Recent Trends in Private Student Loans
The market for private student loans is constantly changing. As recently as three years ago, scores of lenders participated in the private student lending business, offering a wide variety of products for different types of students at competitive rates. However, the credit crisis of late 2007/early 2008 sparked a major shift in how private student loans are funded, and thus offered to you, the consumer.
The credit crisis has changed, perhaps forever, how you obtain a private student loan from a lender, a dynamic that is helpful to understand as you shop for a private student loan.
Follow along below for a detailed analysis of these trends and what they mean for you as you consider a private student loan.
The Credit Crisis – a Meltdown that Affected Everyone
Everyone has heard of the credit crisis and how the mess on Wall Street has affected Main Street. Private student loans are no exception.
In 2007, there we more than 80 lenders offering a variety of private student loan products to students. The reason there were so many lenders is because Wall Street made “oceans of capital” available to these lenders. Lenders would make loans to students and then eventually sell these loans to a Wall Street facilitated “Issuer” of Asset-Backed Securities (ABS). An investor could invest in a slice of this ABS and have comfort in knowing that the Issuer’s debt was guaranteed/backed by the cashflows earned by the private student loans underlying the ABS.
Because there was so much demand for these securities (also known as “liquidity”) lenders had many options for how they could fund their loans. In the old days, it was fairly simple: banks used the deposits they collected from their customers and then lent those deposits out as private student loans.
However, with all this new liquidity there was a new form of lender, known as a finance lender, who could participate in the market without having to be a deposit-collecting bank. A Finance Lender could obtain a line of credit from another bank or financial institution, lend private loans to a student, and then earn income from the “spread” or difference between the income the lender paid for the line of credit and the interest the lender collected from the student. The Finance Lender also earned a premium for selling those loans to an Issuer who would add those loans to the pools underlying the ABS.
When the credit crisis broke out, the Liquidity dried up and the ABS market was shut down completely. With nowhere to sell their loans, Finance Lenders saw their credit lines pulled from their funding sources. The private student loan market dropped from over 80 lenders to less than 10. The only lenders remaining were those who could continue to tap bank deposits to fund their loans and hold those loans on their balance sheets.
After the Crisis – Advantage Big Lender
What do you think happens when a market of 80 lenders reduces to a market of less than 10 large banks? You guessed it – decreased competition. The lenders who were left standing found themselves in a more advantageous position than they were before. 2008 marked a tough year for students. With less lending capital available, students were faced with rising rates and stricter credit criteria. It was not uncommon to see students and co-signers with good credit scores see rates of 10-12% with 4% or higher origination fees.
Enter the Credit Unions and Small Banks
2009 was not much different than 2008, but with a glimmer of hope for students. Out of nowhere over 100 credit unions and some smaller community banks entered the private student loan market. These lenders, often not-for-profit, offered very attractive rates with credit criteria that were less strict than many of their competitors. Students were starting to see rates of 5-8% with zero origination fees. Unfortunately, these credit unions only had so much capital to offer the market. In a market of $10 billion, credit unions and small banks represented only $300 million – a small market share.
2010 – The Year of the Consumer
As credit unions and community banks continue to enter the space, the market is experiencing more competition. In addition, with the elimination of the FFELP loan program, it is more important than ever for lenders to win private student loan business in order to establish a relationship with the coveted “millennial consumer.” Over the course of the past few months, the largest lenders have lowered their rates in response to increased competition from these smaller lenders who have entered the space. As of this writing, there are more than 250 small banks that have entered the lending space. These lenders are contributing more and more capital and eating away at the market share of the largest lenders. In addition, families can now take advantage of expert tools such as the Student Loan Marketplace to assist them with finding the most favorable rates and terms on their loans.
What does this mean for your family?
Make sure to comparison shop for the loan that best fits your family’s financial situation, taking into account loan options from both national banks and from credit unions or community banks. By carefully comparing loan rates and terms such as Total Cost, Monthly Payment, Interest Rates and Fees, you can determine which loan option is the best for your future.
The Student Loan Marketplace is a great starting point for this task, as we provide you with accurate, side-by-side loan comparisons with “apples-to-apples” calculations of these rates and terms.