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

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• 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.

What is an Alternative (or Private) Loan?

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• Funding, guarantee structure, and associated risk of default

• Interest rates, fees, and repayment terms

• The variability in products offered

• Borrower experience may be different

Key Distinctions between Private and Federal Student Loans

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A Year of Volatility

Capitol Hill

• Legislative Changes

• Increased Media Attention

Wall Street

• US Economy

• Consumer Finance Markets

Main Street

• American Savings

• Students’ Needs

On Campus

• How to Equip Students and Families

• Looking Forward

Capitol Hill

“Key lawmakers plan for student loan credit crunch” Inside Higher Education

“Higher education a main priority in election season” The Setonian

“Senator Kennedy offers student-loan bill to ease effects of credit crunch”The Chronicle of Higher Education

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Capitol HillLegislative 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

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Capitol HillLegislative 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 HillLegislative 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

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

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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

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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 StreetStudent Loans

Lending to the Student

• Credit Underwriting

• Pricing

• Benefits & TermsLong Term Funding

• Securitization

• Balance Sheet

Short Term Funding

• Credit Lines

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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

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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

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Wall Street

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

Private Student Loans

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Wall StreetStudent 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 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

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Main StreetThe Funding Gap

Federal Loan Aid35%

Grants andScholarships

25%

Employment and Work Study

20%

Funding Gap24%

Source: College Board, October 2007

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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

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Main StreetThe 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 US Census Bureau

2 Standard & Poor’s/Case-Shiller Home Price Indices

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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

What worries families when considering paying for college?

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•Source: Sallie Mae’s “How America Pays for College” Sallie Mae’s national study of college students and Parents, conducted by Gallup, 2008.

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

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On CampusPreparing & 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 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

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On CampusLooking Ahead

A Strong Lender

• Navigates intelligently

• Adjusts as necessary

• Stays committed to students

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On CampusLooking Ahead

A Wise School

• Equips their students

Funding options

Credit education

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On CampusLooking Ahead

A Smart Borrower

• Maximizes federal & state aid

• Does their research

• Has a cosigner

On CampusLooking 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

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•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 CampusThe Bottom Line

Wall Street & the US Economy

• Probable recession

• Credit crunch

Capitol Hill

• New legislation

• Pending changes

Main Street

• Funding gap

• Tough choices

On Campus

• Changing loan landscape

• Equip students and families

On behalf of CLFE and our membership organizationswe thank you for the opportunity to present today’s session.