Imagine the dilemma facing Emily, a 40-year-old single mother who is eager to buy her first home. A psychologist with $30,000 in federal undergraduate student loans, she lived frugally during the COVID-19 pandemic and saved more than usual after the government sanctioned a loan payment pause. Home prices are still a stretch for her. With her payments resuming, will she be able to take on a mortgage too?
Emily is a fictional example of someone who typifies the challenges faced by today’s consumers, and she is far from alone. As of third-quarter 2023, 43.6 million Americans are shouldering $1.644 trillion in federal student debt, according to the U.S. Department of Education. With private student loans also counted, borrowers owe a total of $1.757 trillion, equating to an average balance of more than $40,000.
“Mortgage lenders have not always felt the need to get into student lending or refinancing, but that is changing as the demand for mortgage products dwindles.”
The age range of those with educational debt is exceptionally broad: 7.1 million borrowers are younger than 25 years old; 15.1 million are 25 to 34; 14.7 million are 35 to 49; 6.5 million are 50 to 61; and 2.7 million are 62 or older. Among them are 3.7 million Parent PLUS borrowers who hold $111.7 billion in outstanding debt.
Depending on someone’s stage of life and financial circumstances, finding new ways to manage this debt might enable them to afford a starter home, trade up, downsize, assist their children with a downpayment, purchase a vacation home or take out a second mortgage for home improvements. But are they likely to approach a mortgage lender for creative ways to handle their debt burdens? In many cases, until recently, the answer was no.
Loyal relationships
The pandemic-induced moratorium on student loan payments, in effect since March 2020, is set to end in September. Mortgage lenders have not always felt the need to get into student lending or refinancing, but that is changing as the demand for mortgage products dwindles. Suddenly, lenders are reconsidering diversification into this additional market, even if they have no experience in it.
Providers of third-party platforms for private student loan origination or refinancing are making this a more practical revenue-generating opportunity. For example, some providers are partnering with investors who want to hold the loans, which opens the door to nondepository institutions for the first time.
The credentials of borrowers who qualify for private student loans, in particular, are attractive to many lenders and investors. These college- educated borrowers typically demonstrate strong credit quality (a 750 FICO score is commonplace) and very good repayment records.
Offering these student loan products can help lenders develop loyal, “sticky” relationships with young borrowers who aren’t yet ready to be homeowners but someday will be. Research indicates that those who continue their education beyond high school will earn at least $1 million more than their peers over their lifetime. These higher earnings will put them in a better position to eventually become homeowners — and they are more likely to imprint with the lenders that made the additional earnings possible.
Proactive steps
Of course, life happens, and some lenders are bound to see more delinquencies or declines in credit quality as a result of the pandemic — impeding a borrower’s ability to repay their loans just as forbearance goes away. Whether these borrowers experienced long COVID or had to support other family members during tough times, this era was often unforgiving.
Lenders can either kick the can down the road on this issue or take proactive steps to keep these borrowers in their homes — and their mortgage loans performing. One of these steps is to offer creative student loan refinancing solutions.
And speaking of the pandemic fallout, three major federal student loan servicers resigned their roles during the health crisis. For originators, this represents an opportunity to swoop in, offer help to affected student loan borrowers by coming up with new financing arrangements, and then either hold them or hand them off to an investor.
Outside assistance
How can lenders without student lending or refinancing experience seize this new opportunity? They and their originators should assess their current client base and those they want to target. If lenders are seeking to support and attract young homebuyers, student lending and refinancing solutions could be a great fit. Conversely, if their current client base includes many Gen Xers with college-age children, a new student lending program might make these borrowers even “stickier” and more profitable.
Outsourcing can be a way to get into this space more quickly. Private-label origination and refinancing platforms, supported behind the scenes by underwriters, automate every aspect of the process — from mobile-friendly applications to origination and disbursement. Lenders should evaluate whether they can truly lean on the companies that offer such technology. Are they comfortable in the driver’s seat and can they help inform a lender’s student borrowing strategy? Do they have a strong background managing regulatory and compliance issues? Will they offer call-center services as well?
Lenders would do well, too, to mirror the processes of younger borrowers who prefer deeper online research. They might choose to enhance their front-end content with how-to guidance, FAQs, and deep, easily searchable resources so that potential clients stay on their site from start to finish — increasing the chances that they will complete their applications.
Mortgage lenders and originators can also work with existing students. Think about new ways to save the day for lower-income borrowers. Some students are of such humble means that the cost of unexpected laptop repairs, or a $1,000 tuition increase, could make the difference between dropping out or graduating — even if they already have federal or private loans.
Student lending platforms can integrate additional microloan services within them — with the objective of keeping these borrowers on course despite the obstacles. Additional services that help undergraduates consolidate their student and personal debt (to pay off health care bills and auto loans, for example) can also wind up being valuable in terms of future mortgage origination opportunities.
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The perfect storm of high home valuations, an inventory shortage and interest rates that have more than doubled compared to historic lows have put the American dream of homeownership out of reach for many. Access to that dream is in the hands of mortgage lenders, and they can make it more achievable by supporting student loan borrowers. ●
