Economic Turmoil and Private Student Loans What it Means to Your Students

1. Economic Turmoil and Private Student Loans What it Means to Your Students California Lenders for Education (CLFE) Presented by Mary Jo Osborn, Wells Fargo, Jeff Lackey, Sallie Mae, Inc. Presentation Date: April 27, 2009 — WASFAA Conference

2. What is an Alternative (or Private) Loan? • Private loans are those that exist outside the federal student loan system and are not guaranteed by the federal government. • Private loans may be provided by banks, non-profit agencies, or other financial institutions. • Private Loans for education were created to bridge the gap between the funds available to a student and school costs. • Considered “alternative” loans, private loans should be used only after all federal student aid options (including federal student loans) have been exhausted.

3. Key Distinctions between Private and Federal Student Loans • Funding, guarantee structure, and associated risk of default • Interest rates, fees, and repayment terms • The variability in products offered • Borrower experience may be different

4. Capitol Hill Legislative Changes Increased Media Attention Wall Street US Economy Consumer Finance Markets Main Street American Savings Students’ Needs On Campus How to Equip Students and Families Looking Forward A Year of Volatility

5. Capitol Hill “Higher education a main priority in election season” The Setonian • “Key lawmakers plan for student loan credit crunch” Inside Higher Education “Senator Kennedy offers student-loan bill to ease effects of credit crunch” The Chronicle of Higher Education

6. Capitol HillLegislative Changes Increased Media Coverage • Student Lending Accountability, Transparency, and Enforcement (SLATE) Act of 2007 • Brings student loan industry into national spotlight Congress Reacts • Over 12 Bills proposed in the House of Representatives while an additional 14 introduced in the Senate College Cost Reduction and Access Act Passed into Law • Cuts subsidies to federal lenders • Caps payment amounts based on graduate’s income for federal loans • Will reduce federal loan interest rates over the next 10 years • Provides federal loan forgiveness for 10 years of public service • Increase in Pell Grant limits

7. Capitol HillLegislative Changes Ensuring Continued Access to Student Loans Act of 2008 Passed into Law (H.R. 5715) on 5/7/2008 • Increased annual and aggregate loan limits • Grace Period and Deferment for Parent PLUS Borrowers • LLR Provisions • Department as Secondary Market • Prohibited Inducements • Extended through 6/30/2010 - H.R. 6889 passed on 10/7/2008

8. Capitol HillLegislative Changes The Higher Education Opportunity Act of 2008 signed into Law (H.R. 4137) on 8/14/2008 Impact of Reauthorization Bill • Makes the “code of conduct” law • Prohibit lender inducements • Disclosure regarding preferred lender list selection process • A new Title X on Private Education Loans • Increased disclosure required for private loans • Require lenders to receive a form by the borrower (provided by the school) that includes COA, EFC, and other aid received

9. Wall Street • “Auction failures force students to lose college funds” Bloomberg “Squeeze Takes Toll on US Student Loans” The Financial Times “Credit crunch hits private student loans” Wall Street Journal

10. Wall Street US Economy Mortgage Market • Record numbers of mortgages go into default and foreclosure Foreclosures have skyrocketed 121% 1 out of every 171 homes is now in foreclosure Housing Market • The housing market depreciates on a national level Home values have depreciated 33.5% in California (July 2007 – July 2008) Foreclosure activity at record levels

11. Wall Street US Economy • Source: RealtyTrac.com July 25, 2008

12. Wall Street US Economy The Federal Reserve Steps In • In an attempt to reactivate capital markets and alleviate consumer debt burden, the Federal Reserve begins a series of key rate cuts Since September the Fed has cut key rates 3.25% Probable Recession • In addition to the breakdowns in the housing and mortgage markets, other sectors begin to slow down and shrink Retail Manufacturing Service Stocks Currency Unemployment

13. Wall StreetStudent Loans Short Term Funding • Credit Lines Lending to the Student • Credit Underwriting • Pricing • Benefits & Terms Long Term Funding • Securitization • BalanceSheet

14. Wall StreetSecuritization Market Breakdown Private Student Loans —Securitizations 6,000,000,000 5,000,000,000 4,000,000,000 3,000,000,000 2,000,000,000 1,000,000,000 0 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

15. Wall StreetCost of Funds Soar Private Student Loans —Cost of Funds 100 90 80 70 60 50 Treasure Spread (BPS) 40 30 20 10 0 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

16. Wall Street Private Student Loans Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108

17. Wall StreetStudent Loans Lenders Face Tough Times • Capital markets remain closed • New credit lines are difficult to get • There are still 5-10 loan providers making private loans Loan Programs Change • Borrower benefits have been reduced • Private loan costs have and will continue to rise • Risk tolerance has diminished

18. Wall StreetStudent Loans Effect on the Borrower • Increased rates • Increased fees • Higher credit quality required • Reduced ability to get all the funds needed • Less choice • Shorter repayment periods

19. Main Street “Economic woes could put college students in a bind” Waterbury Republican American • “Savings failure: American college savers get a “D”” Reuters “College bound students may have a hard time getting a loan” KWTX

20. Main StreetThe Funding Gap Federal Loan Aid 35% Grants andScholarships 25% Funding Gap 24% Employment and Work Study 20% Source: College Board, October 2007

21. Main StreetThe American Family America Does Not Save • In 2006, America’s Personal Savings Rate was negative 1.0%1 • Only 18% are “very confident” they have enough to retire • 54% aged 45–54 have saved less than $50K towards retirement2 • 3% of US households have saved enough to pay for college3 • 22% have saved nothing • US Dept. of Commerce, The Organization of Economic Cooperation and Development • “2006 Retirement Confidence Survey,” Employee Benefit Research Institute • The OFI Private Investments College Savings Index, Oppenheimer Funds, 2008

22. Main StreetThe American Family Home Values Dropping • 66.2% of Americans own their homes1 • Home values have dropped over 15% in the past year2 Costs Rising, Income is Flat • Household incomes rising at less than 2% • Inflation growing at 5.2% • Unemployment rose to 5.5% June 2008 • Tuition is increased 6–8% • US Census Bureau • Standard & Poor’s/Case-Shiller Home Price Indices

23. Main StreetThe American Family Tough Choices for Families • 70% of families finance education • Home equity shrinking and unavailable • 24% of students turn to credit cards to finance tuition1 • “Undergraduate Students and Credit Cards,” Nellie Mae, May 2005

24. What worries families when considering paying for college? • Source: Sallie Mae’s “How America Pays for College” Sallie Mae’s national study of college students and Parents, conducted by Gallup, 2008.

25. On Campus • “How to Head Off a Potential Student Loan Crisis” Inside Higher Education “Lenders Drop Out of Student Loan Market” Business Week “GWU Prepares for Student Loan Scare” The GW Hatchet

26. On CampusPreparing & Equipping Families • Help parents and students cope with the chaos in the student funding arena • Proactive in providing information • Invite borrowers to engage in conversations about their experience • Re-clarify process and procedures • Present realistic picture of the situation • Collaborate with other agencies and institutions Source: ELM Express Newsletter, Spring 2008. Guest Editorial by Steve Sonnenberg

27. On CampusPreparing & Equipping Families • Educate borrowers on the importance of cosigners with strong credit profiles Private loans are credit based — borrowers need established credit Distribute credit education materials • Recommend lenders that offer consumer loan expertise • Have borrowers shop for the best loan for them Availability Rates and Fees

28. On CampusLooking Ahead A Strong Lender • Navigates intelligently • Adjusts as necessary • Stays committed to students

29. On CampusLooking Ahead A Wise School • Equips their students Funding options Credit education

30. On CampusLooking Ahead A Smart Borrower • Maximizes federal & state aid • Does their research • Has a cosigner

31. On CampusLooking Ahead • One-quarter (25%) college families don’t complete the FAFSA application • Not surprisingly, application rates decline with household income • One-in-four families with incomes between $35,000 and $100,000 donot fill out the FAFSA application • Completion of FAFSA by Annual Household Income % Applied • Source: Sallie Mae’s “How America Pays for College” Sallie Mae’s national study of college students and Parents, conducted by Gallup, 2008.

32. Wall Street & the US Economy Probable recession Credit crunch Capitol Hill New legislation Pending changes Main Street Funding gap Tough choices On Campus Changing loan landscape Equip students and families On CampusThe Bottom Line On behalf of CLFE and our membership organizations we thank you for the opportunity to present today’s session.