Growing up in the humblest of circumstances, I’ve always believed that education is the golden ticket to a sweeter life.
That’s why my heart simultaneously leapt and sank when I was accepted to Cornell Law School many years ago. Just millimeters from my goal of attending an Ivy League university, I called to decline Cornell’s offer because it was beyond my financial reach. Luckily, they countered with a generous aid package — opening the doors to my American dream.
In return, I will be forever loyal to this wonderful university as a graduate and a donor.
We in the mortgage banking business are in a similar position to Cornell. We’re the people who give life to individuals’ most cherished aspirations, including first-time homeownership. What if we could earn borrowers’ confidence and affection even earlier, so that they would turn to us repeatedly for other loans, including that initial mortgage?
College lending offers that “stickiness factor”— coming at a point where families are making both practical and emotional decisions about the next four years. There are few milestones as memorable as sending children off to college. It’s only natural to “imprint” on the institutions that make it possible.
But is this nontraditional market really an opportunity for mortgage bankers given well-publicized defaults? Can the industry enter it safely and profitably?
The question is especially relevant right now, as mortgage bankers are being advised to diversify their products and services before the refinancing wave dies down. Private student loans could become an unexpected new arrow in their quiver for several reasons:
With parents losing their jobs during the pandemic, and colleges such as University of California calling for tuition increases, many families will experience greater financial shortfalls in the months ahead.
But demand for student loans is likely to exceed supply given the stringent rules of many private lenders who will only work with families with top credit scores, or who have minimum lending requirements. This will shut out a large group of credit-worthy borrowers who are unable to meet their exacting criteria. They will turn elsewhere for help.
Federal defaults obscure private lending returns
Contrary to popular belief, the federal government, which does about 90% of student lending, has not effectively pushed private lenders out of the market. Currently, these private lenders have about $138 billion in outstanding student loan debt on their books — a large volume for the roughly 8% of loans they do handle.
Moreover, these private loans are offering strong returns. Consider those graduates who are looking to refinance their student debt. They will generally have more than $100,000 to pay back at a spread that exceeds 4%. Current interest rates range from 3% to 9% for fixed loans, and 1.9% to 9% for variable instruments.
What about the possibility that graduates will default? Heated discussions about student loan forgiveness are obscuring the fact that most private borrowers are meeting their obligations. Though the three-year cohort default rate for federal borrowers hovers at just under 10%, the rate for private loans is less than 2.5%.
Nearly 90% of private student loans are also co-signed by a parent or other adult, and are underwritten based on several criteria. This is in contrast to federal student loans, which are entirely need based and require little to no underwriting.
An active secondary market
In the past, nontraditional lenders such as mortgage bankers have been deterred by a perceived need to keep these loans on their balance sheets. Today, there is a secondary market for private student loans, so there is no requirement for mortgage bankers to hold them.
Multiple sticky touchpoints
Finally, for mortgage bankers who place a premium on relationship building, there are few other asset classes that require continuous contact with borrowers and their co-signers (e.g., new loan originations every year that a borrower is in college).
Each touchpoint is a new chance to help entire families with other products, too — whether they need a renovation loan or are planning to downsize. If service is fast, smooth and attentive, lenders will make a lasting positive impression — each time.
At the end of four years (or graduate school), mortgage bankers will launch a fresh group of creditworthy borrowers — better positioned to qualify for higher-paying jobs and jumbo mortgages, and to keep the economy on an upward path.
Those of us in the mortgage business hold people’s dreams in their hands, just as Cornell did for me. The earlier and more expertly we bring their wishes to life, and the more caring we show for them, the greater the chance we have of building a more profitable customer base.
Whether through a consumer loan, a student loan, or a mortgage loan, exceptional attention to borrowers’ happiness is the key. In university lexicon, it’s Business 101.