Bridging the Tuition Gap with Private Student Lending: Opportunity for Lenders

In the next few weeks, incoming college students will be arriving on campus, moving into dorm rooms, choosing classes – and facing their first tuition bill of the fall semester. For those students and their parents,

there is often a considerable gap between the tuition payment due and the funds available from family resources, scholarship aid, and federal student loans. What many students and parents may not realize is that there is a way to close that “tuition gap” through the use of a private student loan, regardless of their household income.

While a growing number of financial institutions have recognized the opportunity to help families bridge the tuition gap with private student loans, many more should consider adding this product to their offerings. At LendKey, a full-service digital lending platform offering access to student loans and other consumer credit, we have assembled a network of several hundred credit unions and banks that to-date have provided more than $2 billion in student loan financing.

There are many benefits for borrowers who take out private student loans, and to lenders who offer this credit resource:

Higher Loan Limits. Unlike federal student loans, which cap the amount that can be borrowed, private student loans generally allow students to borrow up to the cost of attendance, which provides greater financing capacity for students and families. The average in-school student loan amount originated on LendKey’s loan platform is $12,081 for undergraduate students.  In comparison, for federal loans in 2016-2017, the average federal subsidized loan amount was only $6,590 for undergraduate students.

Potential for Lower Rates. By borrowing from a community-based lender, such as the credit unions or banks that participate on the LendKey platform, a student may obtain an attractive interest rate on a private student loan. That is because unlike large nationwide financial institutions, community lenders serve local neighborhoods or affinity groups and are more likely to be borrower-friendly. Increasingly, such lenders are also taking advantage of digital technology to reduce costs and, thus, keep rates affordable.

Fixed or Variable Rates. A private student loan can offer fixed or variable rates.  In contrast, the interest rate for federal student loans is always fixed, and so they remain the same for the duration of the repayment period. Based on the time horizon for the student, a variable rate can provide an opportunity for lower monthly payments during the early stage of repayment when graduates are at the beginning of their careers.

Deferred Payments Aid Affordability. Given the concern about the level of student loan debt, it is important to note that private loans (like federal loans) allow students to defer most of their monthly payments until after graduation. Partner lenders on LendKey’s platform offer an option of paying only $25 per month or making interest-only payments while in school.  This option has the added benefit of potentially improving the student’s credit profile by establishing a payment history.

For Lenders: Attractive Returns, Well-Managed Risk. Lenders who serve the needs of families for private student loans have the opportunity to offer a product with an attractive yield and solid credit quality. For example, the yields on private student and are strong, with net average yields ranging from 5% to 8%.

This asset class also has historically performed well from a credit quality perspective.  Private student loans require an established credit history or a co-signer in good credit standing. The average LendKey in-school student borrower has a FICO score of 750, and 94.0% of loans include creditworthy co-signers.

Digital Solutions Drive Benefits. For financial institutions seeking to offer private student loans, it is smart to consider partnering with an established and compliant digital platform provider. LendKey is a recognized leader in digital lending and servicing. Offering a Lending-as-a-Service solution for credit unions and banks, LendKey enables partner lenders to deploy capital in private student loan products quickly and easily – in as little as six weeks.

Lenders are realizing the marketplace potential for students and their families who need to bridge the tuition gap. Private education loans offer an attractive return, asset diversification, and an opportunity to build relationships with prime consumers for a potential lifetime of borrowing and banking opportunities.

Learn more about our digital lending solution for private education loans by emailing christian@lendkey.com today.