Industry Consolidation

1
Industry Consolidation?

• Paul B. Sheldon
• Managing Director
• Salomon Smith Barney

2
Title IV Volume (1)
(1) Source Department of Education
3
Top Servicers

• FFELP Loan Servicers As of
  Total
• 1. Sallie Mae Servicing 79.0
  44.3
• PHEAA 22.2
  12.4
• Nelnet Loan Servicing 19.0
  10.6
• 4. Citibank 18.6
  10.4
• ACS (fka AFSA) 13.0
  7.3
• GLHESC
  11.6 6.5
• Total - Top 6
  163.4 91.5
• Total Outstanding 178.5 100

Dollars in Billions. Source SSB Estimates
4
Top Guarantors

• FY 2002 FFELP Guarantors
  Amount As of Total
• 1. USAF 8.17 24.9
• 2. California 3.51 10.7
• 3. Pennsylvania 2.53 7.7
• 4. Wisconsin 2.37 7.2
• 5. New York 2.15 6.6
• Texas 2.13 6.5
• Top 6 20.86 63.7
• 7. Remaining 29 Guarantors 11.89 36.3
• Total 32.75 100.0

Dollars in billions. Source Department of
Education, for year ended September 30, 2002
5
Consolidation in the Business?

• Notable changes to originators are Sallie Mae and
  AMS

Dollars in millions. Source Department of
Education
6
Consolidation in the Business?

• Notable changes to holders are Nelnet, Brazos
  Group, CHELA and MOHELA

Dollars in Millions. Source Department of
Education
7
Consolidation in the Business?
These entrants show that there were holes knocked
in the barriers to entry
8
Consolidation in the Industry has Slowed after a
Flurry
9
Student Loan Companies Attending Industry
Conferences
10
Student Loan Companies Attending Industry
Conferences
11
Business Models

• Originate, hold on balance sheet, self-service
• Secondary Market, originate, hold, securitize,
  service, third party servicer
• Pure secondary market
• Originate, hold on balance sheet, third party
  servicer, sell
• Consolidation Lender, securitize, third party
  servicer

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Returns Available in Various Models (1)
(1) Assumes all loans have a 15,000 ABI
13
Returns Available in Various Models

• After three years of sharply declining interest
  rates, causing huge floor income windfall, expect
  three years of increasing interest rates.
• Effect will be to lower yields
• Must control expense
• Must hedge PLUS Loans, should hedge Stafford Loans

14
Returns Available in Various Models
ROA adjusted for lags caused by increasing
interest rates.
(1) Assumes all loans have a 15,000 ABI
15
Life Cycle of the Student Loan Industry
16
Life Cycle of the Student Loan Industry (1)
(1) Dollars in billions
17
Formula for Success in FFELP Programs
18
Formula Components

• SIP CR XML BBPM CA
• CR Common Record

• Common Record to be functional at all schools by
  February 2004
• Common Record will make real-time exchange, and
  real-time approvals the expected norm
• Guarantor, Lender, School and Borrower can talk
  at the same time
• Originators must be prepared with technology
• ELM and Sallie Maes Open Net in forefront with
  technology

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Formula Components

• SIP CR XML BBPM CA
• XML New Internet Standard

• XML will redefine origination process
• XML provides real time data exchange
• XML enables the Common Record

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Threat to Direct Lending
CR XML makes FFELP AOK

• Schools should be indifferent between Direct
  Lending and FFELP
• You cant convert a direct lender with a better
  loan for the kid, but if you combine a better
  loan with CR XML , schools should leave
  Direct Lending.

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Formula Components

• SIP CR XML BBPM CA
• BBPM Borrower Benefits, Marketed

• Borrower Benefits
• Should not be complicated
• Should be heavily marketed
• Should match the competition

22
Formula Components

• SIP CR XML BBPM CA
• CA Competitive Advantage

• Everyone uses the Asset Backed Market for Funding
• Huge Players
• Have low servicing costs
• Marketing economies of scale
• Small funding advantage
• But they have high ROA requirements and pay taxes
• Tiny tax-exempt players have high servicing
  costs, low marketing economies of scale, but have
  tax exempt funding, tax advantages, no income
  tax, and lower ROA requirements.