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NCHELP 2012 Spring Convention Private Student Loan Market May 2012.

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Presentation on theme: "NCHELP 2012 Spring Convention Private Student Loan Market May 2012."— Presentation transcript:

1 NCHELP 2012 Spring Convention Private Student Loan Market May 2012

2 Private Credit Market Potential for Growth PRIVATE STUDENT LOAN MARKET Source College Board Trends in Student Aid 2011 Notes * Based on estimates from the College Board from an annual survey of private lenders. For 2011, the College Board also relied on Student Lending Analytics to develop their estimates. Amounts are adjusted for inflation Higher education costs outpace median household income Increase in expected enrollment Decrease in grants, aid, university endowment funds, home equity lines and credit cards Budget Control Act of 2011 eliminates subsidies for graduate students and repayment incentives National Private Student Loan Originations * Volume by Year $Bn CFPB March 2012 Report: –Outstanding student loan debt is $1TRN Project on Student Debt: –Average student loan debt was $24,250 for Class of 2010 College Board Trends in Student Aid 2011: –Private student loans only 7% of student lending in 2011 –From 2005-2008, private loans were 25% of student lending 2

3 Private Loans Can Help Fill $200Bn Funding Gap U.S. annual cost of higher education approximately $433Bn in 2011-2012 AY –Federal Loans and Grants satisfy only half of funding at $224Bn –Private loans expected to account for approximately $9Bn Annual funding gap of $200Bn 2011-2012 Estimated Sources of Funding for Higher Education Total Cost of Higher Education – $433Bn Source College Board, Trends in College Pricing 2011; Department of Education Student Loans Overview FY 2013 Budget Request; National Center for Education Statistics 2012 Higher Ed funding gap traditionally filled by parental contributions Also funded by other sources of consumer debt –Home equity loans –Credit cards Private student loans can help fill the need 3 PRIVATE STUDENT LOAN MARKET

4 Student Lending – Industry in Transition 4 Industry Consolidation Rapid changes driving industry consolidation & acquisition Portfolio sales & transfers Outsourcing of administration & servicing Sale of legacy administration & servicing For-profits offering low variable rate products Access to low yielding bank depositor base State agencies and not-for-profits in some cases unable to originate Lack of variable rate financing options and low cost funding Increased Price Competition Private loan origination volume $8Bn in 2010-2011 Down from $24Bn in 2007-2008 Competing against Direct Lending and Pell Grants Funding is costly in both tax-exempt and ABS markets Initial parity levels up to 160% Origination Volume Low & Funding Costs High PRIVATE STUDENT LOAN MARKET

5 Student Lending – Industry in Transition (contd) 5 More Conservative Structures, Collateral & Disclosure Rating Agencies and investors more conservative Better quality collateral More overcollateralized conservative structures Higher default assumptions More disclosure Legislation Adds Uncertainty To Industry Legislative developments impacting private loan originations: Launch of Consumer Finance Protection Bureau (CFPB) Know Before You Owe Act of 2012 Durbin Bill and private student loan bankruptcy dischargeability Dodd-Frank Act and other regulatory reforms PRIVATE STUDENT LOAN MARKET

6 Banks Charter One PNC Suntrust Wells Fargo For-Profits Sallie Mae First Marblehead Discover Not-For-Profits New Jersey HESAA Massachusetts EFA Iowa SLLC Credit Unions Originators Private Student Loan Market Participants New entrants have changed dynamics of private student loan market –Banks and for-profit entities with bank subsidiaries are key players in originating variable rate student loans Not-for-profits transitioning away from historical FFELP platforms to originate fixed rate private student loans Credit unions also entering private lending market to provide borrowers affordable products 6 PRIVATE STUDENT LOAN MARKET

7 Consolidation of Student Loan Market Participants 7 Activity includes: –Whole Loan Portfolio Sales –Monetization of Servicing / Admin Fee Streams –Residual Interest Sales –Outsourcing of Servicing Fundamental industry shift due to margin erosion & legislation Consolidation and in some cases exit / suspension of private student lending –Chase and US Bank announced exits from private student lending –Chase to offer student loans only to existing clients –US Bank is exiting product entirely PRIVATE STUDENT LOAN MARKET

8 Student Loan Products Highly Competitive 8 Payment Structure – Full deferral, minimum $25, IO, or P&I Current cashflowing products better suited to capital markets funding structures Payment Term – 10, 15+ years repayment & grace / deferral options Long payment terms lengthen maturity horizon of bonds & funding costs Funding Considerations Products developed to meet borrower needs –But there are funding considerations For-profits offer variable rate loans priced as low as 1ML + 2.0% State agency & non-profit offer fixed rate loans Priced to compete against 7.9% Direct PLUS Recently Sallie Mae introduced 5.75% fixed rate loan Variable & Fixed Rate Product Pricing PRIVATE STUDENT LOAN MARKET

9 Student Loan Issuance Volume 2011 Private Student Loan Issuance Total Private Student Loans – $3.4Bn Source:Morgan Stanley 9 PRIVATE STUDENT LOAN MARKET Term Credit Facilities Provide alternative long-term financing for variable rate loans –Direct placement –Requires one rating –Single-A level –Prepayable at any time –No prefunding and no recycling Private Student loan Issuance in 2011 – $3.4Bn Tax-exempt market funded mostly fixed rate loans Taxable LIBOR FRN market funded mostly variable rate loans

10 Conservative Collateral and Structural Trends 10 PRIVATE STUDENT LOAN MARKET Collateral More Robust More robust collateral for new originations and securitizations Strong FICOs, more co-signers, fewer for-profit schools, fewer DTC loans, and shorter repayment terms Starting Parity Can Be High Starting parity levels for tax-exempt structures starting at 105% to as high as 160% based on collateral, ratings, and nature of moral obligation, if applicable Taxable LIBOR FRN structures can feature starting parities of 135%

11 Rating Agency Update 11 Increasingly Conservative Stance Negative outlook on sector –Unemployment rate greater than 8% –High borrower debt and declining income Longer ratings process and timeline –Dodd-Frank increases liability –More data required and verification of data –17(g)-5 requires all communications with Rating Agencies be available online –Not-for-profits and state agencies with non-SPV structures may be treated as exempt depending on Rating Agency Strong historical data required –Otherwise, use more conservative industry-wide data –Negatively affects structure Increased servicer disclosure and backup servicer requirements Overall effect includes: –Conservative default, recovery & prepay assumptions –Higher financing costs & equity contribution due to lower advance rates –More onerous and costly process for time allocation, staffing & resources Requirements change from one transaction to next PRIVATE STUDENT LOAN MARKET

12 Investor Update 12 Continued Focus on Transparency & Continuing Disclosure Investors require more information and disclosure –At time of issuance and ongoing At issuance requests include –Intex modeling capabilities –Loan performance trends –Historical default rates, recoveries & prepayment rates –Historical volume trends & viability of future originations –Loan level data or repline data –Borrower benefit terms, if applicable Ongoing requests include –Accessible & frequent remittance reports –Updated monthly rather than quarterly PRIVATE STUDENT LOAN MARKET

13 Consumer Finance Protection Bureau (CFPB) DescriptionImpact Mandate: Provide Consumers Information on Financial Products Created by Congress & launched in 2011 Active federal oversight over nonbank consumer financial services providers Authority over private student lenders and for-profit schools Also has enforcement powers Private loan industry subject to increased regulatory oversight 13 CFPB is the key legislative development in 2012 –Focus on consumer risk Student Lending a Key Focus Area November 201 - Request for Information Regarding Private Education Loans and Private Education Lenders March 2012 – Began taking complaints from private student loans borrowers Under CFPB Review – For-profit schools and collection agencies Congressional report due in July of 2012 May lead to industry changes Know Before You Owe Act and CFPB Initiative Bill to Amend Truth in Lending Act & HEA – Require lenders to obtain certification from schools & increase disclosure of federal loan alternatives Model Format – CFPB working with ED to publish model format for schools to communicate financial aid offers More administrative requirements for lenders and schools Longer timeline for loan acceptance & disbursement PRIVATE STUDENT LOAN MARKET

14 Recent Legislative Developments Regulatory and legislative environment creates uncertainty in market DescriptionImpact Volcker Rule Restricts banks & affiliates from proprietary trading - Intended to exempt municipal securities But does not include agencies or authorities of States or political subdivisions Results in estimated 40% of municipal securities excluded from exemption Adverse impact on securities liquidity Impacts primary market pricing and secondary market trading 14 Tax-Exemption Proposals to reduce/eliminate tax exemption of muni bond interest Especially limit value of muni securities interest for high-income earners - 28% cap on deductions and exclusions Tax uncertainty lowers market demand and raises borrowing costs AMT Senate & House at odds on AMT provisions in transportation funding bill Senate version temporarily exempts private- activity bonds from AMT May boost market demand and lower yields Sen. Dick Durbin, D-Ill. advocating Fairness for Struggling Students Act Allow borrowers to wipe out private student loan debt in bankruptcy proceedings Higher loss and lower recovery assumptions Increased financing costs for private student loans Dischargeability in Bankruptcy PRIVATE STUDENT LOAN MARKET

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