How to Help Families Not Break the Piggy Bank to Fund Education
Posted by Michael VanErdewyk
Founder and CEO at YourLoanAdviser
Benjamin Franklin once said “An investment in knowledge pays the best interest”. I’ll add to that and say “The lifetime return of a college education is the best investment”, with lifetime earnings over $1,000,000 more than someone without a college degree.
In 2014-15, the average annual total tuition, fees, room and board rates at a four-year public institution was $20,000, up from $14,000 in 2006-07 — a nearly 43% increase, according to Sallie Mae. Likewise, the full cost of attending a four-year private institution was $44,000, up from $32,000 in 2006-07 — a 37.5% increase.
While families ask young adults to find ways to fund their college education, at these prices even the most promising high-school graduate usually cannot singularly afford this investment. Families step in using their current incomes or savings to foot the difference between scholarships, grants and federal student loans. In 2015, family contributions to higher education amounted to $163 billion, according to Sallie Mae. The majority of this money came from income and liquid savings.
Banks and credit unions are in position to help families not break their piggy banks by providing in-school private student loans (PSLs). Unlike federal student loans, in-school PSLs operate with stringent criteria set by the lender, such as what school they attend, what type of program or major they enroll in and their personal financial and credit history. Often a co-signer is required on these loans.
These types of loans are a low-risk offering for financial institutions that both help students finance their college education and keep families’ savings intact. Interest rates vary on in-school PSLs depending if the loan is a fixed or variable rate and are typically in the 4% to 8% range.
With the total cost of higher education in the United States currently over $450 billion annually, only $10 billion of the annual cost is funded by Private Student Loans, compared with more than $160 billion in family contributions. Much of the family contributions come from parents acting against their own economic wellbeing — racking up credit card debt, taking out personal loans or second mortgages. This means banks and credit unions have a tremendous opportunity to help their customers and members finance college in a better, smarter way. In the current environment, there’s no better time than now to offer PSLs, particularly those that are fully insured by a trusted and highly regulated third party.
Banks and Credit Unions enter the student loan asset class for many reasons, including diversifying their lending base, increasing their investment returns and profitability, and offering a product that creates stickiness with the Millennials who will need other financial products in the future like credit cards, checking or savings accounts, car loans and mortgages.
If a bank or credit union wants to enter the private student lending asset class, they should strongly consider working with Private Student Loan platform-as-a-service solution providers that can help them market and acquire borrowers, originate, service, insure and create liquidity for these loans on your behalf. There are proven, established programs available or you can build a custom loan program based on your unique business goals and your customers’ or members’ needs.
Private student loans allow families to contribute to the rising costs of higher education while holding on to their income and savings. They’re also a lower risk loan for financial institutions as the underwriting criteria starts with the lender—not the government.