isffa annual conference trends in financial aid and private student loans december 7, 2009

© Student Lending Analytics, LLC

ISFFA Annual ConferenceTrends in Financial Aid And Private Student Loans

December 7, 2009

This presentation does not constitute formal policy or legal advice and should not be relied upon as such.


Trends in Financial Aid And Private Student Loans

Agenda

How are schools thinking about their federal student loan program for 2010-11?

What are trends in federal student loan program?

What is current state of private student loan market?– How are schools addressing this shortfall in private student

loans?

How can financial aid staff inform and educate students and help them improve their financial literacy skills?


SLA Flash Survey: FFELP and DL TrendsCurrent Plans For 2010-11 (Overall)

5%

8%

26%

13%

5%

18%

24%

0.0% 10.0% 20.0% 30.0%

Other

Currently FFELP; Will Prepare For WhenRequired By Legislation

Currently FFELP; Preparing for DL; WouldRemain FFEL if Possible

Currently FFELP; Preparing for DL; Undecided

Currently FFELP; Committed Mid-year To DL

Currently FFELP; Committed To DL for 2010-11

We are and will remain a Direct Lending school

Percentage of Total Respondents

Survey question #1: Please select the choice which best describes your institution's current plans for the 2010-2011 academic year?


SLA Flash Survey: FFELP and DL TrendsActivities To Prepare for DL – Overall

5%

3%

18%

25%

28%

29%

29%

53%

56%

58%

59%

75%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

None

Consultants

Comm. Strategy

Mentor Relationship

Electronic Account

Team

Software Vendor

COD School Relations Center

Update PPA

FSA Conference

DL Website

DL Webinars

Percentage of Total Respondents

Survey question #2: CHECK ALL THAT APPLY. My institution (either myself or other staff members) has taken the following steps to prepare for Direct Lending should that become the platform for loan origination as well as servicing in 2010-11:


SLA Flash Survey: FFELP and DL Trends School Administration’s Interest In Direct

Lending

31%

37%

11%

6%

15%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Strongly agree Agree Moderatelydisagree

Strongly disagree Not sure

Per

cent

age

of T

otal

Res

pond

ents

wit

h L

iter

acy

Pro

gram

Survey question: COMMENT ON THIS STATEMENT. The administration at my institution is interested in having a contingency plan prepared to implement Direct Lending by the proposed July 1, 2010 start date.



Agenda




loans?




Trends in Federal Student Loans

Loan Type 2007-08(In Billions)

2008-09(In Billions)

Percent Change

Stafford - Subsidized

$29.5 $30.6 4%

Stafford - Unsubsidized

$28.5 $36.9 29%

PLUS $7.7 $7.4 -4%

GradPLUS $3.2 $3.9 24%

TOTAL $69.0 $78.8 14%

Source: SLA Analysis of Dept. of Education data on Data Center



Private Student Loans Growth…And Decline

$0

$10,000

$20,000

$30,000

95-96

96-97

97-98

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06

06-07

07-08

08-09

Tot

al S

tude

nt L

oans

(In

Mil

lion

s of

Con

stan

t 200

8 D

olla

rs)

Source: College Board: Trends in Student Aid



The Difference That Two Years Makes

2007 2009 (estimates)

Loan Volume $19 billion $10-$12 billion

Avg. Loan Margins LIBOR + 5% LIBOR + 9% to 9.5%

Min. FICO score 620 to 630 680 to 700

Cosigners 50-60% 80-90%

Quarterly Gross Defaults 0.7% 1.2%

Number of Lenders Multiple choices Limited choices

Sources: College Board data used for 2007 Loan Volumes and SLA estimates for 2009 Loan Volume estimates, reviewed securitization prospectus for Loan Margins, DBRS research for Quarterly Gross Defaults



Private Loan Originations – Sallie Mae

0

500

1,000

1,500

2,000

2,500

3,000

1Q 2Q 3Q 4Q

Per

cen

tage

of

Tot

al

2006200720082009

Source: SLA analysis of Sallie Mae loan originations disclosed in public SEC filings



Lender List Penetration Rates

4%

7%

8%

9%

21%

24%

28%

36%

65%

69%

72%

77%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

Charter One

Regions Bank

Citizens Bank

Fifth Third Bank

PNC Bank

SunTrust Bank

US Bank

Discover

Citibank

Sallie Mae

Wells Fargo

Chase

Percentage of Total

Source: SLA Analysis of 425 private loan lender lists, August 2009. State alternative loan programs appeared 107 times on these lists.



Interest Rate Ranges For Major Lenders

4.25% 4.25% 4.50% 4.28% 4.70%5.20% 5.13%

4.25%3.24%

11.00% 11.24% 11.50%11.03%

12.55% 12.20% 11.88%12.75%

13.24%

0.0%

5.0%

10.0%

15.0%

Discover WellsFargo

SunTrust PNCBank

Chase U.S. Bank Citibank SallieMae

Citizens

Cu

rren

t S

tart

ing

Inte

rest

Rat

e R

ange

s (I

nd

ex +

Mar

gin

)

Fees None None None 0% to 6% None None 0% to 6% 0% to 3% None

Source: SLA analysis of repayment examples on lender websites, November 2009



How Are State Alternative Loan Programs Different?

According to College Board, states originated almost $1 billion of private loan volume in 2008-09 or about 8% of non-federal loans

Usually apply to both residents of a given state, as well as students who attend college in a specific state

Apply early!– Complete bond offerings based on expected demand…but funds have

run out on occasion when credit markets were difficult– Bond offering documents may limit percentage of loans in portfolio that

can be deferred

Often have broad-banded pricing in which all approved applications get the same rate

Many provide differential interest rates based on repayment option selected



Interest Rate Ranges For Variable-Rate State Programs

1.79%

3.90% 3.91%4.71%

7.00%

8.43%

2.79%

3.90% 3.91%

7.71%7.00%

8.43%

0.0%

5.0%

10.0%

15.0%

NorthDakota

Minnesota Texas Vermont NorthCarolina

Maine

Cu

rren

t S

tart

ing

Inte

rest

Rat

e R

ange

s (I

nd

ex +

Mar

gin

)

Fees 0 to 2% None None 0% to 5% None 0 to 4%

Source: SLA analysis of state alternative loan program websites, November 2009



Interest Rate Ranges For Fixed-Rate State Programs

7.60%

6.00%6.80%

7.30%

8.75%7.92%

8.89%7.90%

8.49%

5.99% 6.00%6.80%

7.30% 7.55% 7.62% 7.75% 7.75% 7.76%

0.0%

5.0%

10.0%

15.0%

ND TX CT AK NY NJ MA IA RI

Cu

rren

t S

tart

ing

Inte

rest

Rat

e R

ange

s (I

nd

ex +

Mar

gin

)

Source: SLA analysis of state alternative loan program websites, November 2009

Fees 0-2% 3-5% 3% 5% 4-8% 2% 4% 0-4% 4%



Repayment Options

Lender Deferred In-School Interest

In-School Principal & Int.

Citibank X X X

Chase X X X

Citizens X X X

Discover X X X

PNC X X X

Sallie Mae X X

SunTrust X X X

U.S. Bank X X X

Wells Fargo X X X



Borrower Benefits

Lender EFT Discount Graduation Benefit

Cosigner Release (In Months)

Citibank 0.25% No 24

Chase 0.25% No 36

Citizens 0.50% No 36

Discover 0.25% 2% reward None

PNC 0.25% No 48

Sallie Mae 0.25% No Discretion of SLM

SunTrust 0.25% $300 48

U.S. Bank 0.50% No 36-48

Wells Fargo 0.25% 0.5% Rate Reduction

24



Standard Loan Term

0 5 10 15 20 25

Wells Fargo

US Bank

Sallie Mae

Discover

Citizens Bank

Citibank

Chase

SunTrust Bank

PNC Bank

Loan TermNote: Sallie Mae repayment terms vary from 5 to 15 years depending on loan balance and year in school. PNC loan term is 20 years for loans under $40,000 Source: SLA review of lender websites, December 2009



What About Credit Unions?Credit Union Student Choice

– Network of over 80 credit unions nationwide– Variable-rate loans usually based on one-month LIBOR– Average funded rate of 6.0% with no origination fees– Structured as credit line– Loan limits up to $75,000– Requires membership in credit union to apply – Cosigner recommended

Individual credit unions in college towns often provide competitive student loans and transparent disclosures too

– University of Southern California Credit Union (3.3% to 6.8%)– University of Wisconsin Credit Union (4.0% to 9.5%)– University Credit Union serving University of Maine system (3.25% to 7.75%)

Do not assume credit unions ALWAYS offer better rates and terms



Nascent Developments To Keep An Eye On

Source: SLA Analysis of 425 private loan lender lists, August 2009. State alternative loan programs appeared 107 times on these lists.

Student Loan Marketplace

Peer-to-Peer– Structural issues– Capital sources– Microloans from alumni

Borrower default aversion products– SafeStart for private loans

Using interest rates to nudge consumer behavior– State private loan programs



Agenda



What is current state of private student loan market?– How are schools addressing this shortfall in private

student loans?




Strategies for Dealing with Private Loan Issues

Survey question: What are your current strategies to help students find private, nonfederal loans for the 2009-10 school year?Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

16%

16%

50%

60%

73%

3%

15%

19%

51%

54%

78%

77%

73%

25%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Credit Unions

Multiple Lenders

Institutional Loans

State programs

Counseling

Tuition Repayment Plans

Co-signer

Parent PLUS

Jun-09

Aug-08



Will Multiple Applications Harm Your Credit Score?

Research shows that students spend more time researching federal loan options than private student loan options

New policy from Fair Isaac (FICO score) on student loan shopping– “In general, student loan shopping inquiries made during a focused time period (for

example 30 days) will have little to no impact on your score.”

Advice from Fair Isaac on myfico.com site:– Doing a little homework first is always a good idea no matter what type of credit you're

seeking. – You can generally avoid having those inquiries affect your score if you finish your rate

shopping in a reasonable amount of time. – Then try to finish your rate shopping and finalize your loan within 30 days.– Not only will loan rates be easier to compare when the quotes come only a few days

apart, but you also will protect your FICO score.

SLA research found loan interest rates varied from 7% to 12% based on recent shopping of 6 major lenders



The Purchasing Decision

Decision makers: Parents of undergraduates

Federal funding options: Aware but confused

Rationale for choosing private loans: – Time constraints– Incomplete funding to cover all costs of education – Ineligibility for Federal aid

Sources for information about private loans: Rely heavily on schools

Importance of name recognition: Many chose based on this factor

Frequency of comparison shopping: Many went with the first loan offered to them

Source: Federal Reserve Consumer Research and Testing, 2009



Prevalence of Private Loan Lender List

Survey question: Is your institution planning to provide students with a lender list for private loans for the 2009-10 school year?Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

23%

4%

10%

10%

65%

54%

21%

34%

12%

42%

69%

56%

0% 10% 20% 30% 40% 50% 60% 70%

2-year public

4-year public

4-year private

Overall

Yes

No

Not Sure



Lender Selection Process for 2009-10

Survey question: Please describe your institution's process for developing a lender list for private student loans.Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

35%32%

12%

8%

14%

0%

10%

20%

30%

40%

Formal RFI Keep List from08-09

All Lenders Last3-5 Yrs

Informal Process OtherPer

cen

tage

of

Res

pon

den

ts W

ith

Len

der

Lis

t fo

r 20

09-1

0



What Is a “Preferred Lender Arrangement”?

Definition of preferred lender arrangement (from HEOA)– Preferred lender arrangement.--The term `preferred lender

arrangement'-- (A) means an arrangement or agreement between a lender and a covered institution or an institution- affiliated organization of such covered institution

• (i) under which a lender provides or otherwise issues education loans to the students attending such covered institution or the families of such students; and

• (ii) that relates to such covered institution or such institution-affiliated organization recommending, promoting, or endorsing the education loan products of the lender;

NPRM: Lender list that does not have all lenders who lend to students at schools IS A “preferred lender arrangement”



Paradox of Choice

"The first effect is with all these options to choose from, people end up choosing none. They simply pass."

"Second effect is that if people overcome this indecision and paralysis and choose, they may choose badly."

"The third thing, which is in some ways the most surprising, is if you overcome paralysis and manage to choose, and you manage to choose well, you’ll be less satisfied with what you’ve chosen if you’ve chosen from a large set than if you’ve chosen from a small one."

Source: Interview with Barry Schwartz, author of Paradox of Choice



Requirements If You Have A PLADisclosures on preferred lender list– Boilerplate language – Model disclosure forms with details on loans, provided by lenders– Description of process

Process – Describe method and criteria for lender selection process– Identify reasons for selecting each lender

Delivery of information to students/families– Timing– Placement of information

Administrative– File Annual Report– Develop a Code of Conduct– Update Program Participation Agreement



Agenda




loans?




Exhibit A: Need For Financial Literacy Programs

Source: Sallie Mae/Gallup survey on How America Pays For College, 2009. Note: 27% of survey respondents could not answer the question.



Exhibit B: Private Loan Borrowers And Federal Aid

Source: Project on Student Debt analysis of NPSAS data, August 2009

25%38%

11%

12%11%

14%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2003-04 2007-08

Per

cen

tage

of

Stu

den

ts T

akin

g O

ut

Pri

vate

Loa

ns

Did Not Apply For Federal Aid

Completed FAFSA, No Stafford

Borrowed Less Than Maximum

48%

64%



Definitions

“The process by which people improve their understanding of financial products, services and concepts, so they are empowered to make informed choices, avoid pitfalls, know where to go for help and take other actions to improve their present and long-term financial well-being.”

OECD, “Improving Financial Literacy: Analysis of Issues and Policies”



Financial Literacy Scores Have Fallen Over 10 Year Period

57%

48%

52%52%52%50%

0%10%20%30%40%50%60%70%80%90%

100%

1997 2000 2002 2004 2006 2008

Ave

rage

Per

cen

tage

of

Qu

esti

ons

An

swer

ed C

orre

ctly

Source: JumpStart Coalition Biennial Test of Personal Financial Literacy given to high-school seniors.

Notes: From 2007 Press Release: “The 1997 survey results provide a baseline measurement by which to gauge progress toward the coalition's goal of financial competency among all 12th graders by the year 2007. “



Student Debt Growing By 8.4% Annually

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06

06-07

07-08

08-09

Tot

al S

tude

nt L

oans

(In

Mil

lion

s of

Con

stan

t 200

8 D

olla

rs)

Source: College Board: Trends in Student Aid

Federal Loans

Private Loans



Defaulted Student Loan Portfolio Balance

$31.0$32.9 $33.6

$39.1

$45.6

0.0

10.0

20.0

30.0

40.0

50.0

2005 2006 2007 2008 2009

Def

ault

ed F

eder

al S

tud

ent

Loa

n P

ortf

olio

(i

n b

illio

ns

of d

olla

rs)

Source: SLA Analysis of FSA Collections Report, August 2009

Annual Growth: 6.2% 1.9% 16.5% 16.7%



Prevalence of Programs

43%48%

42%

28%

0%

10%

20%

30%

40%

50%

60%

Overall 4-year public 4-year private 2-year public

Per

cen

tage

of

Tot

al R

esp

ond

ents

Survey question #1: Does your institution currently offer a financial literacy program beyond standard entrance and exit loan counseling to your students?



Financial Literacy Topics

94%86% 86%

73% 72%

52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Budgeting LoanRepayment

Credit Cards Credit Report Privacy Scholarships

Per

cen

tage

of

Tot

al R

esp

ond

ents

wit

h L

iter

acy

Pro

gram

Survey question #9: What are the topic(s) covered by your financial literacy training? Please select ALL that apply.



Program Delivery

79%

53%46%

39%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

In-person groupworkshops

Reference pageon financial aid

website

Handoutsavailable upon

request

On-line tutorials Other

Per

cent

age

of T

otal

Res

pond

ents

wit

h L

iter

acy

Pro

gram

Survey question #6: How does your institution administer the financial literacy program?



Self-Evaluation

9%

27%

40%

22%

2%

0%

10%

20%

30%

40%

50%

Excellent Very Good Good Fair Poor

Per

cent

age

of T

otal

Res

pond

ents

wit

h L

iter

acy

Pro

gram

Survey question #12: How would you rate the current financial literacy program at your institution?



Popular Financial Literacy Programs

3

4

4

4

4

6

6

6

8

9

15

0 5 10 15 20

Access Group

Texas Tech

TG

Great Lakes

Dept. of Ed.

USA Funds

NSLP

EdFund

Lenders - Gen.

Guarantors - Gen.

CashCourse

Survey question: What source(s) would you recommend for a financial aid administrator interested in developing a financial literacy program for his/her institution?



Entrance Counseling for Private Loans

Take out federal loans before ever considering these “last resort” loans

– Generally higher interest rates and less repayment flexibility than federal loans– Based on SLA research, the average private loan interest rate is 10%-11%

Cosigners almost always required

Know your interest rate before signing anything– Index (Prime or LIBOR) + Margin

Know that your interest rate will go up– Since 1990, 1 month LIBOR has ranged from 0.3% (current) to 9.125% (11/90)– “Tyranny of calculators”

Shop around!– SLA research in April 2009 found that for the same student and cosigner pairing

interest rates varied from 7% to 12%



Entrance Counseling for Private Loans

Study the details in the promissory note– Can the lender increase your interest rate if you are late with one payment?– How many days after the due date is a payment considered late?– What fees does the lender charge beyond the origination/repayment fee?– How frequently will your interest rate change? Monthly payment change?

Borrowers have option to cancel the loan

If you can pay interest only during while you are in school, DO IT!– It can save you thousands of dollars in loan repayment

Expand your alternatives by considering credit unions or state-run alternative loan programs

DO NOT take out a private loan if you can avoid it!



Exit Counseling for Private Student LoansCongratulations on your upcoming graduation…now it is time to repay your student loans!

These loans will not go away if you don’t pay them– May not be dischargeable in bankruptcy– Stay with you even in death

Once you have settled down to your new address, notify your lender so coupon books/statements will reach you

Find your original paperwork, including your promissory note and Disclosure Statement – Contact lender if you can’t find it

Be pro-active with the borrower benefits that you were promised

Confirm the date that your first payment will be due– Typically have 6 month grace period after graduation



Exit Counseling for Private Student LoansDo not be surprised that your current loan balance is higher than the amount of your original loan

If you are concerned about your ability to make payments on your loans, contact the lender immediately to discuss your options– Forbearance allows you to postpone payments

Your monthly payment will typically be adjusted quarterly or annually by the lender– Expect that interest rates and therefore your monthly payment will increase

as the economy improves

Set up your monthly student loan payment on auto-pay– Earn a reduction in interest rates from 0.25% to 0.50%– Eliminate potential for late fees, which can run as high as $30

If you are ready to pay down some extra principal, contact the lender in case you need to make any special notation on the payment



Questions

?????


Student Lending AnalyticsContact Information

Tim Ranzetta

Student Lending Analytics LLC

650-218-8408

[email protected]

www.studentlendinganalytics.com



Student Lending Analytics: Resources Available

SLA Private Student Loan Ratings

2009 SLA Private Loan Series – Ten part series on topics ranging from finding a cosigner to reading the

promissory note

Student Lending Analytics Blog– Timely, insightful information about the student loan market

Private Loan Insight Survey

Student Satisfaction Surveys

isffa annual conference trends in financial aid and private student loans december 7, 2009

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