NCHELP 2012 Spring Convention
Private Student Loan Market
May 2012
PRIVATE STUDENT LOAN MARKET
Private Credit Market Potential for Growth
National Private Student Loan Originations*
Volume by Year
$Bn
• CFPB March 2012
Report:
– Outstanding student
loan debt is $1TRN
25.0
20.0
15.0
22.6
• 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
10.0
24.3
19.9
16.7
12.8
5.0
0.0
1.9
2.6
3.1
3.8
AY96
AY97
AY98
AY99
5.2
6.4
7.6
AY00
AY01
AY02
Nonfederal Loans
Source
11.8
10.0
AY03
AY04
AY05
AY06
AY07
AY08
AY09
8.6
7.9
AY10
AY11
GradPLUS Loans
College Board Trends in Student Aid 2011
• 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
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
2
PRIVATE STUDENT LOAN MARKET
Private Loans Can Help Fill $200Bn Funding Gap
2011-2012 Estimated Sources of Funding for Higher Education
• Higher Ed funding gap
traditionally filled by
parental contributions
• Also funded by other
sources of consumer
debt
– Home equity loans
– Credit cards
Total Cost of Higher Education – $433Bn
Federal
Loans,
$115 ,
27%
Funding
Gap,
$200 ,
46%
• Private student loans
can help fill the need
• 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,
$9 , 2%
Grants,
$109 ,
25%
– Private loans expected to account for
approximately $9Bn
• Annual funding gap of $200Bn
Source
College Board, Trends in College Pricing 2011; Department of Education Student Loans Overview FY 2013 Budget Request; National Center for Education Statistics 2012
3
PRIVATE STUDENT LOAN MARKET
Student Lending – Industry in Transition
Industry
Consolidation
Increased
Price Competition
Origination
Volume Low
&
Funding Costs High
• 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
• 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%
4
PRIVATE STUDENT LOAN MARKET
Student Lending – Industry in Transition (cont’d)
More
Conservative
Structures,
Collateral &
Disclosure
Legislation
Adds Uncertainty
To Industry
• Rating Agencies and investors more conservative
• Better quality collateral
• More overcollateralized conservative structures
• Higher default assumptions
• More disclosure
• 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
5
PRIVATE STUDENT LOAN MARKET
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
Originators
Banks
For-Profits
Not-For-Profits
• Charter One
• Sallie Mae
• New Jersey HESAA
• PNC
• First Marblehead
• Massachusetts EFA
• Suntrust
• Discover
• Iowa SLLC
• Wells Fargo
• Credit Unions
6
PRIVATE STUDENT LOAN MARKET
Consolidation of Student Loan Market Participants
• Activity includes:
– Whole Loan Portfolio
Sales
– Monetization of
Servicing / Admin Fee
Streams
• 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
– Residual Interest Sales
– Outsourcing of
Servicing
Overview of Student Loan Activity
Date
Seller / Transferor
Buyer / Transferee
Sept. 2010
Student Loan Corp.
Discover
(Citi)
Size Description
$8.7Bn
Student Loan Corp. sells $8.7Bn
private loan portfolio to Discover
Limited private lending
November 2010
December 2011
March 2012
California Student
Aid Commission
(CSAC) / EdFund
Educational
Credit
Management
Corporation
(ECMC)
Access Group
ACS
First Marblehead
Goal Structured
Solutions
U.S. ED orders transfer of
EdFund’s FFELP portfolio to
ECMC without compensation to
$38.0Bn State of California
ECMC now designated
guarantor for CSAC
Access Group outsources
$8.0Bn student loan activities to ACS on
$8.0Bn portfolio
First Marblehead sells legacy
trust administration business for
$13.7MM $13.7MM to Goal
Limited private lending
7
PRIVATE STUDENT LOAN MARKET
Student Loan Products Highly Competitive
• Products developed to
meet borrower needs
– But there are funding
considerations
Variable &
Fixed Rate
Product Pricing
• 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
Funding
Considerations
• 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
8
PRIVATE STUDENT LOAN MARKET
Student Loan Issuance Volume
Term Credit Facilities
Private Student loan Issuance in 2011 – $3.4Bn
• Provide alternative
long-term financing
for variable rate loans
• Tax-exempt market funded mostly fixed rate loans
• Taxable LIBOR FRN market funded mostly variable rate loans
–Direct placement
–Requires one rating
–Single-A level
2011 Private Student Loan Issuance
Select Issuers’ Funding Costs by Market
Total Private Student Loans – $3.4Bn
SLM 2012-A
Taxable
LIBOR FRN
AAA/Aaa (F/M)
1.5 Yr
4.2 Yr
5.7 Yr
VSAC 2011 A-1
Tax-Exempt
Fixed Rate
Aa2/AA (M/F)
9.72 Yr
Yield
Spread
4.24%
MMD + 1.63%
9.85 Yr
Yield
Spread
3.67%
MMD + 1.88%
–Prepayable at any
time
–No prefunding and
no recycling
Tax-Exempt
VRDN
7%
Tax-Exempt
Fix
30%
Source: Morgan Stanley
Taxable
Fix/LIBOR
FRN
63%
RISLA 2012 A
Tax-Exempt
Fixed Rate
A+/A (S/F)
ISL 2011-B
Term Loan
Variable Rate
LIBOR
A (F)
NA
1ML + 1.10%
Int Swaps + 2.40%
1ML + 3.00%
3ML + 3.50%
Source: Morgan Stanley
9
PRIVATE STUDENT LOAN MARKET
Conservative Collateral and Structural Trends
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
SLM New Originations
2008
2011
709
714
Co-signed
54%
For-Profit Schools
33%
FICO’s
Source: SLM Corporation Q1 2012 Investor Presentation, May 7, 2012
SLM Private Education Trusts
2009-D
2012-B
Co-signed
64%
77%
62%
Direct to Consumer
34%
12%
17%
Remaining Term to Maturity
211
164
Source: Standard & Poor’s SLM Private Education Loan Trust 2012-B Presale,
April 4, 2012
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%
10
PRIVATE STUDENT LOAN MARKET
Rating Agency Update
• 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
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
11
PRIVATE STUDENT LOAN MARKET
Investor Update
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
12
PRIVATE STUDENT LOAN MARKET
Consumer Finance Protection Bureau (CFPB)
Description
Impact
• CFPB is the key legislative
development in 2012
– Focus on consumer risk
Mandate:
Provide
Consumers
Information on
Financial
Products
• 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
Student
Lending
a Key Focus
Area
• 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 Before
You 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
13
PRIVATE STUDENT LOAN MARKET
Recent Legislative Developments
Description
• Regulatory and legislative
environment creates
uncertainty in market
Impact
Dischargeability
in Bankruptcy
• 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
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
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 privateactivity bonds from AMT
• May boost market demand
and lower yields
14