For months, mortgage industry leaders, reading the economic tea leaves, have been making a concrete effort to diversify their products and services. With rising interest rates, home price appreciation and a lack of available homes shrinking the market of eligible new homebuyers, they’ve been looking for new revenue sources.
Ironically, those rising interest rates which are deterring potential homebuyers may help lenders come up with other offerings that capture coveted Generation Z borrowers (born from 1997-2012) earlier than ever—and keep them from defecting to other banks when they need a mortgage in a few years.
Examples of these products and services are private student loans/microloans and student loan refis. What is the reasoning behind this?
Meeting Pent-Up Demand
First, lenders, anecdotally, are seeing pent-up demand for student loans. Those students who took a year or two off when the pandemic changed the college experience are excited to return to physical classrooms, dormitories and football games. So now they are in need of more financial options to help cover their educational costs.
Of course, many of these students will seek a federal loan first, since they tend to be priced lower than private loans, although their rates (like many private loans) are going up. At this writing, undergraduate loans have jumped from 3.73% to 4.99% which is a 34% increase – the highest it’s been in several years. Graduate loans are now at a 6.54% interest rate and PLUS loans have rates as high as 7.54%.
However, for federal loans, the maximum undergraduates can borrow is $5,000-$12,500 per academic year. The maximum for graduate students is $20,500.
What happens when a student needs additional funding to attend the public or private institution of their choice, beyond the maximum loan amounts? Or what do students do when the rising rates of their government loans are becoming untenable? In these cases, banks can be a lifeline—either to help students consolidate and refinance all their loans (both public and private), originate new private loans to make up for what the federal loans don’t cover, and/or provide private student microloans.
This flexibility can be especially attractive for students of modest means who are close to dropping out without a boost. After they start their educational journey, unexpected expenses, such as the cost of a new laptop, books and resource materials, or extra lab fees, could force them out before graduation.
The goodwill lenders experience by offering new private loans/microloans or refinancing in these situations can pay dividends—in new income streams, borrower referrals, and happy, upwardly mobile customers who come back to their communities for long-term employment—and you for their first mortgage.
Barriers To Entry Removed: Access Granted
Historically, there have been several barriers to entry for lenders seeking to get into this asset class. They have opted to stay out of student lending and refinancing because of the following challenges:
- Inability to service the loans/refis and carry them on their books
- Complexity in achieving and maintaining regulatory compliance
- High entry costs to obtain the necessary technology
Others have expressed reservations about defaults, which are much less of an issue for private than federal loans (a three-year cohort default rate of 2.75% compared to just under 8%). Close to 90% of these private loans carry a parent’s signature and meet stringent underwriting requirements, while underwriting of federal loans can be less exacting. Moreover, borrowers and their co-signers must be in contact with their lenders every year that the students are in school—offering lenders opportunities to strengthen relationships with the whole family, and sell additional products/services, too.
As for servicing and other issues: Innovative technologies now provide banks solutions to make these processes seamless. In fact, there are white-label technology providers with in-house underwriters and student loan origination experts who make it easy for all types of lenders to generate revenue from private student loans/microloans or refinancing. Moreover, they don’t have to hold these assets on their balance sheets. Technology providers’ secondary market partners are handling this.
The technologies make it possible to offer these private loans and refis in an efficient way since teams behind them do much of the work. These solutions are set up to facilitate the entire application process (through mobile phones, tablets and desktops) and will automatically address all compliance and regulatory requirements along the way. Whether delivering these products through a Software as a Service (Saas) model or incorporating them into lenders’ back office, the teams involved can perform both underwriting and origination support.
As mortgage lenders continue to navigate a volatile environment, private student loans/microloans and refinancing could offer both stability and growth. New technologies are empowering all types of financial institutions with the ability to transform the student loan industry as we know it, so that consumers are able to explore more options and even build better relationships with their banks.
Sara Parrish is President of CampusDoor, one of the nation’s largest third-party student and specialty loan origination shops. The company provides innovative, white-label solutions to lenders—enabling them to help customers finance a college education. CampusDoor has processed more than $26 billion in private student loan applications, assisted more than 2.2 million borrowers and supports more than 1,200 unique loan program