The National Credit Union Administration (NCUA) reported on risks from private student loans in the March edition of The NCUA REPORT. Student loan debt surpassed $1 trillion in 2012 with 15% coming from private student loans according the NCUA quoting Consumer Financial Protection Bureau (CFPB) statistics. Total delinquency nationwide is 5.4% but only 1.46% for credit unions. NCUA warns that credit unions have only been in the private student loan market for a few years with most loans originated not yet in repayment. The agency anticipates higher delinquency as the private student loan market for credit unions matures.
With the above statistics in mind, the agency warns of risks. These include the compounding of interest in deferral periods which can be quite large when repayment begins. The result is that the borrower owes much more than the initial principle (the borrower is probably surprised by this too). Private student loans also have adjustable rate which can cause volatility in repayments amounts which can impair a borrower’s ability to repay. Credit unions should establish “reasonable concentration limits” for private student loans to mitigate these risks. Credit unions can also mitigate some risks by purchasing private insurance to protect against defaults, but NCUA warns that this is not a substitute for sound underwriting and portfolio management practices. The article can be found here.