Managing Student Debt, Delinquency, and Default

1. Managing Student Debt, Delinquency, and Default Eric K. Johnson VASFAA Annual Conference May 22, 2012

2. Topics • Current market conditions • Cohort default rate (CDR) overview • Gainful employment (GE) loan repayment rate (LRR) overview • Non-CDR performance metrics • Best practices to manage education loan debt, delinquency, and default

3. Current Market Conditions • Transition from FFELP to FDLP (ED-servicing) • Elimination of guarantors’ default aversion and financial literacy efforts • Palpable student borrower confusion over “split-servicing” • Greater regulatory scrutiny and legislative considerations • 3-year CDRs and the publishing of “trial” rates • Higher Education Act of 2008: “…life of cohort default rates…” • Gainful employment (GE) regulation and loan repayment rate (LRR) metric • 90/10 ratio considerations • Consumer Financial Protection Bureau (CFPB) oversight • New student borrower risk profile • Unprecedented levels of average student-borrower indebtedness (ABI) • Proliferation of private credit borrowing and other consumer debt • Distance and online learning has created a more “transient” student

4. Bloomberg Article – March 22, 2012 Student-Loan Debt Reaches Record $1 Trillion, Report Says By Janet Lorin U.S. student-loan debt reached the $1 trillion mark, as young borrowers struggle to keep up with soaring tuition costs, according to the initial findings of a government study. The figure, which is higher than the country’s credit-card debt, was probably reached “several months ago,” Rohit Chopra of the Consumer Financial Protection Bureau, said in a posting yesterday, excerpted from a speech he made at the Consumer Bankers Association meeting in Austin, Texas. “…Federal student-loan debt isn’t growing just with new originations,” he said. “With so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school…”

5. Student Loan Debt • Undergraduate Students • Average student loan debt for 4-year undergraduate students was $23,186 • Average student debt of those applying for federal student aid was $24,651 • >86% of 4-year undergrad student applying for federal student aid borrowed money to attend college • 25% borrowed >$30,500 • 10% borrowed >$44,600 • Graduate Students • Median increment debt: • Master’s Degree: $25,000 • Doctoral Degree: $52,000 • Professional Degree: $79,800 Source: http://www.finaid.org and http://nces.ed.gov based on AY 2007-2008 data

6. Cohort Default Rate (CDR) Overview Student Outreach Solutions

7. Cohort Default Rate (CDR) Formula For each school (FY2012 example): # of student borrowers who entered default in FY2012, FY2013, and FY2014 # of student borrowers who entered repayment in FY2012 = FY 2012 Cohort Default Rate (x.x%) NOTE: Federal fiscal year (FY) = October 1 to September 30

8. Cohort Default Rate (CDR) • CDR is the percentage of a school’s student borrowers (with Stafford, SLS, and select consolidation loans) who enter repayment and default by the end of the next two (2) federal fiscal years • A key performance indicator (KPI) relating to a school’s default aversion and student preparedness efforts • “Draft” CDRs are released to individual schools in February • A school can issue a formal “challenge” in an attempt to reduce its CDR by illustrating data errors • Data errors can be a result of inaccurate repayment start dates, incorrectly-reported defaults and/or student-borrower “dispositions” • Servicer due diligence violations • Abbreviated grace period • “Final” CDRs are published nationally each September • “Trial” 3-year CDRs are published as well

9. Benefits of Favorable CDRs • Schools with CDRs of 15% (formerly 10% under the 2-year formula) or less are eligible to receive special benefits from the U.S. Department of Education (ED) such as: • Regulatory relief • Single disbursements within a semester • Loan delivery to first-year students before the 30-day window • Other benefits • The former “school-as-lender” option was only available to schools that recorded favorable CDRs • Other ED-awarded benefits will likely use similar CDR-related criteria

10. Consequences of Unfavorable CDRs • Loss of Title IV eligibility (accessibility to federal student aid) • For schools that post CDRs of 30% or more for three (3) consecutive years • Formerly 25% under the 2-year CDR formula • For schools that record a CDR of 40% for one (1) year • Possible loss of potential students (and revenue) • Reputational and headline risk • Risk of losing access to private loan capital • Eligibility and funding limits

11. Historical Student Loan Default Rates (Source: ED)

12. CDRs (2-year formula) By Institution Type

13. 2- to 3-year CDR Analysis (Source: BridgeSpan Financial/ACS)

14. Gainful Employment Loan Repayment Rate (LRR) Overview Student Outreach Solutions

15. Loan Repayment Rate (LRR) Formula Student Outreach Solutions Payments-Made Loan (PML) + Loans Paid in Full (LPF) ($) during FY2012 Original Outstanding Principal Balance (OOPB) ($) of loans from Student Borrowers who entered repayment in FY2008 and FY2009 = FY 2012 Loan Repayment Rate (x.x%) NOTE: Federal fiscal year (FY) = October 1 to September 30

16. Gainful Employment (GE) • For private-sector schools and all certificate programs • Loan repayment rate (LRR) is a new key performance indicator that ED designed to complement CDR • Arguably the easiest GE metric to positively influence • Introduced in 2011 to motivate successful repayment of student loans • LRR is based on dollars ($); whereas, CDR is based on number (#) of student borrowers • Certain repayment options like deferment (on unsubsidized loans) and forbearance can simultaneously help a school’s CDR and impair its LRR • Schools can exhibit gainful employment in one (1) of three (3) ways: • Loan repayment rate (LRR) must be = to or > than 35% • Debt-to-income ratio must be = to or <12% • Debt-to-discretionary income ratio must be = to or <30%

17. Loan Repayment Rate (LRR) • LRR is demonstrated when student borrower’s: • Loan balance (P&I) is reduced by at least $1.00 over the fiscal year • Loan is paid-in-full • Loan is on track to being forgiven due to public-service employment • Making payments under an interest‐only or income‐based repayment plan (IBR) (subject to the 3% cap/anti‐abuse limit) • In a graduate program and his or her loan is a consolidation loan and all interest accrued over the course of the year has been paid • LRR measures student borrowers in the third and fourth years of repayment with two (2) exceptions: • If there are 30 or fewer borrowers • In this 2‐year period, the period is expanded to include student borrowers in the third, fourth, fifth, and sixth years or if there are still 30 or fewer student borrowers • In this 4‐year period, the program is considered to pass the measure • If the program is a medical or dental program • It only includes student borrowers in their sixth and seventh years to accommodate typical internship and residency periods • Institutions can correct LRR data using a process similar to one used to challenge CDRs

18. Critical Dates Relating to Loan Repayment Rate (FY2014 Example)

19. Other Regulatory Considerations • 90/10 Rule • Private-sector colleges can derive no more than 90% of revenues from federal sources (ED) • GI Bill and Department of Defense (DoD) Tuition Assistance are part of the 10% portion • Durbin proposal intends to raise to an 85/15 ratio and eliminate the so-called “DoD loophole” • Effective July 2012, the 10% will be determined on actual loan payments (cash accounting) instead of using the net present value (NPV)

20. Default- and Repayment-Optimization Best Practices Student Outreach Solutions

21. Student Outreach Solutions • Student Borrower Delinquency Timeline (FFELP) Delinquency Default DEFAULT Grace (180 days) 1-60 days 61-150 days 151-270 days 271-420 days Collections FFELP-Loan Servicing Default claim filed between day-270-360 Default claim purchased @ ~45 days post-claim DAAR* Filed Guarantor Default Aversion Services School’s Default- and Repayment-Management Effort

22. Student Borrower Delinquency Timeline (ED) Delinquency Default DEFAULT Grace (180 days) 1-60 days 61-150 days 151-270 days 271-360 days Collections ED-Loan Servicing Default @ day-360 School’s Default- and Repayment-Management Effort

23. Sample Workflow

24. Delinquency Resolution Sequence

25. Best Practices • Encourage responsible borrowing • Entrance counseling, enrollment, and post-enrollment • Establish frequent and ongoing communication; continuously update demographic information at critical time periods • Enrollment, post-enrollment, grace, graduation/separation, repayment • Develop formal debt management plan and outreach program • Performed internally and/or in collaboration with a third-party vendor • Leverage each organization’s strengths • Determine “at-risk” student borrower population • Prioritize work load for most strategic resource deployment

26. Data Flowchart Default- and Repayment-Management Team

27. Student Borrower Risk Factors (examples for illustrative purposes only) • In-school status • Program-of-study • First in family to attend college • Pell Grant Recipient • No transferrable previous education credit • Repayment status • Withdrawal status • Presence or absence of valid demographic data to determine skip-trace status • Account balance • Note: highest balances do not necessarily translate into the highest default risk • Delinquency status

28. Telephonic Outreach • Compose telephone scripts/narratives • Embrace a warm and friendly tone; however, use open-ended questions (how much, when, etc.) • Verify demographic information on each contact • Promote balance-reducing payments and electronic debit account enrollment for student borrowers who are able to pay • Offer deferment entitlements and forbearance for student borrowers who are unable to pay • Facilitate 3-way conference calls with loan servicers (for pay-by-phone transactions and verbally- approved forbearance requests) • Launch automated and/or manual dialing campaigns • Prioritize work load (e.g., sorted by fiscal year vintage, delinquency, risk exposure) • Provide multiple ways for the student borrower to make inbound contact (toll-free hotline, E-mail, website, etc.) • Consider interactive (attended or unattended) messaging • SMS Texting

29. Sample Operational Flow Chart

30. Operational Best Practices • Lettered Outreach • Craft a letters series (to be delivered via E- and direct-mail) for outreach during various stages of engagement • Welcome letter • Dunning notices (past due) • Late-stage delinquency letter (quote default consequences) • Skip-tracing • Contact previously-known telephone numbers and addresses • Use third-party vendor either on a “pay-per-inquiry” or “batch” basis to source new student borrower demographic information • Evaluate and report performance • Activity-based metrics: telephone right party contacts (RPCs), E-mail open- and click-through-rates; letters sent, skip-trace activities performed • Results-based metrics: resolutions (# and $), skip-trace locates, payment resolutions; delineation of resolution methods, CDR, LRR

31. Thank You For Your Time Eric K. Johnson President, Student Outreach Solutions, Inc. Sallie Mae 11100 USA Parkway, Fishers, Indiana 46037 317.348.9119 (t) | 317.450.7063(c) Eic.Johnson@SallieMae.com SallieMae.com