A Private Eye for Private Loans

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  • Its been quite a year huh? The media sure likes to tell a story. Lets take a few minutes together see past the hype. First lets look at the events that have effected Wall Street and the economy, then we can review the impact Washington and Capitol Hill have had on the industry, and most importantly the impact this is going to have on Main Street USA. Lastly we will review some great ways that you can ensure your students are equipped to navigate this changing landscape. Because at the end of the day, recession or no recession, crisis or no crisis, millions of students will be headed off to college this fall. And last time I checked, the college experience hasn’t become significantly cheaper, and families savings and aid opportunities haven’t risen greatly either. Its just as vital today as it was last year, that we all work together to ensure your students and their families have access to the resources they need to achieve their higher education dreams.
  • Lets start by looking at the US Economy as a whole. As we can see, there is no single issue that has brought us to where we are today. As most markets and economies go through cyclic patterns, we are seeing an overlap of multiple individual downturns that are intertwined, and fueling eachother.
  • Lets start by looking at the US Economy as a whole. As we can see, there is no single issue that has brought us to where we are today. As most markets and economies go through cyclic patterns, we are seeing an overlap of multiple individual downturns that are intertwined, and fueling eachother.
  • As we see the economy as a whole face new and strong headwinds, lets explore how these events are effecting the consumer finance industry.
  • Before we explore how this specifically effects the student loan industry, lets first take a look at the fundign lifecycle of a private student loan. 1.) Up Front Funding is secured in order to supply money to the invidual 2.) Lenders design financial products, and intelligent credit underwriting to provide the best terms possible for the individual 3.) The lender then brings in investors to share in the risk of the loans for the long term, allowing the lender to pay off its up front lending sources, and continue to lend to new students.
  • Before we explore how this specifically effects the student loan industry, lets first take a look at the fundign lifecycle of a private student loan. 1.) Up Front Funding is secured in order to supply money to the invidual 2.) Lenders design financial products, and intelligent credit underwriting to provide the best terms possible for the individual 3.) The lender then brings in investors to share in the risk of the loans for the long term, allowing the lender to pay off its up front lending sources, and continue to lend to new students.
  • Personal savings rate Highest since 1938 18% very confident and 54% according to ERBI retirement confidence survey 3% of US households The OFI Private Investment College Savings Index 22% Upromise College Preparedness survey Tution increased 59% over the last decade
  • Personal savings rate Highest since 1938 18% very confident and 54% according to ERBI retirement confidence survey 3% of US households The OFI Private Investment College Savings Index 22% Upromise College Preparedness survey Tution increased 59% over the last decade

Transcript

  • 1. A Private Eye for Private Loans Finding Smart Funding for your Students Alec Reinstadtler, Education Finance Partners Presentation Date: May 20 — VASFAA Conference
  • 2. A Year of Volatility
    • Wall Street
    • US Economy
    • Consumer Finance Markets
    • Main Street
    • American Savings
    • Students’ Needs
    • On Campus
    • How to Equip Students and Families
    • Why a Lender List is Important
    • Looking Forward
  • 3. Wall Street US Economy
    • Mortgage Market
    • Record numbers of mortgages go into default and foreclosure
      • Foreclosures have skyrocketed 57%
      • 1 out of every 538 homes is now in foreclosure
    • Housing Market
    • The housing market depreciates on a national level
      • Home values have depreciated 8.9%
      • Home sales have declined 21.4%
  • 4. 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 August the Fed has cut key rates 3.00%
    • 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
  • 5. Wall Street Consumer Finance Markets
    • Deteriorating Mortgage Market
    • As mortgages go into default and foreclosure, investors in the mortgage market see record breaking losses.
    • Widespread Losses
    • Investors are taking sizable write downs
    • Fearful & Reluctant Investors
    • Investors have transitioned large portions of their investments into Treasuries to shield their portfolios from further losses.
    Consumer Finance Student Loans Personal Loans Credit Cards Debt Consolidation Mortgages Auto Loans Home Equity
  • 6. Wall Street Student Loans
    • Lending to the Student
    • Credit Underwriting
    • Pricing
    • Benefits & Terms
    • Long Term Funding
    • Securitization
    • Balance Sheet
    • Short Term Funding
    • Credit Lines
  • 7. Wall Street Securitization Market Breakdown 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 Private Student Loans — Securitizations
  • 8. Wall Street Cost of Funds Soar Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Treasure Spread (BPS) 100 90 80 70 60 50 40 30 20 10 0 Private Student Loans — Cost of Funds
  • 9. Wall Street Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Private Student Loans
  • 10. Wall Street Student Loans
    • Lenders Face Tough Times
    • Capital markets remain closed
    • New credit lines are difficult to get
    • 45 loan providers have suspended or exited student loans
    • 11 private loan programs have ceased — more to follow
    • Loan Programs Change
    • Borrower benefits have been reduced
    • Private loan costs have and will continue to rise
    • Risk tolerance has diminished
  • 11. Wall Street Student 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
  • 12. Main Street
    • “Savings failure: American college savers get a “D””
    • Reuters
    “ Economic woes could put college students in a bind” Waterbury Republican American “ College bound students may have a hard time getting a loan” KWTX
  • 13. Main Street The Funding Gap Federal Loan Aid 35% Grants and Scholarships 25% Employment and Work Study 20% Funding Gap 20% Source: College Board, October 2007
  • 14. Main Street The 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 retirement 2
    • 3% of US households have saved enough to pay for college 3
    • 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
  • 15. Main Street The American Family
    • Home Values Dropping
    • 66.2% of Americans own their homes 1
    • Home values have dropped 8.9% in the past year 2
    • Costs Rising, Income is Flat
    • Household incomes rising at less than 2%
    • Inflation growing at 4%
    • Tuition is increased 6 – 8%
    • US Census Bureau
    • Q407 vs Q406, S&P/Case—Shiller Home Price Index
  • 16. Main Street The 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 tuition 1
    • “ Undergraduate Students and Credit Cards,” Nellie Mae, May 2005
  • 17. 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
  • 18. On Campus Preparing & 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
  • 19. On Campus Why a Lender List is so Important
    • Helps families make informed decisions
    • Opportunity to insure they have exhausted FFEL resources
    • Prevents students from applying for a loan they have zero chance of receiving
    • Prevents students from obtaining loans from direct mail or online searches
  • 20. On Campus Why a Lender List is so Important
    • Insert Google Page
  • 21. On Campus Lender Lists: What Should Families Know?
    • Is there a minimum income requirement?
    • Does the loan require a co-signer?
    • Does the lender disclose rates and fees up front?
    • Who gets the lender’s best advertised rates?
      • “ Less than 10% of borrowers get the best advertised rate on private student loans and more than 2/3 get the worst rates...” Mark Kantrowitz- Finaid.org
    • Can the student defer payment in school?
    • Is full-time enrollment and/or SAP required?
  • 22. On Campus Looking Ahead
    • A Strong Lender
    • Navigates intelligently
    • Adjusts as necessary
    • Stays committed to students
  • 23. On Campus Looking Ahead
    • A Smart Borrower
    • Maximizes federal & state aid
    • Does their research
    • Has a cosigner