Tried to get a> private student loan from a bank lately? Good luck.
Thanks to the ongoing credit crunch, nabbing a student loan from a bank is increasingly difficult. Since July 2007, 50 banks have suspended private student loans and only about a dozen still underwrite them, according to FinAid.org, which tracks college financing.
One alternative: your local credit union. More commonly associated with serving groups of teachers or employees, credit unions are stepping into the student loan business, hoping to pick up the slack and profits that banks are leaving behind. The unions are poised to do so because they never got into mortgages the way traditional banks did, and are now flush with cash. It is a perfect way for them to get fairly significant return on an asset class, says Jim Briggs, a financial aid advisor at WiseChoice, which provides students with personalized online college counseling.
This month, at least three credit unions are slated to start offering private student loans, including Southern Lakes Credit Union in Wisconsin, West Branch Valley Federal Credit Union and Merck, Sharp & Dohme Federal Credit Union, which are both in Pennsylvania. In November, New York State s Higher Education Services Corporation, which offers private education loans to students, added the credit union SEFCU to its roster of choices. (It joined Discover Student Loans and PNC Bank.) The following month, it also added Fynanz, a company that originates, services and underwrites private student loans for credit unions. In total, since May 2008 at least 20 credit unions have entered the marketplace through Fynanz's network and at least 82 have entered through Credit Union Student Choice, which processes credit unions loans and provides regulatory compliance.
But beware of pitfalls. For the most part, interest rates on private student loans offered by credit unions are higher than subsidized federal-student-loan rates. What s more, borrowers credit scores often impact the loan s terms and there s little leniency with repayment. In some cases, just to apply for the loan, you have to show a letter of acceptance from the college or university, so the timing isn t always ideal.
Still interested? Here are five issues to consider before signing up for a credit union s private student loan.
You ll need to become a member
In most cases, in order to receive a private student loan from a credit union, the borrower will need to become a member.
To qualify, the borrower has to be within a credit union s field of membership, which can depend on the company they work for or the location of their home or even place of worship. Then there's a one-time payment of around $25, but depending on the credit union, it can be as little as $5 or as much as $50, says Michael Weber, a spokesman for Credit Union Student Choice.
The borrower might also have to set up a checking account. In the most stringent of cases, a borrower will also need to make several deposits (typically of small amounts), says Josh McWhorter, president of Black Oak Asset Management, a financial planning and advisory firm that specializes in college planning.
Credit score checks
Students applying for private student loans should expect credit unions (like banks) to check their credit score.
Because students entering college have little or poor credit history, many are unlikely to qualify for a loan; instead, they ll need to bring a co-signer in. To be approved by a credit union affiliated with Credit Union Student Choice, co-signers will need to show monthly gross income of at least $1,500 and around two years of credit history, says Weber.
Depending on the credit union, all approved borrowers can get the same interest rate. Others will set a borrower s rate based on the credit score range they fall in, says Briggs.
Interest-rate levels on credit unions private student loans often fall between federal student loans and bank loans.
Federal student loans usually have the lowest interest rates. In fact, interest rates on subsidized Stafford loans are decreasing; for the 2009-10 academic year, rates are fixed at 5.6%; for 2010-11 rates are slated at 4.5%; and in 2011-12 they're set at 3.4%.
The average rate on credit unions loans is just above 6% (almost unchanged from this time last year), says Weber. By contrast, at Sallie Mae, one of the largest underwriters of private student loans, current rates range between 4.25% and 12.75%.
Rates on most private loans tend to be variable, meaning they change on an ongoing basis. At Merck, Sharp & Dohme a credit union which will start underwriting private student loans on Thursday rates will set at prime rate plus three with a floor of 6.99% and will reset quarterly.
Compared with credit unions, banks set interest rates on a much wider band, which can be as large as eight percentage points, says Tim Ranzetta, CEO of Student Lending Analytics, a student-loan research and advisory firm.
Some credit unions require that a student show a university s acceptance letter before they apply for a loan.
In order to make sure the money isn t going to buy a motorcycle, someone needs to be in contact with the school to make sure that the right amount of money is being loaned to the student, says Dale Edwards, vice president of lending at Merck, Sharp & Dohme, which will require an acceptance letter before doling out a loan.
Like federal student loans, most credit unions loans don t require payment while the student is in school, and students often have a six-month grace period before payments are required.
After that, though, the borrower has few choices. While federal loans offer repayment plans that are proportional to a borrower s income, private student loans from credit unions don t.
One option that s widely available seems to be more dangerous than helpful. During the first two years of repayment, credit unions will amortize the loan over a 40-year period in order to minimize monthly payments for the first two years, says Weber. After that, the remainder of the loan will need to be paid over 18 years (for loans of $40,000 or less) or 23 years (for loans of more than $40,000) and the monthly amount due will be higher than it was before amortization.
In addition, borrowers are stuck with private student loans (from credit unions and banks) for life, and loans that aren t paid go into collections. In most cases, these loans aren t dischargeable through bankruptcy.