LOAN CONSOLIDATION . . . . . . why won’t it just go away?

1. MASFAP Spring Conference 2007 March 7 – 9, 2007 LOAN CONSOLIDATION . . . . . . why won’t it just go away? Chris Simmerman - Vice President, Campus Programs, Sallie Mae Greg Diamond – Manager, Loan Consolidation, MOHELA

2. Agenda • Welcome • Consolidation – Past and Present • Assessing the Value of Loan Consolidation • Consolidation - Future • Questions & Answers

3. Consolidation – Past and Present HERA and ESAA impact

4. This Past Consolidation Season • Many factors influenced the tremendous demand • Another significant increase in variable interest rates • Impending elimination of in-school / early repayment consolidation options • Elimination of single holder rule • Intense marketing to borrowers • Run up to July 1st this year was much like last year, but things went smoother • Industry was better prepared • Borrowers were more familiar with process • Schools / lenders / guarantors were able to provide more education

5. Consolidation Changes • Effective July 2006, the following changes directly affected Federal Student Loan Consolidation: • Elimination of in-school consolidation in DL and early repayment consolidation in FFEL • Consolidation permitted only when loans are in a grace or repayment status, including deferment or forbearance • Elimination of spousal consolidation • Termination of consolidation eligibility upon receipt of a consolidation loan in either the FFEL or DL program, unless borrower meets certain specific conditions • Mandates parallel terms between FFEL and DL consolidation loans (except as explicitly noted) • Elimination of Single Holder rule • (effective June 15, 2006)

6. Consolidation Changes • Effective July 2006, the following change indirectly affected Federal Student Loan Consolidation: • Fixed interest rates for Stafford and PLUS loans • Stafford loans have a fixed rate of 6.8% • FFEL PLUS loans, including Grad PLUS, have a fixed rate of 8.5% • DL PLUS loans have a fixed rate of 7.9% • Consolidation interest rate cap of 8.25% may be advantageous for PLUS borrowers

7. What did NOT Change • Consolidation interest rate • Consolidation loans have a fixed interest rate for the life of the loan • To determine the fixed rate, a weighted-average is computed based on current interest rates of underlying loans • Calculated rate is rounded up to the nearest 1/8th percent • The interest rate is capped at 8.25% • Special rules apply to the portion of a FFEL consolidation loan comprised of HEAL loans

8. Consolidation Interest Rate • Consolidation interest rate • Fixed weighted average of the loans consolidated, rounded up to the nearest 1/8th percent, with a maximum rate of 8.25%

9. Loan Portfolio Considerations • 2006 / 2007 Borrower Loan Portfolio • May contain any or all of the following: • Consolidation loan with a fixed rate • Perkins Loan with a fixed rate • Stafford loan with variable rate • Stafford loan with a fixed rate • PLUS loan with variable rate • PLUS loan with a fixed rate • Includes Grad PLUS • Private loan with variable rate

10. Grad PLUS • Same program as the PLUS loan, but available to graduate and professional students • Fixed interest rate of 8.5% • Consolidation interest rate cap of 8.25% • Consolidation available after full disbursement of loan – even if student still enrolled • Deferment available while student is enrolled in school

11. Timing Considerations • Timing • June 30th may no longer be a critical deadline • For borrowers with fixed rate loans • For borrowers who already consolidated • June 30th, 2007, is important for those graduating who still have variable rate Stafford and PLUS loans • Can consider locking in at today’s rate or allowing the loans to remain variable • Wait to see the new 2007-08 Stafford and PLUS variable rates published in early June

12. Grace Period Considerations • Grace Period • 2007 graduates may have grace period considerations • Those who consolidated through early repayment consolidation forfeited their grace period on consolidated loans • Repayment begins immediately after separation • Those who borrowed in AY 2006-2007 may have at least one Stafford loan with a grace period • Borrowers need to be aware of their loan portfolio and be prepared to manage loans entering or re-entering repayment at different times

13. Benefits Considerations • Borrower Benefits • Borrowers who previously consolidated typically forfeited any underlying Stafford benefits • New consolidation benefits may apply • 2007 graduates with Stafford loans • Need to determine the “cash value” of the benefits on those loans before deciding to consolidate • Evaluate whether to earn a benefit, such as a principal credit / rebate, before consolidating • Have the lender define the “cash value” of the benefit being offered

14. Assessing the Value of Consolidation Is consolidation still a viable repayment option?

15. Debt Management Considerations • The decision to consolidate is no longer solely interest rate driven. Focus shifts to Debt Management • In a fixed rate environment borrowers need to consider: • Timing and benefits • Longer repayment terms • Smaller monthly payments • Assistance with loan portfolio management

16. Debt Management Considerations • Financial advisors typically recommend that student loan debt payments be less than 8% - 10% monthly gross income

17. Consolidation Considerations • Federal Loan Consolidation is no longer a “one size fits all” solution • When is consolidation a good consideration? • When lower monthly payments allow borrower to focus on repaying higher interest rate debts • When long term payment relief is necessary • When interest rates are low and can be locked in • When solid borrower benefits make a difference • When loan forgiveness is not an option

18. Consolidation Considerations • As the marketing to borrowers intensifies, many will seek guidance from the FAO • Borrowers should consider that: • Repayment can be a long-term relationship • Many, if not most, borrowers cannot reconsolidate under current rules • Many consolidation marketers are not the lenders • Ask who the lender / loan holder and loan servicer will actually be and whether this can change • Borrower benefits may look too good to be true and require reading the fine print

19. Assessing the Value • Payment amount comparison • Consider what the borrower can reasonably afford to pay • Interest cost comparison • Determine the overall cost the borrower is willing to incur • Significance of borrower benefits • Borrowers may delay consolidation to take advantage of underlying loan benefits • By consolidating later in the loan life-cycle, borrowers could reap rewards twice!

20. Consolidation - Future Is the consolidation hype really over?

21. Loan Consolidation Landscape • Consolidation environment in the industry has fundamentally changed • Loan interest rate environment spurred demand for consolidation; new entrants • Elimination of single holder rule means competition will continue to increase, new entrants will likely stay • Marketing activities are getting more aggressive and, in some cases, reckless • Bypassing the financial aid office • Pushing consolidation in all cases • Recruiting students to market • Offering direct financial incentives to prospective applicants • Exploiting state “open records” laws

22. What This Means for Schools • Increased marketing activities on campus and directly to students • More lenders / brokers / consolidators working with students while they are enrolled in school • Possibility that current lenders / guarantors will not be able to provide same level of service / benefits • Cohort default rate could be negatively impacted • Student and parent borrowers more confused about what to do

23. What This Means for Guarantors • Uncertainty concerning repayment base; possible impact on cohort default rate • May impact ability to provide additional services to borrowers • Focus may shift from being the guarantor at origination to being the guarantor at consolidation • Many guarantors are relaxing their consolidation waivers in order to pick up additional loan volume to stabilize their portfolios

24. 10 Fastest Growing Consolidation Guarantors* • Percentage Growth Rate FY ’04-05 vs. FY ’05-06 *Based upon fist 9 months of NSLDS data through June 2006

25. What This Means for Lenders • Increased competition from existing student loan industry lenders and from new entrants • Lenders, marketers, brokers, eligible lender trusts • Will need to reexamine the ability to provide front end benefits if the loans are consolidated away as soon an the borrower enters repayment • or while still in school; Grad PLUS or deferred loans • Activities of marketers / brokers may place guarantee at risk if the activities violate regulations/laws

26. 10 Fastest Growing Consolidation Lenders* • Percentage Growth Rate FY ’04-05 vs. FY ’05-06 *Based upon NSLDS data as of September 2006

27. What This Means for Borrowers • Can consolidate with any eligible lender • Will be a prime marketing target while in school and when entering repayment • Will have a wide variety of choices and will need to carefully consider all options and implications • Will look to the financial aid office for answers and for advice • May be more confused than ever

28. What This Means for the Industry • Environment has fundamentally changed • Participants will evaluate how to best operate in the new landscape • Will need to proactively address these issues • Education and planning are key • We can either drive the process or just go along for the ride

29. What We Should Do • Based on what we have learned and shared today concerning the current and changing loan consolidation environment, what should we do? • As schools • As lenders • As guarantors • As borrowers • As an industry

30. Resources

31. Additional Considerations • Know The Facts About Consolidation… AND share them with your staff and students: • Emails • Entrance & Exit Counseling • Letters • Consolidation Seminars for Students • Proactively addressing this important issue will serve your student and parent borrowers well and prevent problems for your office!

32. Final Thoughts • As long-time participants and service providers in the student loan industry, we have a responsibility to work with other industry leaders to address these issues • Providing educational services, materials and resources to help borrowers successfully manage their education related debt is critical • Consider adding consolidation related information to your financial aid office web-site • Consider consolidation specific e-mail communications to your student and parent borrowers

33. Resources • Guarantor and lender materials • Internet • www.mapping-your-future.org • www.salliemae.com/consolidation • www.mohela.com/consolidation • www.finaid.org

35. Thank you!