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NCHELP 2012 Spring Convention
Private Student Loan Market
May 2012
Private Credit Market Potential for Growth
PRIVATE STUDENT LOAN MARKET
Source College Board Trends in Student Aid 2011
Notes* Based on estimates from the College Board from an annual survey of private lenders. For 2011, the College Board also relied on Student Lending Analytics to develop their estimates.
Amounts are adjusted for inflation
• Higher education costs outpace median household income • Increase in expected enrollment• Decrease in grants, aid, university endowment funds, home equity lines and
credit cards • Budget Control Act of 2011 eliminates subsidies for graduate students and
repayment incentives
National Private Student Loan Originations*
Volume by Year$Bn
• CFPB March 2012 Report:
– Outstanding student loan debt is $1TRN
• Project on Student Debt:
– Average student loan debt was $24,250 for Class of 2010
• College Board Trends in Student Aid 2011:
– Private student loans only 7% of student lending in 2011
– From 2005-2008, private loans were 25% of student lending
2
1.9 2.6 3.1 3.8 5.2 6.4 7.610.0
12.8
16.719.9
22.624.3
11.88.6 7.9
0.0
5.0
10.0
15.0
20.0
25.0
AY96 AY97 AY98 AY99 AY00 AY01 AY02 AY03 AY04 AY05 AY06 AY07 AY08 AY09 AY10 AY11
Nonfederal Loans GradPLUS Loans
Private Loans Can Help Fill $200Bn Funding Gap
• U.S. annual cost of higher education approximately $433Bn in 2011-2012 AY
– Federal Loans and Grants satisfy only half of funding at $224Bn
– Private loans expected to account for approximately $9Bn
• Annual funding gap of $200Bn
2011-2012 Estimated Sources of Funding for Higher EducationTotal Cost of Higher Education – $433Bn
Source College Board, Trends in College Pricing 2011; Department of Education Student Loans Overview FY 2013 Budget Request; National Center for Education Statistics 2012
• Higher Ed funding gap traditionally filled by parental contributions
• Also funded by other sources of consumer debt
– Home equity loans
– Credit cards
• Private student loans can help fill the need
3
PRIVATE STUDENT LOAN MARKET
Funding Gap,
$200 , 46%
Federal Loans, $115 , 27%
Grants, $109 , 25%
Private Loans, $9 , 2%
Student Lending – Industry in Transition
4
IndustryConsolidation
• Rapid changes driving industry consolidation & acquisition • Portfolio sales & transfers• Outsourcing of administration & servicing• Sale of legacy administration & servicing
• For-profits offering low variable rate products• Access to low yielding bank depositor base
• State agencies and not-for-profits in some cases unable to originate • Lack of variable rate financing options and low cost funding
IncreasedPrice Competition
• Private loan origination volume $8Bn in 2010-2011• Down from $24Bn in 2007-2008
• Competing against Direct Lending and Pell Grants• Funding is costly in both tax-exempt and ABS markets
• Initial parity levels up to 160%
OriginationVolume Low
&Funding Costs High
PRIVATE STUDENT LOAN MARKET
Student Lending – Industry in Transition (cont’d)
5
More ConservativeStructures,Collateral & Disclosure
• Rating Agencies and investors more conservative• Better quality collateral• More overcollateralized conservative structures• Higher default assumptions• More disclosure
Legislation Adds Uncertainty
To Industry
• Legislative developments impacting private loan originations:• Launch of Consumer Finance Protection Bureau (CFPB)• Know Before You Owe Act of 2012• Durbin Bill and private student loan bankruptcy dischargeability• Dodd-Frank Act and other regulatory reforms
PRIVATE STUDENT LOAN MARKET
Banks
• Charter One
• PNC
• Suntrust
• Wells Fargo
For-Profits
• Sallie Mae
• First Marblehead
• Discover
Not-For-Profits
• New Jersey HESAA
• Massachusetts EFA
• Iowa SLLC
• Credit Unions
Originators
Private Student Loan Market Participants
• New entrants have changed dynamics of private student loan market
– Banks and for-profit entities with bank subsidiaries are key players in originating variable rate student loans
• Not-for-profits transitioning away from historical FFELP platforms to originate fixed rate private student loans
• Credit unions also entering private lending market to provide borrowers affordable products
6
PRIVATE STUDENT LOAN MARKET
Consolidation of Student Loan Market Participants
7
• Activity includes:
– Whole Loan Portfolio Sales
– Monetization of Servicing / Admin Fee Streams
– Residual Interest Sales
– Outsourcing of Servicing
Overview of Student Loan Activity
Date Seller / Transferor Buyer / Transferee Size Description
Sept. 2010 Student Loan Corp. (Citi) Discover $8.7Bn
Student Loan Corp. sells $8.7Bn private loan portfolio to Discover Limited private lending
November 2010 California Student Aid Commission (CSAC) / EdFund
Educational Credit Management Corporation (ECMC)
$38.0Bn
U.S. ED orders transfer of EdFund’s FFELP portfolio to ECMC without compensation to State of California
ECMC now designated guarantor for CSAC
December 2011 Access Group ACS $8.0Bn Access Group outsources student loan activities to ACS on $8.0Bn portfolio
March 2012 First Marblehead Goal Structured Solutions $13.7MM
First Marblehead sells legacy trust administration business for $13.7MM to Goal Limited private lending
• Fundamental industry shift due to margin erosion & legislation
• Consolidation and in some cases exit / suspension of private student lending
– Chase and US Bank announced exits from private student lending
– Chase to offer student loans only to existing clients
– US Bank is exiting product entirely
PRIVATE STUDENT LOAN MARKET
Student Loan Products Highly Competitive
8
• Payment Structure – Full deferral, minimum $25, IO, or P&I
• Current cashflowing products better suited to capital markets funding structures
• Payment Term – 10, 15+ years repayment & grace / deferral options
• Long payment terms lengthen maturity horizon of bonds & funding costs
FundingConsiderations
• Products developed to meet borrower needs
– But there are funding considerations
• For-profits offer variable rate loans priced as low as 1ML + 2.0%
• State agency & non-profit offer fixed rate loans• Priced to compete against 7.9% Direct
PLUS• Recently Sallie Mae introduced 5.75% fixed
rate loan
Variable & Fixed RateProduct Pricing
PRIVATE STUDENT LOAN MARKET
Student Loan Issuance Volume
2011 Private Student Loan IssuanceTotal Private Student Loans – $3.4Bn
Source: Morgan Stanley
Taxable Fix/LIBOR
FRN63%
Tax-Exempt Fix
30%
Tax-Exempt VRDN
7%
9
PRIVATE STUDENT LOAN MARKET
Select Issuers’ Funding Costs by Market SLM 2012-A Taxable LIBOR FRN AAA/Aaa (F/M)
1.5 Yr 1ML + 1.10% 4.2 Yr Int Swaps + 2.40% 5.7 Yr 1ML + 3.00%
VSAC 2011 A-1 Tax-Exempt Fixed Rate Aa2/AA (M/F)
9.72 Yr Yield 4.24% Spread MMD + 1.63%
RISLA 2012 A Tax-Exempt Fixed Rate A+/A (S/F)
9.85 Yr Yield 3.67% Spread MMD + 1.88%
ISL 2011-B Term Loan Variable Rate LIBOR A (F)
NA 3ML + 3.50%
Source: Morgan Stanley
Term Credit Facilities
• Provide alternative long-term financing for variable rate loans
–Direct placement
–Requires one rating
–Single-A level
–Prepayable at any time
–No prefunding and no recycling
Private Student loan Issuance in 2011 – $3.4Bn
• Tax-exempt market funded mostly fixed rate loans
• Taxable LIBOR FRN market funded mostly variable rate loans
Conservative Collateral and Structural Trends
10
SLM Private Education Trusts 2009-D 2012-B
Co-signed 64% 77%
Direct to Consumer 34% 12%
Remaining Term to Maturity 211 164
Source: Standard & Poor’s SLM Private Education Loan Trust 2012-B Presale, April 4, 2012
PRIVATE STUDENT LOAN MARKET
SLM New Originations 2008 2011
FICO’s 709 714
Co-signed 54% 62%
For-Profit Schools 33% 17%
Source: SLM Corporation Q1 2012 Investor Presentation, May 7, 2012
Collateral More Robust
• More robust collateral for new originations and securitizations
• Strong FICOs, more co-signers, fewer for-profit schools, fewer DTC loans, and shorter repayment terms
Starting Parity Can Be High
• Starting parity levels for tax-exempt structures starting at 105% to as high as 160% based on collateral, ratings, and nature of moral obligation, if applicable
• Taxable LIBOR FRN structures can feature starting parities of 135%
Rating Agency Update
11
Increasingly Conservative Stance
• Negative outlook on sector
– Unemployment rate greater than 8%
– High borrower debt and declining income
• Longer ratings process and timeline
– Dodd-Frank increases liability
– More data required and verification of data
– 17(g)-5 requires all communications with Rating Agencies be available online
– Not-for-profits and state agencies with non-SPV structures may be treated as exempt depending on Rating Agency
• Strong historical data required
– Otherwise, use more conservative industry-wide data
– Negatively affects structure
• Increased servicer disclosure and backup servicer requirements
• Overall effect includes:
– Conservative default, recovery & prepay assumptions
– Higher financing costs & equity contribution due to lower advance rates
– More onerous and costly process for time allocation, staffing & resources
• Requirements change from one transaction to next
PRIVATE STUDENT LOAN MARKET
Investor Update
12
Continued Focus on Transparency & Continuing Disclosure
• Investors require more information and disclosure
– At time of issuance and ongoing
• At issuance requests include
– Intex modeling capabilities
– Loan performance trends
– Historical default rates, recoveries & prepayment rates
– Historical volume trends & viability of future originations
– Loan level data or repline data
– Borrower benefit terms, if applicable
• Ongoing requests include
– Accessible & frequent remittance reports
– Updated monthly rather than quarterly
PRIVATE STUDENT LOAN MARKET
Consumer Finance Protection Bureau (CFPB)
Description Impact
Mandate: Provide ConsumersInformation onFinancialProducts
• Created by Congress & launched in 2011 • Active federal oversight over nonbank
consumer financial services providers• Authority over private student lenders and
for-profit schools• Also has enforcement powers
• Private loan industry subject to increased regulatory oversight
13
• CFPB is the key legislative development in 2012
– Focus on consumer risk
StudentLendinga Key FocusArea
• November 201 - Request for Information Regarding Private Education Loans and Private Education Lenders
• March 2012 – Began taking complaints from private student loans borrowers
• Under CFPB Review – For-profit schools and collection agencies
• Congressional report due in July of 2012
• May lead to industry changes
Know BeforeYou Owe Act and CFPB Initiative
• Bill to Amend Truth in Lending Act & HEA – Require lenders to obtain certification from schools & increase disclosure of federal loan alternatives
• Model Format – CFPB working with ED to publish model format for schools to communicate financial aid offers
• More administrative requirements for lenders and schools
• Longer timeline for loan acceptance & disbursement
PRIVATE STUDENT LOAN MARKET
Recent Legislative Developments
• Regulatory and legislative environment creates uncertainty in market
Description Impact
Volcker Rule
• Restricts banks & affiliates from proprietary trading
- Intended to exempt municipal securities • But does not include agencies or authorities of
States or political subdivisions • Results in estimated 40% of municipal
securities excluded from exemption
• Adverse impact on securities liquidity
• Impacts primary market pricing and secondary market trading
14
Tax-Exemption
• Proposals to reduce/eliminate tax exemption of muni bond interest
• Especially limit value of muni securities interest for high-income earners
- 28% cap on deductions and exclusions
• Tax uncertainty lowers market demand and raises borrowing costs
AMT
• Senate & House at odds on AMT provisions in transportation funding bill
• Senate version temporarily exempts private-activity bonds from AMT
• May boost market demand and lower yields
• Sen. Dick Durbin, D-Ill. advocating Fairness for Struggling Students Act
• Allow borrowers to wipe out private student loan debt in bankruptcy proceedings
• Higher loss and lower recovery assumptions
• Increased financing costs for private student loans
Dischargeabilityin Bankruptcy
PRIVATE STUDENT LOAN MARKET
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