National Council of Higher Education Resources

1. Recent Developments to Replace LIBOR • Moderator • Theresa O’Neil, Bank of America Merrill Lynch • Speakers • Jennifer Earyes, NAVIENT • Julia Hoke, North Carolina State Education Assistance Authority National Council of Higher Education Resources NCHER 2019 Annual Conference Clearwater, Florida June 4, 2019

2. The Future of USD LIBOR is Uncertain • After 12/31/2021 banks will no longer be required to submit data to support the calculation of LIBORs. The 16 banks that currently submit to USD LIBOR could choose to continue to submit data voluntarily. It is unknown what banks will choose to do. $200 TRILLION OF USD LIBOR BASED CONTRACTS • There are more than $200T of USD LIBOR contracts outstanding • There is ~$500M of daily 3M LIBOR trades, which are the basis for creating the LIBOR curve • This creates huge reliance on a small, fragile and potentially shrinking base rate • If something abruptly happened to LIBOR, there could be material problems for that $200T of contracts Priced off less than $1 billion of Daily Interbank (USD LIBOR) trading

3. Alternative Reference Rates Committee • Following Andrew Bailey at the UK’s Financial Conduct Authority (FCA) indicating that the continued production of LIBOR is not guaranteed beyond 2021, the ARRC was reconstituted in 2018 with an expanded membership to help to: • Ensure the successful implementation of the Paced Transition Plan, • Address the increased risk that LIBOR may not exist beyond 2021, and • Serve as a forum to coordinate and track planning across cash and derivatives products and market. • In order to fulfill this mandate, the ARRC continues to conduct the widest possible outreach, seeking input and comments from all parties that may be affected by the possible cessation of LIBOR after 2021.

4. What Is SOFR? • The ARRC selected SOFR as its endorsed alternative rate • Secured Overnight Financing Rate • A combination of 3 Treasury repo rates • Very deep, very liquid • Nearly $1T of daily trading • Aligned with IOSCO principles • But very different from LIBOR

5. LIBOR versus SOFR

6. What about The Student Loan Product? • Private Loans • Estimated approx. $40-60 billion of student loans are indexed to USD LIBOR • In-School v Refinance • Government Loans • No borrower’s loan is indexed to LIBOR • FFELP Special Allowance Payment may be calculated using 1-month USD LIBOR • Highly unique challenge, limit discussion to parties directly impacted

7. All Fallbacks Were Not Created Equal…

8. Making Progress • ARRC reconstituted to expand focus beyond derivatives work • SOFR published April 2018 • ICE implements new LIBOR calculation methodology to use transaction data • SOFR swaps and SOFR futures are traded on CME & LCH Clearinghouses • SOFR-indexed bonds issued • FASB adds SOFR-OIS as eligible benchmark rate for hedge accounting • ARRC to recommend best practice for fallback language for most contract-types • Develop SOFR term structure through increasing liquidity in SOFR market • Advance SOFR to become acceptable for consumer lending • Determine how to handle “legacy” LIBOR-indexed contracts, hedging & funding structures

9. NEW Contracts • New transactions continue to reference LIBOR • Many new transactions contain provisions designed to smooth the transition to a new index, if LIBOR is discontinued. • As an example, new transition provisions might: • define a LIBOR termination event (events that demonstrate that LIBOR has been discontinued), • allow for an alternate reference rate to be selected from among reference rates that are officially recognized or that have come to be used in new similar transactions, • provide a mechanism to set a margin to reflect the anticipated spread between the new rate and LIBOR, and • specify a notice and approval procedure that limits the number of investors required to consent. • The Alternative Reference Rates Committee released consultations to develop standardized transition provisions of this nature across contract types.

10. Can LIBOR Be Continued? • Don’t count on it. • ICE has indicated a desire and willingness to continue to produce LIBOR after 2021 • The ability of ICE to do so would be dependent on a sufficient number of panel banks being voluntarily willing to continue to submit rates • It may be possible for the rate calculation process to be further refined, so that it is based more on market transactions or derived from market transaction, and less dependent on expert judgment • At this time, panel banks have not yet publicly indicated a willingness to continue to submit rates after 2021 • Policymakers should be more aware of the difficulty in transitioning legacy assets and transactions away from LIBOR, and of the potential for a “wall of litigation” created as an unintended consequence of well-meaning reforms

11. 5 Actions to Take Now • Take Inventory Understand where LIBOR exists within your organization. • Do Your Homework Educate yourself about LIBOR’s uncertain future. • Assess the Impacts Assess firm-wide exposure to understand the impacts & challenges. • Get Fallback Language Your new contracts need to address replacement rates. • Be Involved Get involved in the private education loan conversation via the ARRC website. • For further information or to discuss FFELP SAP impacts, contact Jennifer Earyes – Jennifer.Earyes@Navient.com