Opportunities in the student loan market

Getting into the student loan market can be risky, but there are options that can help community banks expand their loan portfolios and capture new customers.

By William Atkinson

While the student loan market can be a profitable one for community banks, fintechs and large national banks are grabbing and holding on to this market. “As community banks look for opportunities to diversify their loan portfolios, I am a bit surprised that not as many of them have focused on student lending,” says Kevin Tweddle, CPA, group executive vice president, innovation and financial technology, for ICBA.

There are some ways that community banks can profitably add this market to their portfolio, and, in so doing, build additional banking relationships with students. However, it is not always straightforward for community banks to enter this market.

“There are some risks involved with student lending, and most community banks tend not to have a high risk tolerance,” says Tweddle.

He notes that lending risk isn’t the only consideration in this market. “One challenge for community banks that want to get involved in this market is that it is a niche play,” he says, “and a lot of niche banking opportunities, especially on the lending side, require volume to make it profitable for the bank.”

Another challenge relates to branding. If a small community bank is operating in a specific market, there may not even be enough student lending opportunities in that market. “As a result, with the lack of volume, it may be difficult for community banks to be competitive from a pricing perspective,” says Tweddle.

He notes that most lenders that have gotten into student loans are doing it at a national level. This volume means they can be more competitive from a pricing perspective, he says.

“Still, there are real opportunities for community banks in this segment of lending, particularly for banks that have colleges or universities in their communities,” Tweddle adds.

The iHELP program
One of the easiest ways for community banks to get involved in the student lending market is through the iHELP private student loan program, which offers student loans and student loan consolidations. The program is set up to help community banks market student loans to current and prospective customers, and to help students bridge the gap between scholarships, federal loans and the final cost of tuition.

The iHELP program provides personalized service for a community bank’s customers, along with full lender support to ensure that all regulations are followed without the need for additional banking staff.

The program is administered by Reunion Student Loan Finance Corporation (RSLFC), which performs all loan origination and servicing support in order to provide a turnkey program for participating banks. Banks can participate in the program in one of two ways: by funding loans and holding them for a profitable return as an originating lender, or by joining as a referral partner, which would not involve funding loans but would still make sure bank customers’ needs are met.

On average, lenders involved with iHELP receive a net return of 4.5 percent on an insured product. Principal and interest are paid back to banks on defaulted loans. However, since the program’s inception in 2010, defaults have been less than 0.7 percent. (The national average, according to MeasureOne Private Student Loan Report Q1 2017, is 2.22 percent.)

Succeeding in student loans
One bank that is having success with the program is Milledgeville State Bank in Milledgeville, Ill., a single-branch bank in the Northwest part of the state with $128 million in assets and a little over $80 million in loans, about half of which is ag related. “Being in a small, rural market, we were looking for a way to increase our consumer loan portfolio,” says Scott Foltz, assistant vice president. “We saw this as a new way to diversify our portfolio a little bit.”

The process was seamless and easy to initiate, according to Foltz. “We did a little homework by making some phone calls to other banks that were currently using the solution, and after getting a lot of positive feedback, we decided to move forward and sign on with the iHELP program,” he says.

There were a few challenges along the way. “We had to work out some bookkeeping issues on how to book fees, interest, etc.,” Foltz says. “Overall, though, the process was smooth, and we are very happy after being involved now for slightly over four years. We have accomplished our goal of increasing our consumer loan portfolio, and we are happy with the rate of return on the loans.”

According to Foltz, the program requires minimal time and bookkeeping. “The loans are insured, and it has been a great tool for our bank to diversify a little bit,” he says. In fact, the program has been such a success that the bank has agreed to increase its portfolio size for the third time since signing on.

Another bank experiencing success with the program is TriStar Bank in Dickson, Tenn., with assets of $265 million. It launched its iHELP program in 2015. “We wanted to offer red-carpet service to the student loan population and remind people that we understand,” says Archibold Marowa, TriStar Bank’s iHELP student loan program officer. “We just wanted to be part of the solution concerning student loans. The iHELP program helps us invest in the dreams of future generations.”

Marowa says that his community bank’s biggest challenge was not having a benchmark or single reference within the bank to help set up the program. “This inexperience led to some discomfort in the bank in terms of the risk of the products,” he says. “However, we worked through the challenge. RSLFC helped provide the information we needed to understand and communicate the risk to our board and senior management.”

The key to the success of the program, according to Marowa, was devoting one person to work specifically with schools and students to provide top-quality service.

“There was a huge need for excellent service in the student loan market, and with the help of RSLFC to underwrite the student loans, we have an amazing team that provides this service,” he says.

“[iHELP] has given us a competitive advantage over other small lenders, since most of them are not interested in the student loan market.”
—Archibold Marowa,
TriStar Bank

In the beginning, growth was slow, but TriStar is now seeing “tremendous growth,” according to Marowa. “Even as a small bank in Dickson, Tennessee, we are now serving several clients from most states,” he says. “This diversity helps us as we build our student loan portfolio. The program has given us a competitive advantage over other small lenders, since most of them are not interested in the student loan market.”

Opening a new market
Another bank experiencing success with the program is The Community Bank in Zanesville, Ohio, with assets of $420 million. Like TriStar, it got on board with iHELP in 2015. “We did not offer direct student loans and wanted to diversify the consumer portion of our loan portfolio,” says Eric S. Holsky, president and CEO.

The main challenge for The Community Bank was creating the process to book and track balances, fees and activity on the bank’s core system.

“There is a manual portion to this process, but it is mitigated by the reporting and support from iHELP,” Holsky says. What also helped, he says, was the fact that it was a turnkey product, and the bank received solid training for both the product itself and the back office/administrative portion. “The portfolio has performed well so far, and the administrative piece has been reasonable,” says Holsky.

For community banks, getting involved in a program like iHELP can be the beginning of a new market opportunity. “The way for banks to make the most of this is to focus on being involved beyond just the lending side,” says ICBA’s Tweddle. “If you are going to make student loans, try to get the whole student relationship—with a lifetime focus. For example, try to get the student checking account, help them with wealth management, and so on.”

ICBA and iHELP renew their relationship

In November 2017, ICBA extended its Preferred Service Provider relationship with iHELP. Since the program’s inception in 2000, more than 450 ICBA community bank members have participated, providing more than $300 million in private student loans to more than 22,000 students.

William Atkinson is a writer in Illinois.