Sallie Mae Straight Talk Conference Calls



Sallie Mae Straight Talk Conference Calls

December 16, 2008

Attendees

Jack Remondi, Vice-Chair and CFO

Barry Feierstein, EVP of Sales and Marketing

Barry Feierstein:

• Large turnout with over 450 registrants representing over 380 schools

o Note: I inadvertently scheduled the SLA Webinar “A Conversation about FFEL and Direct Lending” so we overlapped by half an hour. Neither call seemed to suffer much as over 370 registered for the SLA event

• Forthcoming economic stimulus bill should assist families seeking higher education

• Don’t need to worry about access to federal student loans for FFELP or Direct Lending; receive funding directly from U.S. Treasury, unlimited access to capital; objective of the programs

o Maintain public-private partnership in federal loan program

o Protect taxpayer interests – no net tax impact

• Based on recent data, DL has seen 50% increase in volume this year

o It is growing, handful of very large schools and small schools that have joined the program

o Of course, that would be the case if you were coming off a low base as DL was. It was roughly 20% of the market a year ago vs. 80% for FFELP

o FFELP is also growing with 20% increase in volume

▪ Note: An article on November 7, 2008 in the Chronicle of Higher Education cited the following statistics: “The Education Department issued new data last week detailing an increase in direct lending this year. The numbers show that dollar volume in the bank-based system grew by only 7 percent, while direct lending grew 50 percent, leaving it with about 30 percent of the total marketplace.”

▪ Data from the recent FSA conference in Las Vegas showed that while Direct Lending grew 50% in dollar terms on a YTD basis, FFEL grew by 10% (contact me if you would like to receive a copy of this slide).

• Clearly, overall there is greater demand for student loans

• Schools should make their choice to shift programs on the merits of the program for their individual school only

Real differentiators of FFELP

• Loans almost identical

• Difference is what surrounds the loan

o Consumer choice – to select the financial institution that you are going to borrow from; fighting for right to service any loan that is sold to the Dept.

▪ Competition drives innovation and superior service

o Default prevention

▪ FFELP lenders work hard to keep loans out of default; 3% risk share structure; pay financial penalty if loan defaults

▪ Unmatched customized default prevention and financial literacy programs; superior default management and prevention programs protect borrowers

• For a comparison of cohort default rates between FFELP and Direct Loan programs, see this recent SLA Blog post.

Private loan recap

• Making loans to all applicants that meet underwriting requirements

o Changed requirements

▪ Encouraging co-signers have had an impact on loan approvals

▪ Allowed them to keep interest rates as low as possible

• Note: For information the average rate for Sallie Mae loans, see this SLA Blog post.

• Sallie Mae Bank successfully raising funds to be used for private loans

• Expect to make the same volume of private loans in 2009 as 2008; may fund even more if TALF program works.

Jack Remondi, Vice-Chair and CFO:

• One or more private sector solutions to address funding issues – Asset Backed Commercial Paper conduit: complicated

o Longer term solution will avoid relying on direct federal funding

o Serve as framework for permanent FFELP structure

o Further reduce federal costs of the program by producing taxpayer savings

o Provide financing for up to 5 years

o Leave responsibility for loan servicing with the lender

• The Conduit is NOT a sale of loans to the Department of Education

• On the private loan side, access to stable funding sources through Sallie Mae Bank

o Raised over $1.5 billion to fund private credit loans in last two months

▪ Earlier conference calls indicate cost of funds about LIBOR + 2%, pricing loans at LIBOR + 10% for funding spread of 8%

• Funding mismatch complicates the picture

Questions and Answers

• Question: What will be transpiring for international student loans without U.S. co-signer?

Answer:

o Leader in the market was Citibank; announced that they were suspending that program; worldwide presence gave them an advantage as they could collect easier than others.

o Don’t have specific answer for them; working on programs to raise deposits; difficult to underwrite and collect these loans

o Recognize the need but can’t provide any specifics

• Question: Forecast what will transpire with access to funds and continued liquidity of loan programs after 2010-11?

Answer:

o Congress aware of need to provide certainty; ECASLA extension was an attempt to provide certainty for at least one academic year

o Good news is that strong commitment to maintaining operational strength and capacities of both programs

• Question: What is your forecast for Career Training Loans? Tightening of your underwriting make difficult for students to gain access to them. Most of my students have unmet need of $16,000 for their students.

Answer:

o Career Training loans designed for non-Title IV schools

o Have tightened underwriting on these loans

o No plans not to continue the program

o In these economic times, hard to make unsecured consumer loan of $16,000; encourage use of co-signers; may be hard if your students are independent and can’t find a co-signer.

o No magic bullet over horizon; economy seems to be deteriorating.

• Question: Any change in your level of participation in ELM with the NDN? Citibank is pulling out of the NDN for private loans on January 1st.

Answer:

o Anticipate no change in the ways we process loans; do not want to further complicate people’s lives.

• Question: Is Sallie Mae prepared for influx of student loans that may come from private sector as schools migrate away from Citibank because of the ELM issue?

Answer:

o We are prepared to make the same amount of private loans in 2009 as we did in 2008; may be able to absorb more if TALF comes through

o Also competitive question of what other lenders will do; will they step up too?

o Another federal liquidity solution (Note: presumably that is TALF he is referring to) that may have bearing on this conversation if government can get it up and running in first quarter.

• Question: What of the talk of increasing unsubsidized Stafford loan limits?

Answer:

o People have been looking at other solutions for expanding federal loan limits to address shortfall in other funding solutions (private credit, home equity, savings accounts) but there has been no action taken at this point

• Question: Will Signature loans continue to be available to students studying out of country?

Answer:

o U.S. citizens studying at eligible Title IV school, no change to our existing policy.

• Question: What is being done to assure FFELP loans remain with existing servicer?

Answer:

o IN ABCP conduit, loan servicing will remain with original lender

o Active at working with Dept. of Education to have this issue addressed

▪ Dept. will be issuing RFP for servicing of these loans; very much want to be part of this solution

• Question: PLUS Auction – in HEOA, the Department of Education is required to conduct a series of auctions to allocate PLUS lending in the upcoming academic years.

Answer:

o Given current funding and economic environment, it is unlikely that these auctions will be successful.

o Both Congress and Department of Education are trying to get their arms around what their options are related to this process.

o Bottom line: Everyone is committed to making sure access to PLUS loans is not disrupted regardless of whatever solution

o Stay tuned; be aware that there should not be an access issue for PLUS loans

• Question: Changes to Signature loans; changes to credit criteria; interest rate spreads have increased. How much more expensive will loans be to students in 2009?

Answer:

o Double-edged swords

▪ Higher rates, more debt you drive on a borrower; reaches point of diminishing returns

▪ At same time, defaults estimating to be going and the cost of funds difficult equation to balance;

o Have not seen any internal plans to raise interest rates (in short term), assuming current situations hold constant during that time frame

o Interest rates that we borrow have increased by 4.5% over LIBOR, the funding index we use for these loans in the last eight months; unprecedented change.

o Looking at a couple of other features and terms that will dramatically lower the financing costs that the borrowers ultimately pay on these loans

▪ Note: These changes include requiring students to pay interest only on loans while in school and to reduce term of loan to 8 years. See SLA Blog post for additional detail.

• Question: Will Tuition Answer (Sallie Mae’s DTC loan) come back?

Answer:

o Sallie Mae is the only lender who supports school certification of every private loan in the country

o Last year, shut off Tuition Answer product, primarily for liquidity reasons, pushed all liquidity to support school channel

o If liquidity returns, may reintroduce Tuition Answer product with a school certification

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