Credit unions have expanded into the private student loan market as a means of attracting younger customers and higher returns, but regulators are increasingly concerned about the risks involved in such a move.
The National Credit Union Administration, the industry's primary regulator, warned credit unions in December that entering the private student loan market could leave them with portfolios of bad debt that could hurt their solvency or cost their members. To avoid these risks, credit unions generally require high credit scores and parents to co-sign.
Credit unions are entering the market through contracts with third parties, which determine borrowers' creditworthiness and approve loans or just process payments. Federal credit union regulators have no direct oversight of the loan servicing business. Credit unions also are refinancing student loans so borrowers can consolidate debt and lower rates; but Consumer Financial Protection Bureau student loan ombudsman Rohit Chopra says federal and private loans should not be refinanced together, as it would cause the loss of protections -- like income-based payments and forgiveness if students become teachers -- that accompany federal loans.