By Christian Widhalm, SVP of Lender Partnerships
Credit unions have shown a growing interest in offering private student loans in recent years due to high yields and an easy entry point into the growing digital lending market. As of March 2018, credit unions held more than $4.4 billion in student loans,1 up 14% from the previous year.2
A big driver has been rising consumer demand for private student loans and refinancing outstanding student loan debt, making this asset class extremely compelling for credit unions of all sizes. Student loans provide credit unions an excellent opportunity to serve their members’ needs, and they are an excellent entry-level product to attract new members. The yields on private student and student loan refinancing are strong, with net average yields ranging from 5% to 8%, and the asset class has historically performed well from a credit quality perspective.3
While a compelling case can be made for adding student loans to a portfolio, some credit unions may be wary of committing too much of their balance sheets to this asset class for a variety of different reasons. Fortunately, for those credit unions that seek the benefits of student lending, but wish to maintain liquidity, there are several alternative solutions to mitigate balance sheet risk including options to sell, invest and hold.
Forward Sale (Sell). For credit unions that wish to serve their members’ needs for student loans, or who hope to use the offering to attract new members, originating loans for sale is a way to gradually enter the market while learning the dynamics of the asset class. LendKey’s forward sale program allows the the originating credit union lender to initially fund 100% of the loan, but achieves full liquidity upon sale to the secondary market within a short time frame. This makes for a highly efficient use of its balance sheet while mitigating credit risk. Furthermore, the originating lender maintains the member relationship and has an opportunity to cross-sell other products and services.
Since 2015, LendKey has enabled credit unions to originate over $235 million in student loans through the forward sale program.
Participation Networks (Invest). Credit unions that wish to allocate some capital to student loans, while diversifying their assets, can invest in this asset class by joining a participation network and purchasing participation interests in student loans. In LendKey’s participation model, as many as ten lenders can pool their resources to make loans under mutually-agreed upon underwriting and pricing policies. The originating lender approves the loan and retains a 10% ownership stake. The other nine lenders independently review each loan file before purchasing proportional participation interests of the remaining 90% of the loan. Like the forward sale transaction discussed above, the originating lender retains the member relationship. Since each lender holds 10% shares in a variety of loans across the U.S., the participation network can improve the credit unions’ balance sheets while reducing the concentration risk potentially associated with lending in a small geographic region.
Since LendKey’s founding in 2009, over 220 credit unions have enrolled in LendKey’s participation program, originating over $1 billion in private student and student refinancing loans combined.
Custom Programs (Hold). Finally, credit unions that wish to commit a greater level of capital to student lending have the option of tailoring a custom program and holding 100% of the loans on their balance sheets. The originating lender applies its own underwriting and pricing parameters, and has the opportunity to brand and market the student loan products as it wishes. The credit union holds 100% of the loans and maintains the member relationship. While credit unions overall are making increasingly effective use of their balance sheets (the national loan-to-share ratio is currently just under 81%), there is clearly room for many credit unions to deploy their balance sheets more efficiently in higher yielding asset classes such as student loans, and custom programs are a means to achieve this goal.
LendKey has generated over $850 million in student loan volume through custom programs with credit unions since 2009.
While the sell, hold and invest options offer a range of solutions based on a credit union’s liquidity objectives and risk tolerance, all three solutions generate new members. Since 2009, credit unions working with LendKey’s various programs have added over 35,000 new members.
Regardless of which option a lender prefers, LendKey is a strong partner for credit unions that want to deploy their balance sheets more productively and enhance services for current and new members. LendKey is the recognized leader in digital lending services, and the company pioneered the Lending-as-a-Service model for financial institutions. LendKey provides end-to-end solutions that include marketing support, loan origination, servicing, credit decisioning, administration, and liquidity management. By improving lives with lending made simple, the company’s innovative technology and streamlined processes enable credit unions to generate loan volume in just a few weeks after partnering with LendKey.
Every institution comes to the table with unique goals, balance sheet, and risk priorities. Technology solution partnerships should not limit institutions to a one-size-fits-all digital lending program. Choosing the right level of commitment – sell, invest or hold – allows a credit union to find a solution that meets its objectives, while providing access to the education financing students need to realize their dreams.
Need help managing liquidity for your student loan portfolio? Email firstname.lastname@example.org for more information today.
1SNL data per the most recent quarter in July 2018
2Data provided by CU Times via https://www.cutimes.com/2018/01/18/credit-unions-fill-loan-gaps-for-more-students/
3Average yield of LendKey’s partner lenders in Private Student Lending and Student Loan Refinancing combined as of July 2018