In this article, we'll discuss and go into detail about the pros and cons of credit union student loans.
Finding the right lender for a student loan can be a challenge. Today, students have many options ranging from federal government student loans to ones backed by traditional banks.
Those who are seeking a student loan may be overlooking one big option – student loans through a credit union. A credit union is a member-owned non-profit financial organization, and this sets it apart from online lenders, traditional banks and the government.
Since credit unions aren’t in business for the purposes of profits, they might sound like ideal lenders, but like other lending options, there are a few downsides to consider. Here is a pro and con guide to credit union student loans.
Credit Union Student Loans: The Pros
In the area of student loans, credit unions operate much the same as the federal government. For instance, borrowers will have the option of making low payments – or no payments – while attending school.
Then, once they graduate, they will start making payments until the loan balance is paid. The benefits of student loans through a credit union include:
- The potential of lower interest rates
- More attentive customer service
- Easier lending standards
- Lower fees
- The possibility of additional discounts
- No limits
- There could be a statute of limitations
- International students may be able to get one
- Builds credit
- Fills in the financing gaps
- Tax-deductible interest
- The option to pay for miscellaneous school expenses
- The opportunity for a high-paying career
The Possibility of Lower Interest Rates
Even though credit unions are smaller financial institutions than regular banks, they are still competitive when it comes to setting interest rates. The nonprofit setup of credit unions often means that they can offer to lend students money at lower rates.
For instance, last March, Alliant Credit Union was offering student loans with rates that were just under 4% while Discover was advertising student loans at above 4.5%. Not every credit union will have a lower interest rate than online lenders or big banks, but it’s always a good idea for financial borrowers to research by comparison shopping different lenders. That way, borrowers can get the best deal.
Better Customer Service
Credit unions are different than banks because they are member-owned financial institutions. Because of this, they may treat customers with a bit more fairness and overall care.
Those who join credit unions for their financial dealings are required to become members. Credit union members usually elect a board of volunteer directors to run the institutions, which means that borrowers get a say in how the credit union operates.
Since credit unions are smaller financial institutions that have the potential of failing – unlike big banks that are able to manage multimillion-dollar legal penalties and scandals – they are more likely to treat their borrowers well to remain in business.
Some credit unions offer financial counseling and training to help their members handle complex financial situations. This can be especially helpful for students because they are just beginning their financial history. With guidance, they can start out in the right way by making on-time payments and staying within their credit limits.
More Lax Lending Standards
When students are applying for federal student loans, to receive approval, they need good credit and a certain level of income. Those who don’t have these things may still be able to get the loan with a cosigner.
While some credit unions require this as well, not all do. Also, borrowers who apply for a loan through a credit union that they are a member of may receive approval based on the fact that they belong to the financial institution. Being a member means that there is an established relationship between the borrower and the lender, giving the credit union more lending confidence.
Often, credit unions have lower fees than traditional financial institutions. They may have lower late fees or overdraft fees. Once student borrowers shift their financial transactions to a credit union, they may find that the organization doesn’t charge for electronic transactions, withdrawals or checks. Some major banks charge for these services.
Students who take out a credit union loan may qualify for additional discounts. Some financial institutions may offer students a discount when they get good grades or sign up for automatic deductions. These discounts often come in the form of reduced interest rates or loyalty discounts.
Federal student loans feature yearly and aggregate limits on the amount that a student can borrow. These limits are based on the student’s year in school and if he or she is a dependent.
For instance, a first-year student who is in an undergraduate program and is considered a dependent can usually borrow up to $5,500, but no more than $3,500 of the amount can be in subsidized loans. The total amount for this type of student loan would be $31,500. Also, no more than $23,000 of the amount would be permitted to be in subsidized loans.
Universities often charge more than that for students to attend their school, which means that their students would need to find additional lending. Federal student loans are also allowed to charge borrowers a fee. Credit unions do not have the same loan limitations. They can choose whether or not they charge a fee.
Statute of Limitations
If a student loan borrower should default on a federal student loan, then regardless of the situation, they will likely have to repay the debt eventually because a federal loan does not come with a statute of limitations.
In fact, the borrower’s wages or tax refunds could be garnished to pay the loan debt. While it’s never a good situation to default on a loan, credit union loans have a statute of limitations.
Depending on the state, they range from three to 10 years. After that time period, lenders have few options to collect. Defaulting on a loan comes with serious consequences. For instance, it can be tough for the borrower to rebuild his or her credit, meaning that they will likely have trouble securing future loans and the ones that they do secure will have high-interest rates to offset the risk.
International Students May Be Able to Qualify
Some credit unions approve international students for credit union student loans. However, those who apply are likely to need a cosigner.
Helps People Build Credit
A big pro to taking out a credit union student loan is that it will work to build the borrower’s credit. To get the most benefit from this, we recommend being diligent about making the student loan payments on time and paying the loan off as quickly as possible.
Also, individuals who take out student loans should keep an eye on their other credit responsibilities. To build the best credit score, borrowers shouldn’t owe more than 30% of their available credit lines. When it comes to having debt, the sweet spot tends to be closer to 10% of a borrower’s available credit.
Fills in the Financing Gaps
Since the government caps the amount that students are able to borrow for school, students can take advantage of loans through credit unions to fill in the gaps. According to studies, the average cost of attending college for the 2017 to 2018 school year came to slightly more than $20,500 for in-state public schools and almost $47,000 for nonprofit private schools.
These financial figures include tuition, fees, room, and board. Since the federal government caps the amount that students are permitted to borrow to $5,500 a year for undergraduate students who are dependents, that leaves quite a gap, one that can be filled with a credit union loan.
Taking out a student loan from a credit union means that the interest accrued may be tax-deductible. Borrowers can deduct it under the Student Loan Interest Deduction program. Students can deduct as much as $2,500 on their taxable income depending on the individual’s tax bracket.
Some credit unions will allow students to use a student loan to pay for after graduation expenses, such as tutoring when studying for the bar following law school or for residency or relocation expenses after grading from medical or dental school. Students may have the option of using the loan to pay for previous school charges. Federal student loans permit this too, but students can only use it to cover $200 in previous school charges.
The Opportunity for a Better Paying Job
One of the biggest benefits to taking out a student loan through a credit union is that it gives students the chance to attend college to get a better paying job. A study conducted by Georgetown University found that, in general, college graduates earn $1 million more over the course of their lives than those who enter the workforce with just their high school diploma. The annual income gap between students who graduate from college and those who only graduate from high school is somewhere around $17,500.
The Drawbacks of Credit Union Student Loans
The potential of better customer service and lower interest rates may have student borrowers convinced that a loan through a credit union is the best way to go, but there are some drawbacks. Here are a few for student borrowers to keep in mind. They include:
- Being required to join the credit union
- Trouble finding a student loan
- Fewer perks
- Credit checks
- Fewer branches
- Fewer financial hardship options
- Interest rates may be variable
- No subsidies
- Student borrowers may need a cosigner
- Student loans mean student debt
- Low-income students may not qualify
Students Must Join the Credit Union
To take advantage of a credit union’s services, students must join the financial institution. Some credit unions just require applicants to make a small donation to a charity to become one while others only accept people who:
- Live in a particular area
- Are employed by a certain business
- Are connected to a local school
- Belong to a certain labor union
- Are a part of another organization
Some credit unions require student borrowers to take out other financial products through them, such as a checking or a savings account. If the borrower has already set up these products through another institution, then shifting everything may be time consuming and inconvenient. Before applying for a student loan through a credit union, potential borrowers should research the financial institution to see what the membership requirements are.
Trouble Finding a Student Loan
Major financial institutions generally operate in every state. They are also well-known establishments that have familiar branding.
Since local credit unions are spread around the country, finding the best deal on a student loan can be a big issue. Complicating the borrowing option, even more, is the fact that not all credit unions offer the same financial products.
Some don’t offer student loans like 121, while others limit the loans that they offer to undergraduate students. Others only refinance student loans.
Getting the best deal on a student loan through a credit union may require a good deal of work. However, when considering interest rates on long-term loans, it may be worth the effort.
There are services that make the process easier. Some financial websites let borrowers research different loan options on one site. There’s also a list of credit union student loans that are available across the nation.
While large, private financial institutions have the profit margins and customer base to offer borrowers special services and programs, local credit unions may not be able to do the same. For instance, some private lenders offer programs that help borrowers earn extra income if they should become unexpectedly unemployed. The program connects members with consulting opportunities that allow them to receive professional experience while getting a few additional dollars. Receiving help during a time of unemployment is a nice amenity, but the most important thing for student borrowers to consider are:
- Low-interest rates
- Flexible repayment terms
- Minimal fees
Hard Credit Check
Some credit unions require a hard credit check to display the available rate and approve the loan. This can affect a borrower’s credit score, making it tougher for the student to get a loan through a different financial institution.
Since many credit unions are local, there are fewer branches around the country. This means that students may not have the option of applying in person. Also, if a borrower changes over to the credit union, then there may be fewer ATMs available for cash withdrawals.
Fewer Financial Hardship Options
While there is no statute of limitations on federal government student loans, there are federal forgiveness and income-driven repayment programs. These types of plans are not available with credit union loans.
Some credit unions may offer their own kind of assistance such as payment deferment or forbearance, which allows borrowers to temporarily stop making payments for a set time. In most cases, these programs allow the borrower to stop making payments without constantly incurring late fees. However, interest is likely to continue accruing.
Interest Rates Could Be Variable
When taking out a student loan through a credit union, the interest rate may be variable. While variable rates frequently start off lower, they have the potential of shifting up or down. This means that the payment amount could change, making it tough for students to budget. Also, the amount being charged can go up or down. There is a lack of consistency with variable rates.
No Federal Subsidy
There are federal student loans that have an interest subsidy, but it depends on the type of loan. With a subsidy, the government will pay the interest while the borrower attends school. This may even be a possibility during the repayment process if the debt type is eligible. Since interest won’t be accruing, the borrower saves a good deal of money. In fact, it can total into the hundreds or thousands.
A student loan through a credit union won’t be eligible for this type of program. While some credit unions allow deferrals during the time that the borrower is attending school, interest is likely to start to accrue from the first day that the loan is withdrawn. This means that the interest is added to the principal balance, increasing it. Also, some institutions require student borrowers to make interest payments on the loan.
Student borrowers may need a cosigner
In some cases, federal student loans don’t require a cosigner, but a credit union may require one, even if the borrower has good credit. A financial institution is likely to want a cosigner because the student won’t be able to work while attending school. When someone cosigns for a loan, he or she is responsible for the debt if the initial borrower is unable to repay the loan. The downside for cosigners is that, if the student borrower misses a payment or defaults on the loan, then their credit will be damaged too. They may even have to face collection agents.
Student Loans Mean Debt
A big drawback to student loans is that college students are starting their adult lives in debt. This may be causing students to delay purchasing homes, resulting in less financial stability and increased financial strain. However, the stark reality is that attending college is too expensive for many people, so a student loan from a credit union can be the thing that pulls someone out of poverty or helps people make their way up the ladder.
Low-Income Students May Not Qualify
To qualify for a student loan through a credit union, borrowers need to be able to prove a certain level of income. Low-income borrowers generally don’t earn enough to qualify. According to statistics, just 5% of low-income students are able to qualify for student loans through a credit union while 8% of high-income students do.
There are Different Types of Credit Unions
When it comes to credit unions, there are four main categories. They include:
- Federal credit unions
- State-chartered credit unions
- Natural-person credit unions
- Corporate credit unions
Federal credit unions are commissioned and regulated by the federal government. The government does this under the Federal Credit Union Act. State banking representatives charter and regulate state-charted credit unions while natural-person credit unions provide financial assistance for individuals. Corporate credit unions provide natural persons with financial services.
How to Apply for a Credit Union Student Loan
There are several steps involved when applying for a student loan from a credit union.
1. Confirm eligibility
The credit union will need to verify that students are eligible for a student loan. To do this, they will check the borrower’s credit. The financial institution will also confirm that the student is enrolled in a college or university by contacting the school’s financial aid department. Along with this, the institution must certify the loan.
2. Provide financial and personal information
Student borrowers will need to provide detailed financial and personal information. This may include:
- Name, email and address
- Social Security Number
- Name of the borrower’s employer
- Confirmation of income
- Most recent financial statements
- The amount of the borrower’s monthly rent or his or her mortgage payment
- The name of the school he or she is attending
- The estimated cost to attend college
- Anticipated graduation date
3. Input and process student loan application
Borrowers can submit their student loan application online. He or she can also complete this process over the phone or in-person at their local credit union branch. Once a borrower submits the application, the credit union will process it and let the borrower know if they’ve been approved.
4. Approval, term information, and fund disbursement
Once a student borrower receives approval, the credit union will contact him or her with the good news. At that time, a credit union customer service agent will go over the terms of the loan and send forms for the borrower to sign. The financial institution will then issue the funds to the borrower’s school based on the college’s certification disbursement requirements.
What Are the Repayment Terms Like?
Many credit unions offer student loans for undergraduate and graduate students. They may also offer consolidation loans for those who have already graduated and want, or need, to refinance a student loan.
Depending on the credit union, student borrowers may be able to defer making payments on the loan until something like six months after graduation. Lenders may also permit students to borrow from year to year or in total. For instance, a student could borrow $15,000 each year or $60,000 all at once.
Students should check on fees. While credit unions often have lower fees than other types of lenders, they could charge an application or origination fee as well as a prepayment penalty. Most no longer charge these fees, but it’s always a good idea to check.
Repayment terms tend to vary. For instance, borrowers can repay a student loan within five, 10, 15 or 20 years depending on how low they need to keep the payments.
If a student were to take out a $50,000 credit union student loan with an interest rate of 4.66% and repayment terms of 10 years, then the payment amount would be $522. The total cost of this loan would be $62,647.
For an $80,000 loan with the same interest rate that includes repayment terms of 15 years, the monthly payment amount would be $619, and the borrower would pay a total of $111,340 for the loan.
A $25,000 student loan with an interest rate of 3.8% would run the borrower $458 under a five-year term. The total amount for the loan would cost the borrower $27,490.
How Long Does the Loan Application Process Take?
The processing time for student loans varies based on the financial institution. Many credit unions complete applications in just two weeks, but the process could take a few months. We recommend that students begin the loan application process as soon as possible to ensure funding before school starts.
To make the process go as smoothly as possible, borrowers should print their two most recent paystubs as well as their W2s and current tax documents. Borrowers should also consider reaching out to someone with established credit to agree to cosign the loan just in case this is needed. Borrowers must be currently registered with the school that they are attending.
When applying, borrowers will need to complete a school certification form. This will let the financial institution know how much the student needs to borrow to attend school.
A Focus on Community
Credit unions focus on community. This means that members of the union typically have similar interests, work closely with one another, live in the same area or are involved in the same organization. Joining a credit union means that student borrowers have the chance to be a part of a financial institution that considers the needs of other borrowers like themselves.
Credit unions have a unique business model, and this means that student borrowers may get a better deal going through one of these financial institutions instead of going through a traditional bank.
Credit union loans help students make their way through college when financial shortages would keep them from doing so. Along with this, they can help students build good credit and teach them money management skills. Financial institutions do their best to keep these loans affordable and fair.