Monday, September 17, 2018

Paper Examines Private Student Loans at CUs

A paper recently published in the Review of Quantitative Finance and Accounting examined credit unions' entrance into the private student loan market and exposure to private student loans between 2011 and 2015.

Credit unions, unlike banks, have been required by the National Credit Union Administration to report their holdings of private student loans, since 2011.

According to the paper, private student loans have been the fastest growing loan category among credit unions, expanding from $1.03 billion at the end of March 2011 to $3.53 billion at year-end 2015.

The paper found competition with other depository institutions, strong loan demand, educational field of membership, and proximity to campus were all driving forces behind credit unions having more exposure to private student loans.

Here are some of the other findings from the paper.
  • There is a positive relationship between the holding of long-term rate sensitive assets and private student loans. The author posits that private student loans typical have variable interest rates. By increasing their holdings in private student loans, credit unions will reduce their interest rate risk.
  • Credit unions with a higher loans-to-deposits (shares) ratio were more likely to be involved in private student loans.  
  • Lower capitalized credit unions were more likely to be exposed to private student loans.
  • As credit unions get larger, they are more likely to have a greater concentration in private student loans.
  • Private student loans have a negative and statistically significant effect on a credit union’s return on assets. The paper argues that credit unions that entered the private student loan market had higher non-interest expense, as they added staff and resources to originate and service these new asset class.
  • Concentration in private student loans did not affect risk at credit unions. However, this may be due to student loans still being in deferral and not yet seasoned.
  • Many credit unions that entered the private student loan market did so through participation loans. However, as participation loans make up a greater share of private student loans, there is an increase in delinquency rates.
Read the paper.

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