Student Loans and Capital Markets

1
Student Loans and Capital Markets

• Thomas M. Graf
• Executive Director
• MEFA
• December 5, 2008

2
Capital Markets

• Early Warning Signs
• Current Environment
• Continued Volatility

3
Capital MarketsEarly Warning Signs

• Unprecedented Disruption Began With Sub-Prime
  Mortgage Crisis
• Headline risk evident
• Large bank write-downs
• Quality of underwriting concerns as performance
  shifts
• Investor confidence eroding
• Asset-Backed Securities Impact
• Limited liquidity as financing channels begin to
  close
• Increased funding costs for lenders and banks

4
Capital MarketsEarly Warning Signs

• Bond Insurers Under Pressure
• Insured assets performance was deteriorating
• Increased capitalization requirements to fulfill
  outstanding policies
• Bond investors outlook diverging from published
  actions
• Rating Agencies Scrutinized
• Insurers on watch or negative outlook
  downgrades were on the horizon
• Investors looking through insurance wrap to
  underlying ratings

5
Capital MarketsEarly Warning Signs

• Education Lenders Exit the Market
• Increased funding costs
• Liquidity contraction by investors
• Investors concerned that student loans will
  perform like sub-prime mortgages

6
Capital MarketsCurrent Environment
7
Capital MarketsCurrent Environment
Education Loan Transactions
Source Bank of America, The Student Loan Report
11/18/08
8
Capital MarketsCurrent Environment
Interest Rates
Source Bank of America, The Student Loan Report
11/18/08
9
Capital MarketsContinued Volatility

• Significant Impact on Families
• Fewer education financing options
• Tightened underwriting FICO standards raised to
  improve risk management
• Borrower benefits eliminated from loan programs
• Increased borrowing costs in capital markets
• Reliance on home equity limited due to housing
  price corrections
• Stock market losses impact households net worth

10
Capital MarketsContinued Volatility

• Pressure on College Campuses
• Tightened operating budgets and fiscal policies
• Impact on institutional financial aid
• Shrinking endowments losses likely to impact
  operating budgets and financial aid
• Maintain access to broadest socioeconomic
  demographic

11
Capital MarketsContinued Volatility

• Federal Government Intervention
• Continue commitment to ensure students have
  access to federal loans
• Ensuring Continued Access to Student Loans 2008
  (ECASL)
• Term Asset-Backed Securities Loan Facility (TALF)
• Wait and see with new administration

12
Capital MarketsContinued Volatility

• Education Lenders Focus
• Continued commitment to access capital markets to
  raise proceeds for affordable education loans
• MEFAs response in challenging marketplace
• Spring 2008 suspend FFELP participation
• Fall 2008 successful transaction to fund
  private education loans