Is Your Bank or Credit Union Looking at the
Right Investment Assets?
Posted by YourLoanAdviser Staff
Banks typically take the safe bet, balancing risk against sometimes-lackluster returns. That’s why—despite a few hiccups along the way—they’ve survived over the long run. No one would argue that exercising care when putting an investment portfolio together is a bad move, particularly with regulators looking over your shoulder. But what should small and mid-size banks and credit unions invest in? Some would say real estate or auto loans or heavy equipment leases. But there’s another option, and that is Private Student Loans (PSLs).
One reason to consider PSLs is the evolution of your customer base. Your current customers are aging. Millenials have a well-publicized aversion to financial institutions, and now’s the time to begin creating and nurturing relationships with them that will pay off going forward. At this point in U.S. history, 40 million people hold student debt worth $1 trillion, the largest household debt after mortgages. Fast fact: By 2020—only four years away—18 to 31-year-olds will make up 50 percent of the workforce, with combined incomes of $6.2 trillion. That’s a good reason to start the courtship.
Another reason is PSL quality. PSLs are solid performers, providing a stable return on assets that exceeds the bank’s internal financial thresholds and will likely garner more wallet share from your current customers. According to MeasureOne Private Student Loan Performance Report Q3 2015, private student loans continue to show positive trends in repayment, charge-offs, delinquencies with 90+ day delinquencies decreasing from 2.38% in Q3 2014 to 2.12% in Q3 of 2015. PSLs are rigorously underwritten—and require annual credit reviews. PSLs generally require a co-signer. Federal loans only cover a portion of the cost of post-secondary education. And here’s an interesting thought: you may be lending to students already—in the form of personal loans to their parents.
Private student loans are not going away. In fact, the market is robust and growing—with PSL originations increasing steadily from $2.7 million in 2011 to $4.3 million in 2015.
Consider these facts:
- 25-34 year-olds with four-year college degrees have an unemployment rate of 2.1% vs. 8.4% for high school graduates.
- 60% of students graduate with student loans.
- 69% of student loan borrowers have debt balances of less than $25,000, and only 4% have balances of $100,000+.
- Average payment-to-income ratio has decreased from 15% in 1992 to 7% in 2010.
Earlier I touched on the idea of building lasting relationships with your borrowers. I think the value of that effort is borne out by the experience of SoFi (short for Social Finance.) SoFi has done a great job of capturing a market—in this case, graduates of top schools like Stanford. The organization has only been around since 2011, but it has been really successful in forming close bonds with its borrowers. And it has expanded from student loan refi to mortgages, personal, and parent loan financing. That’s what I call a word to the wise.
Finding the Right PSL Partner
Without doubt, PSLs require special expertise in origination and servicing. The best approach once you’ve decided to go in this direction is to team with a reliable third-party vendor.
You’ll want a partner who has developed a turnkey solution that covers everything from information and analytics to risk management. The right partner should help your team manage the complexity of regulatory compliance, origination and servicing infrastructure. In short, this partner does the heavy lifting. The best partner—and we’re unashamedly blowing our own horn here—offers the optimal combination of information and execution. YourLoanAdviser works from a proprietary database containing 25 years of loan data and has disbursed more than $14 billion in loans to some 920,000 students. We’ve insured $2.5 billion in loan principal and interest.
If there’s one critical takeaway here, it’s that PSLs are a viable asset class when you’re working with a fully regulated insurance company that understands the regulatory landscape and can help you navigate it successfully. Click here for more information on reasons to create a Private Student Loan asset class.