Why You Should Offer a Gap Loan
The cost of higher education continues to grow. A number of colleges recently announced tuition increases to as high as $90,000 per year. This is a staggering number considering the real median household income was $74,580 in 2022 according to the US Census Bureau.
With the cost of college so high, students and their families are forced to look for funds to support their desire to pursue higher education. Yet funds, such as financial aid, 529 plans, or scholarships, are often not enough.
The discrepancy between what students can pay for and the actual cost of college has created a growing need for student loans to help close the gap between the cost of college and the financial aid they receive.
In this blog, we explore why the gap in paying for college exists and the business benefits for financial organizations and affiliate programs that offer private student loans to customers and members.
Understanding the Gap
Before offering a private student loan, it helps to understand why there is a gap that needs to be filled in the first place. It starts with the Free Application for Federal Student Aid (FAFSA).
Completing the FAFSA is an important part of a student’s financial journey to pay for college. If approved for financial aid, the student will receive a financial aid award letter from the school they applied to. This letter provides information about how much financial assistance the school will offer the student, such as grants, scholarships, or work-study programs.
This is where the gap becomes visible. According to College Board Research, the average financial aid package for a full-time equivalent undergraduate student in 2022-2023 was $15,480.
In a hypothetical example, if a student received that sum in financial aid and was attending a college with a $90,000 annual tuition, the student would be required to fund the additional $74,520 for a single year.
I can relate to this on a personal level. I worked several jobs while in school, maximized grants and scholarships, and still could not meet the full cost of attendance. I would not have been able to attend college without gap loans.
We thoroughly support the FAFSA process, but we also recognize that it’s just the first step. Clearly, more assistance is needed to support students in their efforts to invest in their future.
The Need for Private Student Loans
Private student loans are often the primary option students and their families explore after exhausting other funding methods, like scholarships, grants, school-based financial aid, 529 plans, and even home equity.
In fact, there’s a steady increase in the demand for student loans each year. Based on data from the National Center for Education Statistics’ (NCES) National Postsecondary Student Aid Study (NPSAS), about 10% of four-year college students used a private student loan to fund their education in 2019-2020.[1]
Private student loans as an asset class are an attractive option for lenders and affiliate groups. The gap loan, in particular, has a specific role in the pursuit of higher education.
By offering a solution for students and their families to help fund their higher education goals, these organizations can achieve market and financial objectives, while also building stronger customer relationships.
The Opportunity with Private Student Loans
It’s extremely likely that your customers or members already have a student loan, and it’s probably from another financial institution. Engaging with your customers and members can elevate awareness of what you can offer them and help increase your presence in their financial journey.
Worth noting is that selecting a college and determining how to make the finances work to afford to pay for college is an extremely emotional time for students and their families. Organizations that offer their customers a product that is tailored to their unique needs to navigate this type of emotional decision can alleviate stress and make them feel valued.
Customers will remember how these products made them feel (in this case, relieved), and those positive emotions play a big role in building brand loyalty. To that point, by building a trusted and reliable reputation within families, you can expand your reach through referrals; they can refer their children and other family members to you.
Private student loans can also give organizations the opportunity to provide something outside the normal suite of offerings to meet customer/member needs, while also boosting efforts to meet business goals. Take a look at what one of our partners had to say:
“Partnering with Monogram enabled us to leverage our brand and deepen relationships with our existing members while expanding our business.”
Donald Kerr, Director Student Lending and College Services, AAA Northeast
The evolution of the market requires continuous improvement in credit modeling, something we pride ourselves on at Monogram. We leverage an expansive data set built on the past 30+ years of the private student loan industry. Additionally, our approach to credit modeling can be applied beyond student lending, which creates new opportunities for your business.
Help Your Customers and Members Close the Gap
The demand for student loans will keep growing as students and their families look to close the gap between financial aid and the actual cost of college. Offering private student loans as part of your product offerings is an opportunity to engage with existing customers and members to help provide them with something they need, either now or in the future.
Not only is this good customer service, it’s also good business.
Explore options that make sense for your business goals, whether that’s creating your own private-labeled private student loan or participating in a referral program.