A Private Eye for Private Loans

A Private Eye for Private Loans Finding Smart Funding for your Students

Alec Reinstadtler, Education Finance Partners

Presentation Date: May 20 — VASFAA Conference

2

A Year of Volatility

Wall Street

• US Economy

• Consumer Finance Markets

Main Street

• American Savings

• Students’ Needs

On Campus

• How to Equip Students and Families

• Why a Lender List is Important

• Looking Forward

3

Wall Street US Economy

Mortgage Market

• Record numbers of mortgages go into default and foreclosure

Foreclosures have skyrocketed 57%

1 out of every 538 homes is now in foreclosure

Housing Market

• The housing market depreciates on a national level

Home values have depreciated 8.9%

Home sales have declined 21.4%

4

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 August the Fed has cut key rates 3.00%

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

5

Wall StreetConsumer Finance Markets

Deteriorating Mortgage MarketAs mortgages go into default and foreclosure, investors in the mortgage market see record breaking losses.

Widespread LossesInvestors are taking sizable write downs

Fearful & Reluctant InvestorsInvestors have transitioned large portions of their investments into Treasuries to shield their portfolios from further losses.

ConsumerFinance

ConsumerFinance

Student Loans

Student Loans

Personal Loans

Personal Loans Credit CardsCredit Cards

Debt Consolidation

Debt Consolidation

MortgagesMortgages

Auto LoansAuto Loans

Home EquityHome Equity

6

Wall StreetStudent Loans

Lending to the Student

• Credit Underwriting

• Pricing

• Benefits & TermsLong Term Funding

• Securitization

• Balance Sheet

Short Term Funding

• Credit Lines

7

Wall StreetSecuritization Market Breakdown

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

Private Student Loans — Securitizations

8

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

Wall StreetCost of Funds Soar

Tre

as

ure

Sp

rea

d (

BP

S)

100

90

80

70

60

50

40

30

20

10

0

Private Student Loans — Cost of Funds

9

Wall Street

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

Private Student Loans

10

Wall StreetStudent Loans

Lenders Face Tough Times

• Capital markets remain closed

• New credit lines are difficult to get

• 45 loan providers have suspended or exited student loans

• 11 private loan programs have ceased—more to follow

Loan Programs Change

• Borrower benefits have been reduced

• Private loan costs have and will continue to rise

• Risk tolerance has diminished

11

Wall StreetStudent 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

Main Street

“Savings failure: American college savers get a “D””Reuters

“Economic woes could put college students in a bind”Waterbury Republican American

“College bound students may have a hard time getting a loan”KWTX

13

Main StreetThe Funding Gap

Federal Loan Aid35%

Grants andScholarships

25%

Employment and Work Study

20%

Funding Gap20%

Source: College Board, October 2007

14

Main StreetThe 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 US Dept. of Commerce, The Organization of Economic Cooperation and Development

2 “2006 Retirement Confidence Survey,” Employee Benefit Research Institute

3 The OFI Private Investments College Savings Index, Oppenheimer Funds, 2008

15

Main StreetThe American Family

Home Values Dropping

• 66.2% of Americans own their homes1

• Home values have dropped 8.9% in the past year2

Costs Rising, Income is Flat

• Household incomes rising at less than 2%

• Inflation growing at 4%

• Tuition is increased 6–8%

1 US Census Bureau

2 Q407 vs Q406, S&P/Case—Shiller Home Price Index

16

Main StreetThe 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

On Campus

“How to Head Off a Potential Student Loan Crisis”Inside Higher Education

“Lenders Drop Out of Student Loan Market”Business Week

“GWU Prepares for Student Loan Scare”The GW Hatchet

18

On CampusPreparing & 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

19

On CampusWhy a Lender List is so Important

• Helps families make informed decisions

• Opportunity to insure they have exhausted FFEL resources

• Prevents students from applying for a loan they have zero chance of receiving

• Prevents students from obtaining loans from direct mail or online searches

20

On CampusWhy a Lender List is so Important

• Insert Google Page

21

On CampusLender Lists: What Should Families Know?

• Is there a minimum income requirement?

• Does the loan require a co-signer?

• Does the lender disclose rates and fees up front?

• Who gets the lender’s best advertised rates?• “Less than 10% of borrowers get the best advertised rate on private student loans and more than

2/3 get the worst rates...” Mark Kantrowitz- Finaid.org

• Can the student defer payment in school?

• Is full-time enrollment and/or SAP required?

22

On CampusLooking Ahead

A Strong Lender

• Navigates intelligently

• Adjusts as necessary

• Stays committed to students

23

On CampusLooking Ahead

A Smart Borrower

• Maximizes federal & state aid

• Does their research

• Has a cosigner