Credit Unions Starting to Require Hands-On Approach to Student Loans
Posted By Donna Fuscaldo on February 5, 2016 at 12:43 pm
Cosigning a student loan gets a thumbs down from many financial planners, who argue that parents don’t realize the impact a potential default will have on their life and financial stability. After all, if a child can’t pay back a loan, the parents are on the hook for it. That increased payment could mean they have to wait longer to retire or save less for retirement. Not to mention, it increases the amount of debt they owe, potentially shutting them out of the borrowing market for a new car or new home.
However, a few credit unions and banks are trying to limit the risk of students defaulting, arguing that the old hands-off approach to borrowing money with a cosigner for college just doesn’t work anymore.
“With most of the student loan lending platforms, the student takes out the loan as a freshman and wouldn’t get a bill for four-and-a-half years,” says Vince Passione, Chief Executive of LendKey, the lending-as-a-service platform for student loans providers. “It’s important for students to know how much they owe.” It’s also important for parents to understand what it means to be a cosigner, which is more than just a character reference, he says.
The traditional way student loans, both private and federal, work? The student applies and gets money, which goes directly to the school, and then doesn’t have to think about it until after graduation when the first bill arrives in the mail. Often, the student has no clue how much he or she owes, or how much the monthly payment is going to be. Multiply that across two or three different loans, and it can easily create a precarious situation. If students can’t find a good-paying job immediately after graduation, they struggle to pay back their loans – the main reason why so many student loans are in some form of deferment or default. Now, however, credit unions are gravitating toward a more hands-on approach – one that requires students and parents to be more involved with their loans from the day they apply.
Student loan cosigning isn’t going away
The need for parents to cosign student loans isn’t going away, as the price of a four-year degree at both private and public schools continues to rise. Not to mention, those graduating with a four-year degree are still going to have significantly higher lifetime earnings than those who have only a high school degree. By 2020, the Center on Education and the Workforce at Georgetown University predicts that 65% of all jobs will require post-secondary education, with 35% of job openings requiring a bachelor’s degree.
Because of that, many credit unions are getting into the student loan lending market. They figure that many of their members already have existing student loan debt, as well as children who they want to help pay for school. “Our member base has a strong appetite for student loan programs,” says Aaron Aggerwal, assistant vice president of education lending at Navy Federal Credit Union, which just got into the student loan lending market last year. “Nearly one million of our members carry student loans in some form or fashion.”
Student borrowers held accountable for loans
In order for a parent to cosign a student loan with Navy Federal Credit Union, the student has to agree to make some form of payment, whether it is $25 or interest-only payments each month, from the time they take out the loan. Aggerwal says that not gets students in the habit of making regular payments, but it also keeps them aware of how much they owe. It can also lower the overall cost of borrowing because the student will be paying off some of the loan while in school, as opposed to waiting for graduation.
The loan also comes with a cosigner release, which lets parents off the hook after the student has made a certain number of on-time payments. The credit union also has a student loan consolidation program available to students, which can be another way to get their parents’ name off the debt. “We want to set our members up for financial success, so students are required to make some form of payment while they are in school,” says Aggerwal. “This gets them in the habit of monitoring their student loans and keeps them aware of their overall obligation.”
In order to take advantage of these programs, the borrower (though not the cosigner) has to be a member of the credit union. While that limits the access of the program to borrowers, Navy Federal Credit Union isn’t the only credit union creating student loan programs like this. According to Passione, 320 banks and credit unions are using the LendKey’s lending platform to both lend students money for school and hold them accountable from the start of the lending process. With these platforms, borrowers of private loans become comfortable with the concept of taking out a loan and having to manage the expense every month, says Passione. “They begin to build good payment habits that build up their credit score.”