This document discusses the future prospects of the private student lending industry. It notes that rising college costs combined with rising demand for higher education has led to an annual $110 billion funding gap in the US. While government aid helps close this gap, private student loans will need to play a bigger role. The document outlines some challenges facing private student lenders, such as reputational risk, but argues that fundamentals point toward a prosperous future if certain market conditions are met, such as GDP growth and the return of stable asset-backed securities markets for student loans. Overall, it presents an optimistic view of the private student lending industry over the next 2-3 years.

1. www.pwc.com
Student lending
in 2013 and
beyond
Why the fundamentals
point towards a
prosperous future
August 2013

2. Student lending in 2013 and beyond 1
Why the fundamentals point
towards a prosperous future
Over the past 1o years, inflation adjusted tuition costs
have risen by 2.4% annually for private non-profit
four-year schools and 4.1% annually for public four-
year schools1. Despite these rising costs, the demand
for a college education has also risen steadily over the
same period. Rising costs combined with rising
demand has resulted in a shortfall in the availability of
higher education funding that will continue to prevent
millions of students pursuing a post-secondary
education. This demand/supply imbalance has
resulted in an estimated $110 billion+ annual funding
gap for secondary education in the United States.
Figure 1 – Higher education funding gap
Source: National Center for Education Statistics, College Board
This gap exists despite the considerable federal financial aid available,
despite all of the institutional, state and private grants and despite the
relatively limited contribution of private student loans.
Given the well known State and Federal government constraints on
budgets, it is likely that the government will be challenged to provide
additional funding beyond current levels. This begs the question “how
can the funding gap be closed?” The logical answer is that the private
sector needs to play a bigger role and find ways to make more private
student loan funds available with terms and rates that fit the needs and
financial profiles of a wide variety of customers from different socio-
economic backgrounds. In addition, the private student lending industry
should attract new entrants able to inject new sources of capital into the
industry with the expectation of generating acceptable returns.
1 Source: College Board, Trends in College Pricing.
$350.0
$113.5
$115
$37.8
$38.1
$16.0
$10.8
$9.2
$8.1
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
$400.0
Tuition Fees,
Room & Board
Federal Loans Federal
Grants
Institutional
Grants
Federal Other Private Grants State Grants Private Loans FUNDING
GAP

3. Student lending in 2013 and beyond 2
The challenges faced by private student
lenders
There are three strategic challenges faced by existing private student
lenders or prospective new entrants into the market:
• Overcoming or preventing the reputational risk of being a private
student loan provider;
• Striking the right balance in risk-pricing loans such that you attract
rather than repel potential borrowers, and
• Clarifying your strategy for monetizing student loan assets, whether
that be make-and-hold or by selling your loans in the asset backed
securities markets.
Addressing these strategic challenges is not simple but dealing with
them is a pre-requisite for establishing a successful student lending
business. Nonetheless, we believe that there is considerable reason to be
optimistic about the future of the private student loan industry. We also
believe is it necessary to acknowledge why reputational risk has emerged
as a significant challenge and draw comfort from the fact that many hard
lessons have been learned in the private student lending industry over
the past decade.
Experienced lenders have seen the best and the worst of the industry.
They enjoyed a period of extraordinary growth in demand for private
loans (2004-2007), coupled with tremendous yields when those loans
were sold in the Asset Backed Securities markets (ABS). They
subsequently weathered a period of escalating defaults and declining
yields driven by a combination of macro-economic factors (2008-2010)
and under performing loan portfolios originated during a period when
risk policies were not as strict as they are today. To compound the
reputational risk perception, when the ABS market that shut down
abruptly in early 2008, many lenders were left with tenuous assets on
their balance sheets that they had to either write-off or write down.
These challenges have been exacerbated by a sustained period of
politically charged finger-pointing aimed squarely at the private student
lenders and their servicer partners. The attitude of many of these
experienced lenders is best characterized as cautiously optimistic but
tempered by a sense that the market will never as vibrant as it was in the
2006 -2007 time period.
For the newcomer to this industry, they intuitively see huge demand
from an annually renewable, young customer base. They also see the
potential to build and solidify a banking relationship with a college
student, beyond the initial education loan, and the opportunity to help
that student with his or her financial independence and needs across
several lines of business (i.e., deposits and savings accounts, credit
cards, auto loans, mortgages and other financial products). When looked
at this way, the long term value becomes quite apparent.

4. Student lending in 2013 and beyond 3
Unfortunately, the dichotomy of the past and the present scares industry
veterans and potential new entrants alike. The notion of taking a student
loan proposition to a Risk Committee and trying to make a case that
“this is good business” is perceived as a stretch for those not sufficiently
schooled in the nuances of student lending or bold enough to see the
opportunity. Historical performance data does not cast private Student
Lending Asset Backed Securities (SLABS) in favorable light. What is lost
on potential new entrants to the industry and on the SLABS market in
general is that the credit profile of private student loans today is very
high. All the major players are consistently >720 FICO with 85%-90%+
co-signer rates.
Capitalizing on the new normal
emerging in the private student lending
market place
High asset quality in itself will not be enough to convince sceptics to re-
enter or break new ground in the student loan market. As with most
potential opportunities, a series of supporting favourable market
conditions are required to bring the opportunity to life and to develop
belief in current and future market participants that they should back
the asset class. We believe there are four particular market conditions
that should be in place that are conducive to sustainable profits and
therefore likely to drive lender participation.
Table 1 – The four market conditions that may drive student
lending industry participation
Market condition Rationale
GDP Growth must be >2.5% to
actively stimulate the job market
Default ratios on student loans
correlate to employment and
economic growth
The Student Lending Asset Backed
Securities (SLABS) market must
view student loans as having an
acceptable risk profile and yield
The SLABS market cannot tolerate
the escalating default rates seen in
earlier vintages and will demand a
higher level of comfort driven by
more transparency surrounding
individual loan performance
Interest rates must begin to rise
over the medium term but at a rate
that does not drive increased
default
Provides opportunity to improve
spreads and profit margin
Student loans remain non-
dischargeable in bankruptcy
Non-dischargeability provides
SLABS investors and make-and-hold
lenders with an additional layer of
protection making student loans a
less risky asset to hold

5. Student lending in 2013 and beyond 4
A case can be made that some of these conditions are starting to align.
Some analysts are now predicting US GDP growth rates as high as 2.5% -
3% in 2o13 and unemployment is now at its lowest level since December
2008. In addition, there are signs that confidence is returning to the
SLABS market – a SLABS sale in March 2013 was oversubscribed with
some people familiar with the deal saying that demand for the riskiest
tranches – those that will lose money first if the loans go bad – were 15
times greater than the supply.
There are of course unknowns and complex externalities that are beyond
the influence of both the lender and the student. Similar to other asset
classes, much can change from the point of origination through the
deferment period and subsequently through the life of the loan, some of
which can adversely impact the asset. For example, ABS markets may or
may not have an appetite for student loans. As we have seen, economic
conditions can change during the deferment period or early into
repayment and this can adversely affect the graduate’s ability to become
employed and meet monthly payments obligations. Changes in the
regulatory and political environments can make originating and
administering a loan challenging and costly.
Despite these unknowns we believe that there are a number of
fundamental factors that point towards the student lending industry
being increasingly attractive to private lenders in the next 2-3 years as a
new normal emerges.
Firstly, one of the most attractive foundational elements of student loans
is the non-dischargeability in bankruptcy provision that ensures high
recovery rates over time should a loan become delinquent. While it may
take an extended period of time in our current economy for an individual
to become employed, it is more likely than not that college educated
individuals will eventually find employment. With the non-
dischargeability provision the loan will eventually be rehabilitated.
Although Senator Richard Durbin has introduced a bill that would allow
students with private loans to discharge them in bankruptcy, we believe
this bill is unlikely to gain traction given many of the other financial
issues facing Congress at this time. However, should Congress vote to
eliminate the non-dischargeability provision, we also believe that it is
unlikely to have a significant effect on default rates as in most cases both
the student and the parent would need to file for bankruptcy. This is tied
to one of the more unique aspects of student loans as an asset class – the
percentage of loans that are co-signed by the parent. One top lender
recently reported that their latest quarter originations were 78% co-
signed with average FICO scores above 7402. These strong fundamental
credit characteristics bode well for the future demand for the asset class.
2 Sallie Mae – 2013 2nd Quarter Review Earnings Call Presentation July 18, 2013.

6. Student lending in 2013 and beyond 5
Secondly, despite the disruption in the market, there is renewable
demand for student loans. Every year a new class of high school seniors
graduate and seek out the colleges of their choice and the funds to pay
for their education. Students and their families will embark on a journey
of financial collaboration and ultimately separation, presenting lending
institutions with the opportunity to begin an independent relationship
with a young borrower – and the catalyst for this relationship can be the
student loan. Making the investment now in building and administering
a student loan product, if done correctly, can create significant long-term
value.
In fact, well administered student loans can develop value in their own
right in the short term and lead to profitable long term relationships if
used as the lead into supporting borrowers throughout their financial
journey. Figure 2 illustrates the potential touch-points of the borrower’s
journey and how the education funding need can be viewed as the first in
a series of life events that enable further product sales and the
development of a trusting financial relationship.
Figure 2 – Long term value of the customer
We have observed leading institutions step away from product
pushing and strive to understand the current needs of each
customer based on his/her individual circumstances.
Many consumer needs are triggered by life events, as illustrated below.
Although each consumer travels a different path, financial institutions
that build trusting relationships with their customers set their radar to
identify these life events as they occur.
Source: PwC
New job
Health/medical
Community
Children
Teenager/students Single adults Childless couples Young families Established families Empty nesters Mature adults
Initiate banking
relationship
(savings/checking
accounts)
Life
trigger
points
Consumer
needs
Debt
Investable
assets
Enter college,
work force
(payment
vehicles—credit/
debit, auto loans)
Marriage
(joint checking
accounts, 401K plans,
CDs, money market)
Birth of a child
(IRA plans, new home
mortgage loans,
insurance, 529
education plans)
School-aged •
children
(home equity loans,
529 education
plans, insurance)
College bound
children
(investments,
education loans,
second mortgages)
Retirement
(investments, reverse
mortgage, estate
planning, retirement
plan distribution)
Car
College Apartment
Second car
New home Bigger home
Travel
New business Expanding business
College
Build nest egg Spend nest egg
Legacy
What do I do next?
Lose job
Buy “stuff”

7. Student lending in 2013 and beyond 6
To capitalize effectively on the relationship opportunity, incumbent
players and new entrants should not forget the lessons learned from the
heyday of student lending. As favorable market conditions begin to
return we believe that successful student lending organizations will
share a number of common characteristics as they build back the
industry.
Table 2 – Pre-requisites for success in the re-emerging private
student lending market place
Successful characteristics Rationale
Put the borrower first – see the
person behind every loan
Caters to the rational and emotional
elements of the customer’s
purchasing decision and promote
trust
Help the student focus more on the
affordability of the loan once in
repayment rather than how much
they need today
A bottom-up view based on
affordability rather than a top-down
view based on need, will make for a
better and more responsible
borrowing decision
Don’t sacrifice credit quality for
volume
Not everyone will qualify for a loan
but establishing a better
understanding the applicant’s long
term prospects may help inform the
overall risk profile
Offer flexible products that evolve
with the borrower
The credit profile of a dependent
18-year old is very different from an
independent 28-year old
Offer graduated repayment plans
that are consistent with investor
requirements to reduce the potential
of loans becoming delinquent
Consider the graduate’s early-career
cash flow and helps the borrower
establish a consistent repayment
pattern
Collaborate with value chain partners
(e.g., schools, lenders, servicers)
Promotes responsible borrowing
and helps to align the interests of
the value chain partners
View student lending as a strategic
gateway into a lifetime relationship
with the customer
Consider the customer to be a
customer for life. Deeper product
penetration increases customer
profitability and reduces the
likelihood of switching
Do a better job supporting the whole
customer across the organization
Break down the lines of business
silos and support the borrower
cross-LOS
Establish and strive to continuously
improve operational processes
(efficient, consistent and well
controlled)
Lowers cost of operations; scales
more profitably, consistent and well
controlled operations provide an
effective basis to meet regulatory
requirements

8. Student lending in 2013 and beyond 7
As we highlighted earlier, despite the unknowns around the results of
increased regulatory oversight and debates related to bankruptcy
dischargability, we believe that there are a number of fundamental
factors that point towards the student lending industry being
increasingly attractive to private lenders in the next 2-3 years as a new
normal emerges.
Provided lenders, both current and new entrants, can recast their
student lending models around the attributes highlighted, there is a
large, growing and annually renewable market to be tapped into. Now is
the time for industry participants to act if they want to capitalize on the
short and long terms opportunities for profit in the student lending
market place.
How PwC can help
PwC continues to support many existing student lending industry
participants and potential new entrants to the market in areas that
include student loan origination, student loan servicing, default and
delinquency, operational excellence, regulatory compliance and risk
management.
Examples of how the student lending team can help you to respond
Student loan
origination
• Loan origination process design and implementation
• Loan origination process optimization
• Borrower segmentation and marketing strategy
• Customer experience strategy development and
implementation
• Origination strategy and credit policy development
• Fraud strategy development
• Potential fraud detection and prevention
• Origination process QA/QC
• Loan origination system implementation
• SLABS optimization strategies
Student loan
servicing
• Servicing strategy development
• Buyer side servicer souring advice
• Design of servicing future state operating models
• Servicing profitability analysis
• Development of key metrics and performance
dashboards
• Design and implementation of operational risk control
frameworks

9. Student lending in 2013 and beyond 8
Examples of how the student lending team can help you to respond
Default and
delinquency
management
• Default and delinquency loss mitigation strategy
development
• Assessment default management capability and
infrastructure
• Development of default and delinquency segmentation
and modelling to support improved account level
decision making
• Design of default management reporting and dashboard
development
• Design and implementation of default management
analytics
• Risk modeling and account management strategies
Operational
excellence
• The design and implementation of cost reduction
strategies and sustainable cost management programs
• Management reporting analysis including dashboard and
KPI development
• Peer benchmarking, gap analysis, and recommendation
across origination, servicing and default operations
• Development of change management strategy and
capability
Regulatory
compliance
• Strategies and approaches to manage compliance with
upcoming CFPB oversight
• Assessment and transformation of customer complaints
handling
• Readiness reviews for regulatory requirements including
UDAAP, RESPA, TILA, EFTA, FDCPA, HPA, FCRA,
GLBA, ECOA, SAFE, and HMDA
• Review of strategy, policies and procedures for vendor
oversight/surveillance
• Development and implementation of comprehensive
compliance programs
• Vendor surveillance program assessment
• Vendor surveillance benchmarking and analytics
Risk
management
• Lifecycle credit risk management strategy, credit policy,
execution development
• Development of portfolio risk management analytics
• Risk management organization audit and development of
risk management strategy
• Risk management reporting analysis and development of
effective end-to-end risk management systems
• Risk Scoring model development, validation, and
calibration
• Portfolio management strategy development

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC
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For more information on how to respond to the developments in the student lending market, please reach out
to our Student Lending Team:
Andy Hawley
Principal
andy.hawley@us.pwc.com
(617)803 5993
Richard Altham
Principal
richard.d.altham@us.pwc.com
(207) 502 2347
Martin Touhey
Principal
martin.e.touhey@us.pwc.com
(206) 790 8751
Nick Tilston
Senior Manager
nicholas.p.tilston@us.pwc.com
(857) 383 9057
Laurence Bonifant
Senior Manager
laurence.t.bonifant@us.pwc.com
(603) 491 4709
Nathan Parry
Senior Manager
nathan.e.parry@us.pwc.com
(617) 530 7112
Mark Shura
Manager
mark.j.shura@us.pwc.com
(617) 620 3601
Adam Kelly
Manager
adam.p.kelly@us.pwc.com
(317) 918 4413