Economic turmoil and private student loans what it means to your students
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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?.

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Economic turmoil and private student loans what it means to your students

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


Economic turmoil and private student loans what it means to your students

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.


Economic turmoil and private student loans what it means to your students

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


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

A Year of Volatility


Capitol hill

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

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


Capitol hill legislative changes1

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


Capitol hill legislative changes2

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

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

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


Wall street us economy1

Wall Street US Economy

  • Source: RealtyTrac.com July 25, 2008


Wall street us economy2

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


Wall street student loans

Wall StreetStudent Loans

Short Term Funding

  • Credit Lines

Lending to the Student

  • Credit Underwriting

  • Pricing

  • Benefits & Terms

Long Term Funding

  • Securitization

  • BalanceSheet


Wall street securitization market breakdown

Wall StreetSecuritization 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


Wall street cost of funds soar

Wall StreetCost of Funds Soar

Private Student Loans —Cost of Funds

100

90

80

70

60

50

Treasure Spread (BPS)

40

30

20

10

0

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108


Wall street1

Wall Street

Private Student Loans

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108


Wall street student loans1

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


Wall street student loans2

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

Main Street

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

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

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


Main street the funding gap

Main StreetThe Funding Gap

Federal Loan Aid

35%

Grants andScholarships

25%

Funding Gap

24%

Employment and Work Study

20%

Source: College Board, October 2007


Main street the american family

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

  • 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


Main street the american family1

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%

  • US Census Bureau

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


Main street the american family2

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

  • “Undergraduate Students and Credit Cards,” Nellie Mae, May 2005


What worries families when considering paying for college

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.


On campus

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


On campus preparing equipping families

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


On campus preparing equipping families1

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


On campus looking ahead

On CampusLooking Ahead

A Strong Lender

  • Navigates intelligently

  • Adjusts as necessary

  • Stays committed to students


On campus looking ahead1

On CampusLooking Ahead

A Wise School

  • Equips their students

    Funding options

    Credit education


On campus looking ahead2

On CampusLooking Ahead

A Smart Borrower

  • Maximizes federal & state aid

  • Does their research

  • Has a cosigner


On campus looking ahead3

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 donot 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.


On campus the 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 CampusThe Bottom Line

On behalf of CLFE and our membership organizations

we thank you for the opportunity to present today’s session.


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