Economic Turmoil and
Private Student Loans
What it Means
to Your Students
California Lenders for Education (CLFE)
Presented by Mary Jo Osborn, Wells Fargo, Jeff Lackey, Sallie Mae, Inc.
Presentation Date: April 27, 2009 — WASFAA Conference
What is an Alternative (or Private) Loan?
• Private loans are those that exist outside the federal student loan
system and are not guaranteed by the federal government.
• Private loans may be provided by banks, non-profit agencies, or
other financial institutions.
• Private Loans for education were created to bridge the gap between
the funds available to a student and school costs.
• Considered “alternative” loans, private loans should be used only
after all federal student aid options (including federal student loans)
have been exhausted.
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Key Distinctions between Private and Federal Student
Loans
• Funding, guarantee structure, and associated risk of default
• Interest rates, fees, and repayment terms
• The variability in products offered
• Borrower experience may be different
3
A Year of Volatility
Capitol Hill
Main Street
• Legislative Changes
• American Savings
• Increased Media Attention
• Students’ Needs
Wall Street
On Campus
• US Economy
• How to Equip Students
and Families
• Consumer Finance Markets
• Looking Forward
4
Capitol Hill
“Higher education a main priority in election season”
The Setonian
“Key lawmakers plan for student loan credit crunch”
Inside Higher Education
“Senator Kennedy offers student-loan bill to ease effects of credit crunch”
The Chronicle of Higher Education
Capitol Hill
Legislative Changes
Increased Media Coverage
• Student Lending Accountability, Transparency, and Enforcement
(SLATE) Act of 2007
• Brings student loan industry into national spotlight
Congress Reacts
• Over 12 Bills proposed in the House of Representatives
while an additional 14 introduced in the Senate
College Cost Reduction and Access Act Passed into Law
• Cuts subsidies to federal lenders
• Caps payment amounts based on graduate’s income for federal loans
• Will reduce federal loan interest rates over the next 10 years
• Provides federal loan forgiveness for 10 years of public service
• Increase in Pell Grant limits
6
Capitol Hill
Legislative Changes
Ensuring Continued Access to Student Loans Act of 2008 Passed
into Law (H.R. 5715) on 5/7/2008
• Increased annual and aggregate loan limits
• Grace Period and Deferment for Parent PLUS Borrowers
• LLR Provisions
• Department as Secondary Market
• Prohibited Inducements
• Extended through 6/30/2010 - H.R. 6889 passed on 10/7/2008
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Capitol Hill
Legislative Changes
The Higher Education Opportunity Act of 2008 signed into Law (H.R.
4137) on 8/14/2008
Impact of Reauthorization Bill
• Makes the “code of conduct” law
• Prohibit lender inducements
• Disclosure regarding preferred lender list selection process
• A new Title X on Private Education Loans
• Increased disclosure required for private loans
• Require lenders to receive a form by the borrower (provided by the
school) that includes COA, EFC, and other aid received
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Wall Street
“Auction failures force students to lose college funds”
Bloomberg
“Squeeze Takes Toll on US Student Loans”
The Financial Times
“Credit crunch hits private student loans”
Wall Street Journal
Wall Street
US Economy
Mortgage Market
• Record numbers of mortgages go into default and foreclosure
Foreclosures have skyrocketed 121%
1 out of every 171 homes is now in foreclosure
Housing Market
• The housing market depreciates on a national level
Home values have depreciated 33.5% in California (July 2007 – July 2008)
Foreclosure activity at record levels
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Wall Street
US Economy
•
Source: RealtyTrac.com July 25, 2008 11
Wall Street
US Economy
The Federal Reserve Steps In
• In an attempt to reactivate capital markets and alleviate consumer debt
burden, the Federal Reserve begins a series of key rate cuts
Since September the Fed has cut key rates 3.25%
Probable Recession
• In addition to the breakdowns in the housing and mortgage markets,
other sectors begin to slow down and shrink
Retail
Manufacturing
Service
Stocks
Currency
Unemployment
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Wall Street
Student Loans
Short Term Funding
• Credit Lines
Long Term Funding
• Securitization
• Balance Sheet
Lending to the Student
• Credit Underwriting
• Pricing
• Benefits & Terms
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Wall Street
Securitization Market Breakdown
Private Student Loans — Securitizations
6,000,000,000
5,000,000,000
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
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Wall Street
Cost of Funds Soar
Private Student Loans — Cost of Funds
100
90
80
Treasure Spread (BPS)
70
60
50
40
30
20
10
0
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
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Wall Street
Private Student Loans
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
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Wall Street
Student Loans
Lenders Face Tough Times
• Capital markets remain closed
• New credit lines are difficult to get
• There are still 5-10 loan providers making private loans
Loan Programs Change
• Borrower benefits have been reduced
• Private loan costs have and will continue to rise
• Risk tolerance has diminished
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Wall Street
Student Loans
Effect on the Borrower
• Increased rates
• Increased fees
• Higher credit quality required
• Reduced ability to get all the funds needed
• Less choice
• Shorter repayment periods
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Main Street
“Economic woes could put college students in a bind”
Waterbury Republican American
“College bound students may have a hard time getting a loan”
“Savings failure: American college savers get a “D””
Reuters
KWTX
Main Street
The Funding Gap
Federal Loan Aid
35%
Grants and
Scholarships
25%
Funding Gap
24%
Source: College Board, October 2007
Employment
and Work Study
20%
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Main Street
The American Family
America Does Not Save
• In 2006, America’s Personal Savings Rate was negative 1.0%1
• Only 18% are “very confident” they have enough to retire
• 54% aged 45–54 have saved less than $50K towards retirement2
• 3% of US households have saved enough to pay for college3
• 22% have saved nothing
1
2
3
US Dept. of Commerce, The Organization of Economic Cooperation and Development
“2006 Retirement Confidence Survey,” Employee Benefit Research Institute
The OFI Private Investments College Savings Index, Oppenheimer Funds, 2008
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Main Street
The American Family
Home Values Dropping
• 66.2% of Americans own their homes1
• Home values have dropped over 15% in the past year2
Costs Rising, Income is Flat
• Household incomes rising at less than 2%
• Inflation growing at 5.2%
• Unemployment rose to 5.5% June 2008
• Tuition is increased 6–8%
1
2
US Census Bureau
Standard & Poor’s/Case-Shiller Home Price Indices
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Main Street
The American Family
Tough Choices for Families
• 70% of families finance education
• Home equity shrinking and unavailable
• 24% of students turn to credit cards to finance tuition1
1
“Undergraduate Students and Credit Cards,” Nellie Mae, May 2005
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What worries families when considering paying for college?
•Source:
Sallie Mae’s “How America Pays for College” Sallie Mae’s national study of college students and Parents, conducted by Gallup, 2008.
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On Campus
“How to Head Off a Potential Student Loan Crisis”
“Lenders Drop Out of Student Loan Market”
“GWU Prepares for Student Loan Scare”
Inside Higher Education
Business Week
The GW Hatchet
On Campus
Preparing & Equipping Families
• Help parents and students cope with the chaos in the student funding
arena
• Proactive in providing information
• Invite borrowers to engage in conversations about their experience
• Re-clarify process and procedures
• Present realistic picture of the situation
• Collaborate with other agencies and institutions
Source: ELM Express Newsletter, Spring 2008. Guest Editorial by Steve Sonnenberg
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On Campus
Preparing & Equipping Families
• Educate borrowers on the importance of cosigners with
strong credit profiles
Private loans are credit based — borrowers need established credit
Distribute credit education materials
• Recommend lenders that offer consumer loan expertise
• Have borrowers shop for the best loan for them
Availability
Rates and Fees
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On Campus
Looking Ahead
A Strong Lender
• Navigates intelligently
• Adjusts as necessary
• Stays committed to students
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On Campus
Looking Ahead
A Wise School
• Equips their students
Funding options
Credit education
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On Campus
Looking Ahead
A Smart Borrower
• Maximizes federal & state aid
• Does their research
• Has a cosigner
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On Campus
Looking Ahead
•
One-quarter (25%) college families don’t complete the FAFSA
application
•
Not surprisingly, application rates decline with household income
•
One-in-four families with incomes between $35,000 and $100,000 do
not fill out the FAFSA application
•Completion
of FAFSA by Annual
Household Income % Applied
•Source:
Sallie Mae’s “How America Pays for College” Sallie Mae’s national study of college students and Parents, conducted by Gallup, 2008.
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On Campus
The Bottom Line
Wall Street & the US Economy
Main Street
• Probable recession
• Funding gap
• Credit crunch
• Tough choices
Capitol Hill
On Campus
• New legislation
• Changing loan landscape
• Pending changes
• Equip students and families
On behalf of CLFE and our membership organizations
we thank you for the opportunity to present today’s session.
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