By Alison Herrick, Partner, Wipfli
Most student loans are federal loans issued by the Department of Education. But private loans that fill gaps in the system offer a potential growth area for credit unions.
Is now the right moment for your credit union to start exploring offering student loan products? Keep reading to learn more about benefits, risks and how to create an effective student loan game plan.
Why Do Student Loans Offer a Growth Opportunity for Credit Unions?
With the passing of the One Big Beautiful Bill Act (OBBB), the federal government is putting new limits on federal student lending. Among other changes, new caps on the amount that graduate students are eligible to borrow could increase the number of students who need additional funding sources to cover the full cost of their education.
Private student loans offer a potential solution that can help students fill funding gaps. Over the next few years, students may increasingly max out their federal borrowing power and then turn to credit unions and other financial institutions to make up the difference.
Credit unions in particular may benefit, because they often choose to offer student loan products through a CUSO or in partnership with another credit union. This can make the process of servicing loans simpler and may also allow for easier entry into the student loan space.
What Are the Risks and Compliance Issues Around Student Lending That Credit Unions Need to Consider?
Credit union leaders should carefully evaluate the potential risks that come from offering student loan products. These include potential defaults, deferment periods and compliance harm.
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Loan default: Student loans are typically unsecured, relying on the credit quality of the borrower or the borrower’s parents. The default risk may be more significant here because a student’s ability to repay largely depends on completing their degree, which not every student will do.
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Deferment periods: Student loans typically go into deferment while a student is in school, and in some cases, for up to six months after graduation. As a result, credit unions issuing loans won’t see a return on those loans until after the student graduates.
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Compliance risks: The major compliance risk to be aware of here is consumer harm. Student loan borrowers are typically young adults who often lack the financial awareness that older borrowers may possess. Properly educating borrowers on interest rates, repayment terms and how borrowing affects their credit is essential.
What are the key steps for credit unions to develop a successful student loan product? Credit union leaders should proceed thoughtfully through the process of developing and offering student loan products. Key steps include developing a roadmap, building lending relationships with students, evaluating risks and preparing for heightened regulatory scrutiny. You may also want to consult with a third-party advisory firm with experience in financial services and regulatory compliance for additional guidance.
1. Assess Your Risks
Before you do anything else, conduct a risk assessment to determine if it makes sense to offer student loans. Consider if you have the right underwriting capabilities in place and if adding a student loan portfolio would generally make sense for your business. You should also check your charter to make sure it doesn’t contain language that could affect your ability to engage in student lending.
2. Decide if You Want a Partner
Early on, you should also start thinking about whether you want to handle your lending entirely in-house or partner with a CUSO or another credit union. The latter approach lets you outsource servicing and compliance while also allowing you to benefit from economies of scale. However, you’ll still take on the credit risk and will also miss out on the chance to develop a deeper relationship with your borrowers.
3. Develop a Roadmap
Develop a roadmap to guide your credit union through the implementation of new student loan products. The roadmap should begin with strategic alignment and board approval, followed by a feasibility analysis to assess member demand, competitive considerations, and financial impacts. It should then progress to detailed program design, including underwriting standards, pricing, portfolio and concentration limits, compliance readiness, and operational planning.
Finally, the roadmap should address post launch monitoring, ongoing governance, and performance oversight. If third party partners are used, the roadmap should explicitly incorporate vendor selection and due diligence activities.
4. Build Lending Relationships
Reach out to your members who have children nearing college age to let them know you’re now offering student loans. Connect with local high schools and ask if you can offer financial workshops to educate students on their college loan options and help them prepare to navigate the lending environment.
5. Manage AI Risks
If you’re incorporating AI into credit approval or other aspects of your lending process, be sure you are managing the associated risks. For example, are you complying with fair lending laws and taking steps to watch out for machine bias? Do you know exactly how AI is being used so you can implement appropriate safeguards?
You will need a strong AI monitoring process in place, audit checks and complaint monitoring. You’ll also need a clean, organized data foundation or your AI outputs will be of poor quality.
6. Prepare for Regulatory Scrutiny
Regulators like to give extra scrutiny to new product offerings. If you start issuing student loans, be prepared that you may need to have your ducks in a row even more than usual.
7. Evaluate Your Portfolio Regularly
Regularly evaluate your portfolio to identify loans that may be going bad to make sure you have a sufficient credit loss reserve to cover a default on those loans. You can use the NCUA’s simplified CECL tool to do this. If you are just starting to issue student loans, you won’t have your own historical data to pull from to help with this analysis, so you’ll need to turn to data from peers as well as broader economic trends like unemployment and the housing market.
What’s Next?
Given recent changes in federal student loan policy, it is likely that students will increasingly turn to private lenders over the next few years as federal loan dollars become more limited. Credit union CEOs should weigh their options here and consider whether adding a loan portfolio could strengthen their institutions.
Connect with Wipfli to learn more.
