Milliman Student Loan Consulting Services

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I would like to introduce Milliman’s independent and transparent student loan consulting services. Milliman’s Credit Risk Group, headquartered in Brookfield, Wisconsin, has focused on analyzing credit risk for insurers, banks, investors, and other financial companies since the early 1990s.

Milliman is an independent party and does not buy, sell, or make markets with respect to private student loans and associated securities. Moreover, Milliman offers a transparent analysis with detail sufficient enough to enable any professional qualified in student loan default modeling to determine the reasonableness of the results, methods, and assumptions. As you know, this level of transparency is demanded by management, practitioners, auditors, and regulators.

Please find an informational brochure on Milliman’s student loan consulting services, along with an article on student loan defaults and a fact sheet about Milliman. I look forward to discussing this further with you in the near future. Please feel free to contact me at 262-796-3307 at your earliest convenience.

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Milliman Student Loan Consulting Services

  1. 1. Milliman Student Loan Consulting ServicesIndependent and transparent analysesof your private student loan default riskWHO NEEDS AN INDEPENDENT EXPERT TO ANALYZE or sells these securities. Milliman’s independence preventsDEFAULT RISKS ASSOCIATED WITH YOUR PRIVATE STUDENT potential conflicts of interest.LOAN PORTFOLIO?ƒƒ Investment banks who underwrite private student-loan-backed ƒƒ Credit focus. Our practice has been involved in credit securities (SLBS) or who hold private student loan auction-rate analyses since the early 1990s with a strong emphasis on securities (SLARS) on their balance sheet credit risk modeling.ƒƒ Schools with private student loan funds MILLIMAN’S DEFAULT RISK MODEL By analyzing the default risk of private SLBS or SLARS on yourƒƒ Lenders who originate or service private student loans balance sheet, whole loans in your origination channel, or the risk associated with your school’s fund portfolio, you will be in a betterYou are part of an increasingly important private student loan position to understand your financial health. Our model uses themarket, yet may find yourself with a difficult task determining the following components to determine the overall default risk of yourdefault risk associated with your loans, particularly now during private student loans:these troubled economic times. You can understand better whatthis risk means to you and how you can address it by engaging ƒƒ Performance to date . Collateral persistency, loss, andMilliman’s student loan consulting team and tapping into our delinquencies help gauge performance thus far for thedefault risk services. collateral and can be used to estimate future performance.BENEFITS OF THE MILLIMAN DEFAULT RISK MODEL ƒƒ Loan-level underwriting characteristics. SpecificWhat makes Milliman private student loan default analyses characteristics of borrowers, co-signors, and schools quantifyso valuable? credit performance by individual loans.ƒƒ Improved decision making . With no government ƒƒ Economic environment . The model leverages economic guarantee, private student loans are vulnerable to default risk. variables such as unemployment to capture external risk in Understanding the terms of your risk is critical for making the market. decisions regarding the profitability of your student loan portfolio. Get the help you need to assess the default risk associated with your private student loans. Contact Milliman todayƒƒ Respond to SEC changes. On April 7, 2010, the SEC to find out more about how to put independent and proposed changes to Regulation AB to help enhance the data transparent default risk analyses to work for you. available to investors of securitizations. Rely on Milliman to analyze this new information to provide the insight required to Figure 1: Select Illustrative Variables That Drive Private attract potential investors. Student Loan Defaultƒƒ Enhanced transparency. Greater transparency puts your company in a better position to access financial markets. School Type Interest Rate Degree Origination Channelƒƒ Reduced overhead. Milliman’s expertise helps companies avoid the onerous and expensive task of acquiring or developing in- FICO Dropout Rate house expertise. Co-Signer Unemployment RateMilliman distinguishes itself by offering the following: Debt Performance To-Dateƒƒ Independent valuation. Holders of SLBS or SLARS and schools who have received outside funding all too often obtain Starting Salary estimates from an investment bank or broker that also buysKen Bjurstrom Leighton Hunley Mike Schmitzken.bjurstrom@milliman.com leighton.hunley@milliman.com mike.schmitz@milliman.com+1 262 796 3325 +1 262 796 3307 +1 262 796 3322 milliman.com
  2. 2. Milliman Credit Risk BriefUnderstanding the student loan marketLeighton HunleyIf you or anyone you know has college-age children, then you are Risk and realismlikely familiar with the economic realities of an education nowadays. Where do private lenders in the student loan market find themselvesSome of the numbers can be very startling. According to the College now? One of the lessons of the recent economic downturn has beenBoard, total costs at a private university, factoring in books and travel the simple reality that risk can bring a very tangible downside, andas well as tuition, room and board, and other expenses, are now the private student loan market is no exception. Earlier this year, theclosing in on $40,000 for a single year.1 That’s nearly $160,000 for U.S. Department of Education (DOE) reported that the default ratea four-year degree. for federally guaranteed student loans was 6.7% for fiscal year 2007, as shown in Figure 1. That represents a 2.1% jump in the default rateWhere are today’s graduates finding their tuition funds? The growth over the 2005 fiscal year and the highest rate since 1998.7in federally subsidized student loans, according to the College Board,has slowed from an average annual rate of 10.8% in adjusted dollars Moreover, as troubling as the rise is, it probably still underestimatesfor the 10-year period from 1977-78 to 1987-88 to 5.5% across much the magnitude of student loan defaults. This is because the DOE’sof the first decade of this century.2 Given these circumstances, it’s no cohort default rate is calculated using the cumulative number ofwonder that private student loan lenders have stepped forward to fill borrowers who stop paying on their loans within the first two yearsthe gap. But now that they’re in it, do they know how to prepare for the after entering repayment, which is generally believed to be too shortpotential downsides of the student loan market? a timeframe to make an accurate assessment. Defaults can and do occur at later times, according to a 10-year follow-up study by theThe opportunity National Center for Education Statistics (NCES), a part of the DOE,The evidence for the crying need that drives this market is more which found that students typically default on their loans four yearsthan ample. Published college tuition and fees soared 439% after graduating from college.8(unadjusted for inflation) from 1982 through 2007, while medianfamily income increased 147% over the same time period, according Another important point: The NCES study, which tracked the debtto the National Center for Public Policy and Higher Education, a status of 1992-1993 college graduates, found the default rate tononpartisan organization.3 be nearly 10%. But this figure is an overall rate. Some sub-groups had decidedly higher default rates, as can be seen in Figure 2. ForYet federal student loan options available offered by the William D. FordFederal Direct Loan Program in many cases cover only a fractionof college costs. The current Stafford four-year limit of $27,000covers only roughly 65% of a public four-year institution’s tuition National 1: Figure Student Loan Default Rates By Cohort Yearand fees, or 30% of a private college’s costs, if the schools’ National Student Loan Default Rates by Cohort Yearprices were frozen at today’s levels (less if prices continue 8to increase). Subsidized Stafford loans, which are availableto students who can show financial need, fell to 34% of total 7student loans in the 2008-2009 academic year, down from 649% 10 years earlier. The proportion of non-subsidized Stafford Cohort Default Rateloans has also declined slightly.4 5 4Private lenders have seized the opportunity. As reportedby the College Board, the proportion of non-federal loans 3swelled to 25% in 2007-2008, up from 9% in 1998-1999.5This increase in non-federal loans has occurred over a time 2when total education loans more than doubled.6 Private 1student loan originations did slow in 2009 amid widespreadconcerns about the economy and securitization funding, but 0this retrenchment may be only a temporary pullback from a 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007market that has exploded. Source: US Department of EducationJune 2010
  3. 3. Milliman Credit Risk Briefexample, graduates with $15,000 or more in loanshad a default rate that was slightly more than twice 10-Year Default Rates Among 1992-93 Bachelors Degree Recipients Figure 2:the average.9 (No 10-Year Default Rates Among 1992-1993 Bachelor’s Degree Recipients additional degree enrollment an SALARY IN 1994Staying safe in the student loan market HighestOn one level, the implications for lenders are all tooevident. A lack of income or depressed earnings due High Middleto high unemployment clearly reduces a graduate’s Low Middleability to repay loans. But the more importantquestion is: By how much? To price properly, a Lowestlender needs the ability to assess the overall effect TOTAL AMOUNT BORROWEDunemployment changes would have on its uniquestudent loan portfolio. >= $15,000 $10,000 - $14,999This is true for other variables that drive default rates. $5,000 - $9,999For example, debt levels can have an effect on astudent’s ability to pay. But does the tipping point <$5,000occur at $10,000 in student loans? $20,000? Ormore? Credit scores, interest rates, college dropout 0 5 10 15 20rates, and the presence of a cosigner on a student Cumulative 10-Year Default Rateloan can each have an impact on default rates. Some40% of students fail to complete college10 —which Source: US Department of Education, National Center for Education Statisticsfrequently puts them on an earnings path thatdoesn’t support the debt levels taken on in college. Only in this way will lenders be able to underwrite and price theirHowever, student loans with a cosignatory are much less likely to products in a way that reflects the true risk of student loan defaults.default than other loans, all other factors being equal.How do these variables interact to drive default rates? What Leighton Hunley is a financial consultant with the Milwaukee officeeffect do they have on a lender’s portfolio? How should pricing of Milliman. Contact Leighton at leighton.hunley@milliman.com orbe adjusted to reflect high unemployment? How can changes in 262.796.3307.pricing and underwriting impact future defaults? These questionsare difficult to answer, but an advantage can be gained with anassessment of the factors that make up credit risk. 1 Baum, S. et al. (2009). Trends in college pricing. College Board, Trends in Higher Education Series. Retrieved May 28, 2010, from http://www.trends-Looking ahead collegeboard.com/college_pricing/pdf/2009_Trends_College_Pricing.pdf.With tuition continuing to rise and with high unemployment— 2 Baum, S. & Ma, J. (2007). Trends in college pricing. College Board, Trends in Higher Education Series. Retrieved June 8, 2010, from http://www.collegeboard.especially among recent graduates—the recent increase in college com/prod_downloads/about/news_info/trends/trends_pricing_07.pdf.loan defaults should not be too surprising. These macroeconomic 3 Lewin, Tamar (Dec. 3, 2008). College may become unaffordable for mostfactors are likely to persist for the foreseeable future, reinforcing in U.S. New York Times. Retrieved June 8, 2010, from http://www.nytimes.the trend toward rising defaults for student loan lenders. This com/2008/12/03/education/03college.html?_r=1. 4 Baum, S. et al. (2009). Trends in student aid. College Board, Trends indynamic is reinforced because many of the relief mechanisms Higher Education Series. Retrieved May 28, 2010, from http://www.trends-such as forbearance that allowed students to suspend payments collegeboard.com/student_aid/pdf/2009_Trends_Student_Aid.pdf.for a period of time are now more scarce. 5 Trends in student aid, ibid. 6 Trends in student aid, ibid. 7 U.S. Department of Education (2009). National student loan default rates. FederalAn assessment of student loan characteristics is imperative to Student Aid, Default Prevention and Management. Retrieved June 8, 2010, fromgaining a handle on default rates. Some variables that drive default http://www2.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html.rates are more qualitative than quantitative. But today’s technology 8 Choy, Susan P. & Li, Xiaojie (June 2006). Dealing with debt: 1992-93 bachelor’s degree recipients 10 years later. National Center for Education Statistics.offers analysts the ability to create models that incorporate key Retrieved May 28, 2010, from http://nces.ed.gov/das/epubs/2006156/index.asp.determinants of default rates, which can be used to set interest 9 Choy & Li, ibid.rates at a level commensurate with the associated risks. 10 Clark, Kim (April 8, 2007). Run the numbers. U.S. News & World Report. Retrieved June 8, 2010, from http://www.usnews.com/usnews/biztech/The materials in this document represent the opinion of the authors and are not articles/070408/16intro.htm?s_cid=related-links:TOP.representative of the views of Milliman, Inc. Milliman does not certify the information,nor does it guarantee the accuracy and completeness of such information. Use ofsuch information is voluntary and should not be relied upon unless an independentreview of its accuracy and completeness has been performed. Materials may not bereproduced without the express consent of Milliman.Copyright © 2010 Milliman, Inc.Understanding the student loan market milliman.comLeighton Hunley
  4. 4. Milliman 2010 FactsheetMilliman is a firm of consultants and actuaries serving the full spectrum ofbusiness, governmental, and financial organizations. Founded in 1947, the firmhas 52 offices in principal cities in the United States and worldwide.Milliman’s revenues were $610 million in 2009.Practice areas• Employee benefits, investment, and compensation consulting services• Health consulting services• Life and financial consulting services• Property/casualty consulting servicesOfficesAlbany Hartford New York San Juan, PRAmsterdam Hong Kong Norwalk São PauloAtlanta Houston Omaha SeattleBermuda Indianapolis Paris SeoulBoise London Philadelphia ShanghaiBoston Los Angeles Phoenix SydneyBucharest Madrid Portland, ME TampaChicago México City Portland, OR TokyoColumbus Milan Princeton Walnut CreekDallas Milwaukee St. Louis WarsawDenver Minneapolis Salt Lake City WashingtonDubai Munich San Diego West PatersonDublin New Delhi San Francisco ZürichOrganizationMilliman is owned and managed by approximately 300 principals, who have been elected in recognition of their technical, professional, andbusiness achievements.LeadershipPatrick J. Grannan, president and CEOBradley M. Smith, chairmanEmployeesMilliman has over 2,400 employees, including a consulting staff of 1,100 qualified consultants and actuaries.Offices in Principal Cities Worldwide

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