By Lance Teinert, CEO CURevl
Earlier this year I wrote an article entitled “Overcoming Inflation and Rising Interest Rates in 2022” in which we examined the impact of rising inflation and how the upward trend in interest rates might impact the balance sheets of credit unions across the nation. Beginning in January 2022, the Federal Reserve signaled that it would meet inflation head on by raising interest rates by a factor of 100 and 150 basis points throughout 2022. Since that article was written, the Fed has raised interest rates by 125 basis points in total. Despite these hikes and much to the surprise of many economists and bankers, the rate of inflation has continued to steadily increase to a level of 8.6% at the end of May.
It's clear that the argument supporting “transitory inflation” has been proven wrong.
Many argue, including the economist Art Laffer, that the rate of inflation will continue to rise until such time as interest rates exceed the rate of inflation. Others believe, including the economist Paul Krugman, that history is repeating itself and pent-up demand following the pandemic (similar to pent up demand and supply chain shortages following World War II) has created the higher-than-normal Consumer Price Index, and deflation is likely to take place in the coming months to flatten the upward trend.
Regardless of the economic analysis as to cause and effect and what action (or lack thereof) is needed to correct the problem, the markets are once again facing another one or more interest rate hikes between now and the end of 2022. The impact of interest rate hikes can mean multiple outcomes, including higher cost of consumer credit and rate compression for credit unions and other financial institutions across the nation.
As of July 1, 2022, the 30-year fixed mortgage rate has climbed to nearly 6 percent. New automobile finance rates are over 5 percent, and the Wall Street Journal Prime Rate has increased to 4.75%. Over the past 12 months, the federal student loan interest rate has increased by 1.26%. Bottom line: the Federal Reserve’s interest rate hikes are being reflected in the marketplace.
According to the National Center for Education Statistics (NCES), college enrollment hit an all-time high in 2010 and began sliding downward until it began ticking upward in 2017. As a result of the pandemic enrollment once again declined (as expected). However, the NCES predicts that “between fall 2020 and 2030, total undergraduate enrollment is projected to increase by 8 percent to 17.1 million students.”
If history repeats itself, the NCES prediction will hold true. Following the last period of high inflation, college enrollment grew from 7.1 million enrolled to over 8.1 million, according to the Education Date Initiative. In other words, people will continue to attend college despite downward economic trends, and enrollment shifts upward once the economy recovers and improves over time.
25 years ago, a good friend of mine and education finance veteran stated that credit unions were “the perfect student lender.” He noted that credit unions are consumer friendly, service oriented and motivated to help their customers (members) more than any other type of financial institution. Today, well over 1,000 credit unions nationwide offer private student loans either directly or through referral programs. The three key events in a person’s life are attending college, buying their first home, and retirement. Credit unions offer products and services to help meet these needs, but much more can be done to help with attending college.
Despite the impending interest rate hikes, America will see an enrollment increase in the fall of 2022. As a result, families will be looking for loan products that fill the financial gap between expected family contribution and cost of attendance. Credit unions are needed more than ever to help fill this gap.
At CURevl, our professionals work directly with credit unions nationwide to offer college planning and education finance products that are affordable yet positive yielding. As we continue to weather the inflation-driven economic storm that plagues us today, our mission is to find creative ways to connect families to credit unions and help those families achieve their dreams of a better tomorrow.
We invite all credit unions to check us out at curevl.com and compare our products, services and team members to other providers. Our combination of college planning, loan origination, life-of-loan servicing and capital markets support sets us apart from the competition. And best of all, we are just a phone call away.