By AnnaMaria Andriotis
The largest credit union in the U.S. by assets has begun
offering private student loans, making Navy Federal Credit Union
the latest lender to enter a market that is seeing increased
competition and innovation.
The Vienna, Va.-based credit union began accepting applications
for student loans on Saturday and is offering to refinance existing
student loans. It is the first time the institution, which has more
than $64 billion in assets and more than 5.5 million members, has
ventured into the private student-loan arena.
The student-loan market has become less risky for lenders in
recent years as institutions tighten their requirements, and it
offers the potential to develop relationships with young adults who
may be looking for a broad range of banking services now or in the
future. Other lenders that have expanded their activity in the
student-loan business include Citizens Financial Group and Social
Finance, better known as SoFi.
Refinancing especially has taken off as lenders look to poach
the most desirable borrowers, those with high credit scores and
cosigners, from other lenders. Citizens Financial began refinancing
private student loans early last year and began replacing federal
student loans with private ones in September. SoFi originated $1.25
billion in student loan refis in 2014, up from $224 million a year
earlier. The firm, which refinances private and federal student
loans into new private student loans, said it refinanced more than
$500 million in student loans in the first quarter of this
year.
Unlike federal student loans, which are available to all
students and have high default rates, private student loans are
exhibiting losses that are low and declining. Gross charge-off
rates--the percentage of dollars in outstanding loans that lenders
have written off as a loss because they don't expect
repayment--fell to 2.42% in the third quarter of 2014 from 3.11% a
year earlier, according to the latest data from MeasureOne, a San
Francisco-based firm that tracks student loans. That was the lowest
level since at least the third quarter of 2008, the furthest back
the firm tracks the data.
For lenders including Navy Federal, it is also a market-share
play. Nearly one million--or about 18%--of the credit union's
members have federal or private student loans, says Aaron Aggerwal,
assistant vice president of education lending. (The institution
reviewed members' credit reports to come to that figure.) The
credit union aims to offer many of them the opportunity to
refinance into lower interest rates, thereby closing out a loan
that is currently being paid to a competing lender and originating
a new one with the credit union.
Navy Federal also expects many of its existing members will need
student loans for themselves or their children in the coming years.
About half of its members are under the age of 35 and, among that
population, more than 500,000 are younger than 18, says Mr.
Aggerwal.
Wells Fargo, the second largest private student lender by
origination volume, has also been moving to increase originations,
banking on the likelihood that its private-student-loan borrowers
will come to it for mortgages and other loans when they need them.
The lender rolled out loan modifications last year to offer
repayment options to some borrowers who were having a hard time
keeping up with their payments--a rarity in the
private-student-loan industry and a move Wells said it hoped would
foster customer loyalty.
Wells Fargo says the dollar amount of its private student
lending has been increasing 5% to 6% on average each year for at
least the past three years. The lender sold its portfolio of
federal student loans last year in order to grow its
private-student-loan business and focus more on its existing
customers.
New private student loans for undergraduates and graduates
attending college totaled just over $7 billion for the 2013-14
academic year, up 6.2% from the prior year, according to
MeasureOne, whose data account for at least 80% of the private
student-loan origination market. (These figures exclude
refinancings.)
It was the third consecutive increase since the market bottomed
out in 2010-11 because of the financial crisis and the subsequent
tightening of lending standards. In each of the past few years,
less than 10% of the dollars extended in private undergraduate
student loans has gone to student borrowers without a cosigner--an
adult, often the student's parent, who signs on to the loan and is
also responsible for payments. By contrast, the figure was 23.3% in
2008-09, according to MeasureOne.
Navy Federal is offering only variable-rate loans, on which
interest rates can adjust as often as every quarter. The rates are
pegged to the three-month London interbank offered rate. For
students going to college, the rates currently range from as low as
3.25% to 9.51% depending on creditworthiness, whether there is a
cosigner and other factors. The rate range for refis is higher, at
3.76% to 10.25%. Borrowers can get a discount of a quarter of a
percentage point when they set up automatic bill payments for the
loan. Loan repayment periods run 15 years.
The interest rates on federal student loans currently given out
are fixed. Most private student lenders offer borrowers a choice
between fixed and variable interest rates. Some of the lowest
private student-loan interest rates are offered on variable-rate
loans, but those rates and their monthly payments can increase
substantially over time if prevailing rates rise.
By refinancing federal loans into private loans borrowers often
lose many of the flexible repayment options the government offers,
including debt forgiveness for public-service jobs and some
income-based repayment programs.
Navy Federal says borrowers without a cosigner will generally
need a FICO credit score of at least about 660 (on a scale that
ranges from 300 to 850). If there is a cosigner, one of the two
borrowers needs at least roughly a 640. But it says it will
consider lower scores from borrowers who have a long relationship
with Navy Federal or many assets there or have other loans with
Navy Federal that they've handled well.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
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