NEW YORK (MainStreet) — The deal Congress made last summer to move federal student loan rates from 3.4% to 3.85% for the current year was criticized in some quarters and greeted with relief in others. At least the rates did not jump from 3.4% to 6.8% as was generally feared.
But interest rates are at historic low levels and have nowhere to go but up. "Since rates dropped at the start of the credit crisis, we can probably expect them to start increasing by about 1.5% per year in 2015," said Mark Kantrowitz, senior vice president and publisher of Edvisor's Network. That, he added, would mean rates on new loans will probably exceed the old 6.8% rate in 2017 and certainly by 2020.
"So while a student enrolling in college now will save money on their student loans, his or her younger sibling will pay a lot more," he said. "A few years from now, I wouldn't be surprised if students and their parents will be demanding a return to fixed 6.8% interest rates."
Meanwhile, Americans are heading to college in droves. From 1998 to 2008, the College Board estimates that the number of bachelor's degrees increased by 32%, while the number of associate and graduate degrees increased by 34% and 41%, respectively. The number of students enrolled in college is expected to hit 20 million by 2016.
Private lenders will remain an expensive option and for the most part, a lender of last resort—with one exception. Credit unions may provide a hospitable port during the coming rate hike hurricane.
"Credit unions are emerging as strong private student lenders, with a $2.3 billion portfolio," said Paul Gentile, executive vice president of CUNA, the Credit Union National Association. "Delinquency rates for credit union private student loans are significantly lower than federal student loans as well as other private student loans." Credit unions can consolidate private loans at rates as low as 4.75%--depending on the results of the underwriting process. Gentile said CUNA represents over 95 million members with combined assets of over $1 trillion.
"Currently, credit unions do not play a role in federal student loans," he said. However, that could change as credit unions are increasingly offering consolidation loans for people with private loans. There has been some thought given to providing help with consolidating federal student loans. That isn't feasible today, unless some regulatory changes are made."
As not-for-profit financial cooperatives, credit unions often collaborate to expand the products they can offer. Student Choice is an example. Founded by a group of credit unions in 2008, Student Choice claims to have enabled hundreds of credit unions to offer cheaper, private student loan alternatives to member organizations.
"Rates for student loans through credit unions can be considerably lower than what you can expect at a bank," said Al Krulick in his blog on www.debt.org. "Credit unions are more likely to work with if you have a poor credit history or do not have a co-signer. Credit unions' rates are likely to be higher, however, than those for federally subsidized student loans."
Prospective borrowers will most likely have to become members if they want a student loan—and meet the criteria for membership, which usually includes a fee which can range from $5 to $50.
"A credit union may ask you to set up a checking account and make deposits with them before it can move forward with a student loan. Your credit score likely will be checked when you apply," Krulick said.
The majority of credit unions won't make you start paying off the loan until you graduate, said Krulick. "But once the grace period ends, credit unions usually have strict repayment terms. That may leave you with less flexibility in paying off the loans," he said.
The New York University Federal Credit Union (NYUFC) is an example of the variety found in the credit union space. NYYFC boasts a quick and easy application process, with "preliminary approval available in one minute" from its Web-base application portal. While it makes these loans to NYU students, employees and their immediate families only, the NYYFC says on its Website that it is not affiliated with the university.
--Written by John Sandman for MainStreet