FFELP Funding – What’s It All About? Scandal, Cuts, and Marketplace Conditions Steven Brooks Executive Director, State Education Assistance Authority Wrightsville Beach, NC April 2008

Future of the FFEL Program  Lots of news stories last year –Scandals regarding preferred lenders –Financial aid professionals held up as the enemy of students and families  Lots of news stories this spring –Lenders leaving the FFEL and/or private loans –Marketplace turmoil affecting funding of loans  What is actually happening to the industry and what is the outlook for the short and long term future?

The Cuomo Scandals  Much more heat than light  Confusion in public mind of private loans and FFEL  Opponents of FFEL seized upon the Cuomo activities as a way to promote Direct Lending  Regulation resulted that has led to profound changes regarding preferred lender lists – changes that may be confusing to students in many instances  Good news in March when Wall Street Journal reported that the financial aid office’s preferred list is the best place to look for your loan!

The CCRA Congressional Cutbacks for lenders and guarantors in FFEL  Significant reductions in SAP and doubled origination fees for both non-profits and for-profit lenders  Significant cuts for guarantors in collection fees on defaulted loans  Spreads are very thin even in good market conditions  Important to note that the CCRA was enacted during a period of optimal market conditions, with no apparent thought about what might happen if market costs were to rise  Some think the Act is misnamed – should it be CARA – College Access Reduction Act?

The Marketplace Historically  Lender issues bonds and pays investors interest on the bonds  Lender uses proceeds to fund loans  Regardless of the fixed borrower rate, the lender only receives the SAP support level, which is a variable rate  This return is sufficient to –Pay costs of originating and servicing the loans –Pay interest and principal on bonds used to fund the loans –Pay for borrower benefits/loan discounts –Pay for “good works” (non-profit) or pay taxes/shareholders (for-profits)

The Marketplace Historically  What Kind of Financing has been obtained traditionally? –Taxable and Tax-Exempt Bond Issuance  Floaters – Taxable issues –LIBOR-indexed Bonds –3 month LIBOR plus a spread for investors  Auction Rate Bonds – taxable and tax exempt  Variable Rate Demand Bonds – taxable and tax exempt  Fixed Rate Bonds with “swaps” – tax-exempt –“Warehouse” Line of Credit for Lender to use if bond market is not viable at time funds are needed Emphasis here is on non-bank lenders - account for approximately ¾ of all FFEL Collateral

LIBOR Floaters - Traditional Versus Recent Pricing  Sallie Mae traditionally LIBOR bps  Sallie Mae this spring –WAL 6.4 years – 3 month LIBOR bps  Nelnet this spring –WAL 6.0 years – 3 month LIBOR bps  Current pricing makes it uneconomic to issue debt to finance loans, especially because of the reduced spreads on the loans themselves resulting from the CCRA

Auction Rate Bonds – Marketplace has failed. Period.  No one is offering to buy the bonds –Not an issue of quality but instead an issue of liquidity –Banks unwilling/unable to step in and buy the bonds back from their investors (as many assumed they would do) –Issuers like SEAA pay the “maximum rate” in the meantime –Issuers are scrambling to refinance their auction rate debt – in a crowded and illiquid marketplace –There are as much as $342 Billion in outstanding auction rate bonds on the market and a significant portion is in student loan bonds

Variable Rate Demand Bonds  Insured by monoline insurance companies –Monolines in trouble themselves –Rates have soared –Uninsured currently trading for much less than insured  $171 billion of auction paper plus a similar amount in insured VRDBs out there now, all chasing a solution  Market not providing much liquidity – so issuance of these in an insured fashion is difficult

What is the future of FFEL?  Some lenders out; most stay in  Higher costs of funds  Smaller spreads on loans  Lesser borrower benefits –Still cheaper for borrowers than direct loans –Now likely cheaper in budget scoring than direct loans