offering in 2005 and today processes over 35% of all auto finance loan applications in the U.S. Previously, Vince was President of Ameritrade’s Institutional Client Division and was the CEO of OnMoney.com, an online personal financial management website. Vince has also held senior level positions at Citigroup including CTO of their U.S. Consumer Bank and COO of Citi Financial Interactive. He began his career at IBM and has a Bachelor of Science degree in computer science from Polytechnic University.
About LendKey
In today’s climate of increased regulation and credit scrutiny, it has become much more difficult for lenders to launch cost effective lending programs. Significant investment in lending infrastructure and resources adds to the challenge of entering markets and experimenting with new asset classes.
LendKey is a cloud-based technology company that provides the essential infrastructure for any party to quickly, securely, efficiently and profitably lend to anyone else. Its platforms allow anyone to affordably set up a full-scale, fully compliant lending operation within weeks, as well as tap into a community of like-minded lenders.
