Private student loan market emerging

Private Student Loan Market

In 2009, the Obama administration passed legislation to allow the government to lend directly to student loan borrowers. At the time, this meant that these loans would be available when other financial institutions wouldn’t or weren’t able to lend, and that the federal government could offer loans at lower interest rates than private institutions.

Now, more than 85 percent of student loans are federal loans, but that may soon change. Some credit unions and banks are realizing that as the cost of college continues to increase , the need for student loans will as well, and provide more room for private lenders. This move could also remove some of the risk within the loans made by the federal government, an article in USA Today explained, since the default rate has been on the rise for the past few years.

“Taxpayers are looking at a much riskier portfolio than a private lender would support,” Amy Crews Cutts, chief economist at credit agency Equifax, told the news source. “It’s risky because of the volumes. The government stepped in during a crisis to make sure those funds would be available. But we’ve over-stimulated that part of the market without the quality of underwriting you need.”

For private lenders that plan on entering this market, lender software can help improve the quality of student loans. With credit and risk management tools, financial institutions can learn more about the borrower and his or her ability to repay, helping to cut back on many of the delinquencies now plaguing the current federal student loan industry. Investing in risk management tools will continue to become more important as more private institutions are needed to provide loans.

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