Private Student Loans, Smart for Both Borrowers and Lenders
Posted by Michael VanErdewyk
Chairman and CEO, YourLoanAdviser
Today’s college students are savvier about their higher education choices – which school to attend, what to major in and choosing how to pay for it. These late Millennials and early GenZers simply don’t accept the status quo.
After selecting the right school and the program major that will help them succeed after graduation, this socially and digitally connected generation shops around for the best financing options to fund the cost of college. YourLoanAdviser estimates that many students who scoop up as many scholarships and grants possible and max out on federal student loans and still face a $10,000 per year funding gap to pay for the full cost of attending college.
When these borrowers and their families explore private student loans (PSLs) to fund the education gap, they appreciate the flexibility and future refinance/ consolidation options that other financing products and the government cannot offer.
While the ROI on obtaining a college degree is worthwhile, costs continue to rise with little signs of slowing. For banks, credit unions and lenders looking to diversify their product offerings in a profitable, low-risk way, PSLs should not be overlooked.
The Great Recession from the 2008/2009 banking crisis caused many private student loan lenders to close and the elimination of their federal FFELP program resulted in financial institutions no longer being able to offer federal student loans. Today is a different time, economy and environment. The PSL industry has evolved away from being dominated by large money center banks offering limited PSL options. Today, there are over 500 banks, credit unions and alternative lenders offering robust, competitive and very attractive PSL options that have substantially broadened the opportunity to more types of borrowers.
Given the protracted low interest rate environment for lenders and a real need to finance the education gap, private sector lenders have chosen to provide capital at attractive rates to borrowers in the PSL market. Today, these progressive lenders see PSLs as a year-round product by offering refinance/consolidation in addition to in-school loans. Both products serve as on-ramps to developing deep customer relationships with Millennials.
Lender mindsets about PSLs have changed and that has been a key to their success.
With the help of turnkey PSL platform-as-a-service solutions providers like YourLoanAdviser, traditional as well as non-traditional lenders are able to participate in the PSL market, profitably and with the support of regulators.
For lenders, PSLs present a big opportunity to direct more students to lower-cost private loans while keeping parents from paying for college with high interest credit card debt, personal loans, savings, withdrawals from retirement accounts or second mortgages so close to their retirement. PSLs can offer lenders stable returns, exceptionally low default rates and up to 100% loan protection with private student loan insurance offered through YourLoanAdviser Surety Company and programs like Connext Private Student Loans Powered by YourLoanAdviser for banks and alternative lenders.
In fact, another sign that PSLs are growing is that YourLoanAdviser Surety Company reached a significant milestone earlier this year—it has insured more than $2.6 billion in PSLs and helped over 100,000 students finance their higher education.
PSLs will continue to garner attention from lenders. PSLs have dramatically lower default rates than those on federal loans—2.5% vs. 11.8% respectively, according to a MeasureOne Private Student Loan Report published late last year. That’s because PSLs have underwriting criteria and analytics in place that go beyond FICO scores to predict a student’s ability to repay.
College costs will no doubt continue their upward trajectory. But PSLs are here to stay, helping bridge the gap for students and families looking to achieve their higher education and future dreams. And becoming an attractive and profitable asset class for lenders.