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04/12/2017

Do Private Student Loans Hold Opportunity for Community Banks?

Barry Adcock April 12th, 2017

By 2025, nearly 20 million students will be enrolled in college and university undergraduate programs, according to the National Center for Education Statistics. They’ll come from all over the country and internationally, from all walks of life, to study a staggering array of subjects. And virtually all of them will have one thing in common: They’ll worry about how they will pay for their education.

Student loans: Opportunity or crisis?

College costs are high and unlikely to decline anytime soon — if ever. A degree from a public four-year college will cost out-of-state students more than $95,000, data from the College Board indicates. A four-year degree from a private college costs approximately $130,000. Those figures only reflect tuition and fees and don’t take into account other college-related costs like books, rent for students who live off-campus, health care costs and more.

According to the Sallie Mae report “How America Pays for College,” the typical family funds 16 percent of the costs of college through student loans and 6 percent through parental borrowing. While the bulk of student loans are underwritten by the federal government, students are limited on how much they can borrow from the government each year. Parents can borrow additional money from the federal government, but federally funded student loans are rarely sufficient to cover all a student’s costs. Many will turn to private student loans to make up the difference.

In 2014, 69 percent of graduates from public and nonprofit colleges had an average student loan debt of $28,950 per borrower, the Institute for College Access and Success reports. While the percentage of grads with debt rose only slightly between 2004 and 2014, the average amount of debt at graduation increased more than twice the rate of inflation, TICAS notes.

Student loan and student debt statistics have prompted many in the political arena and academia to dub the situation a crisis, and without a doubt, many graduates will struggle to repay their student loans. However, for community banks that have built their business on providing customers with personalized experiences, relevant products, and financial guidance, the student loan industry could present a unique opportunity to develop a new revenue stream.

Breaking the barrier

Currently, the bulk of student loan funding comes from the federal government. A quarter of all college students borrow some money through federal student loans, Sallie Mae says. Nonfederal student loans totaled about $10 billion in the 2014-2015 academic year, according to the College Board. The majority of bank-funded student loans come from big players, while community banks have historically represented a much smaller portion of the private student loan market.

Because student loans are service-intensive, servicing costs have been an obstacle for small financial institutions looking to develop their student loan portfolios. What’s more, community banks have proven slower than mega-banks in adopting the kind of technology that would make it easier and more profitable to underwrite, manage and service student loans.

Yet in many ways, student loans could be a good fit for smaller banks looking to grow a fresh and reliable revenue stream. Community banking is fundamentally relationship-driven and small banks excel at relationship building. Student borrowers could embrace the level of personal attention and service that are hallmarks of community banks. Ample research points to the millennial preference for personalized experiences and to their antipathy toward large institutional banks.

What’s more, smaller banks have a built-in pool of student loan customers. Parental borrowing is a common tactic for families trying to bridge the gap between costs and federal student loan awards. Those parents are already paying for mortgages and car loans, and saving for retirement. Developing student loan business among existing bank customers could be as simple as mining data a small bank already has to identify families with children approaching their college years.

Solutions for seizing the opportunity

Community banks that want to develop their student loan portfolio are not without options. Several companies have emerged in the past decade that allow a smaller bank to outsource some of the most challenging aspects of student loan business. These companies will insure, originate, and service student loans on behalf of smaller banks who need only provide the funding for the loans.

Another option is to specialize in refinancing existing student loans. While federal student loans typically offer repayment flexibility and generous forgiveness options, private student loans are often far more restrictive. Community banks may find a unique opportunity in refinancing existing private student loans for qualified borrowers who want a better interest rate or more manageable repayment plan.