Three Coins in a Fountain'''

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Three Coins in a Fountain...

• FFELP-Guarantors-Private LoansFrom Wall Street
  to WashingtonWhat's Going On?

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What will be covered?

• Industry happenings and their impact on you and
  your students.
• What are a lender and servicers roles?
• What are a guarantors roles?
• What are private education loans and how do they
  work?

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EXTRA! EXTRA! READ ALL ABOUT IT !!!
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Holy Confusion Batman !!!
OOOF !!!!!
BAP !!!!!!
POW!!!!!!!
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HEADS UP BOY WONDER !!!!
BAP

• The Cuomo Effect
• HERA/CCRAA
• Market Deterioration

POW
OOOF
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The Impact

• Cuomo Effect
• Preferred Lender Lists
• Codes of Conduct
• CCRAA and HERA
• Budget Reconciliation bills
• Lender and Guarantor Revenue cuts
• Market Deterioration
• Exacerbates legislative and regulatory issues

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Auction Rate Securities Lines of
Credit Deposits
FUNDING SOURCES
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Guarantors
What are their roles?
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What is a guarantor?

• A state or private nonprofit organization that
  has an agreement with the U.S. Secretary of
  Education to administer loan guarantee program
  under the Higher Education Act.
• 
  Source Common Manual

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What is a guarantor?

• One who assumes financial responsibility for
  another.
• Synonyms
• Surety, backer, underwriter, sponsor
• Source Roget II, The New
  Thesaurus

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What are the responsibilities of a guarantor?

• Federal oversight of the FFELP
• Compliance
• School Audits
• Lender Reviews
• Common Manual
• Reporting
• Training and Financial Literacy
• ACCESS

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What are the responsibilities of a guarantor?

• Conduct default aversion activities to prevent a
  borrower from defaulting and insure that the
  lender is repaid the loan funds in the event that
  the borrower does not repay.
• Default Prevention Initiatives
• Early education
• Counseling
• Deferments and Forbearances

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Timeline

• Borrower enters repayment
• Lender begins due diligence day 1 of delinquency
• Between day 60 and 120 lender makes Default
  Aversion Assistance request to GA
• GA begins due diligence (after day 60)

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Timeline

• Loan defaults at day 270-360
• Lender submits claim to GA between day 270 and
  360
• GA pays lender 97 of outstanding balance
• GA submits claim to ED
• ED pays GA 95 of outstanding balance

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What else might a guarantor do?

• Originate and Disburse loans
• Track MPNs
• Disburse to schools
• Provide other information counseling, outreach
  and community service

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Revenue Sources

• Account Maintenance Fee (AMF)
• 0.10 to 0.06
• Loan Processing and Issuance Fee
• 0.40
• Collection Retention
• Was 23 now 16

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FFELP Lenders and Servicers
What are their roles?
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Lender/Servicer

• Lender must administer its loan portfolio
  in compliance with the following
• The Higher Education Act of 1965
• Federal regulations
• Federal directives,
• Common Manual
• and guarantor
• Lender usually contracts these activities
  out to a Servicer

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Lender

• Provides funding for loans
• Manages any loan changes until the loan has been
  fully disbursed and passed on to the servicer
• It is ultimately the lenders responsibility to
  ensure that all requirements are upheld, but it
  generally does so through its contracts with the
  servicer

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Lender / Servicer General Responsibilities

• (including but not limited to)
• A lender is required to keep current, complete,
  and accurate records for each FFELP loan it
  holds. All records must be retrievable in a
  coherent hard copy format or in other media
  formats such as microform, computer file, optical
  disk, or CD-ROM.

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Communicate with borrower and/or endorser

• Provide repayment disclosure
• Stafford (240 -30 days prior to repayment)
• PLUS (at or prior to repayment)
• Respond to inquiries within 30 days
• Remain in contact with borrower during life of
  the loan
• Skip Tracing

• Provide Paid in Full Notice

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Manages Loan

• Manages payments, deferments, forbearance and due
  diligence, if needed.
• Ensures no gap in collection activity
• Maintains accurate, complete and current records
  for each FFELP loan it holds.

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Communicates with Guarantor

• Updates guarantor of changes post origination
• Requests aversion assistance during periods of
  delinquency (60-120 days)
• Files default claim (271-360 days)

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Historical Net Revenue Spread in FFELP
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Impact of CCRAA
P

• Cuts yields
• Non-Profits by 40 bps (70 bps on PLUS loans)
• For-Profits by 55 bps (85 bps on PLUS loans)
• Increases upfront fees by 0.5 - lenders now pay
  1.0
• Cuts most default reimbursements by 3

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IMPACT of CCRAA on Market Dynamic

• Scaled back borrower benefits
• Reduction in staff, marketing technology
• Reluctance to lend at low high default schools
• Reduction in consolidation programs
  
  
• Unable to maintain reasonable spreads
• Unable to make return on equity
• Unable to maintain market share
• Other interests (i.e., product cross-selling)
  could impact lender decisions

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Revenues down, expenses up

• Revenue Down
• Diminished yields (40/70bps 55/85bps)
• Cut most default rembursements by 3
• Expenses Up
• Increased up front fees by 0.5
• Liquidity more expensive (subprime mortgage)

Money costs to much Ross MacDonald
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Private Education Lenders

• What are their roles?

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The Gap
Source The College Board, 2005
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Private Loan Volume

• Macro trends driving the market growth are in
  place for the next six years
• It is anticipated that by 2012 private loans will
  exceed federal loans as the primary source of
  education funding

1995 2004 28 CAGR 2005 2010 25 CAGR
(estimated)
Amount (Billions)
Source The College Board Historical Private
Loan Volume Data from 1995 - 2004
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Impact on Schools

• Greater understanding of private loans
• Expanded financial counseling role
• Greater need to identify suitable options

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Federal Lending No Risk
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Private Lending Managing Risk
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Private Lending Managing Risk
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Pricing for Risk
Loan Amount
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Pricing for Risk
Risk Amount
165
Federal
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Pricing for Risk
Risk Amount
5,500
165
Federal
Private
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Pricing for Risk
Risk Amount
Interest Processing
5,500
165
Federal
Private
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Price Equates to Risk

• Bankrate.com 2/8/07
• Survey of top 6 private lenders 2/8/07

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Why FICO? Scores Matter
Source MyFICO? as of February 7, 2007 based on
15K loan with 15 year repayment.
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Know Your Student Demographic
National Distribution of FICO? Scores
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FICO? Score Facts Fallacies
Closing unused credit cards will improve a FICO?
score. ? True ? False
A FICO? score should be the same at all 3 credit
bureaus. ? True ? False
Upon marriage, spousal credit reports are
merged. ? True ? False
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FICO? Score Facts Fallacies

• Checking ones own credit score creates an
  inquiry that lowers the score.
• True ? False
• Annual household income is calculated into a
  FICO? score.
• ? True ? False

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Whats Not in a FICO? Score?

• Race, color, religion, national origin, sex and
  marital status
• Salary, occupation, title, employer, date
  employed or employment history
• Child/family support obligations or rental
  agreements
• Certain types of inquiries
• Any information not found in credit report
• Any information not predictive of future credit
  performance
• Participation in credit counseling of any kind

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Components of a FICO? Score
Amounts Owed
Payment History
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30
10
15
10
Length of Credit History
Types of Credit Used
New Credit
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Student Debt Meet Frank

• Frank Needs an 8,000 Private Loan
• He Has
• Established Credit
• Parents Willing to Co-Sign
• 850 FICO? Score
• His Rate 7.5 - No Fee
• His Monthly Payment 99.19
• Total Cost Over Life of Loan 17,854.26

Based on an 8000 loan amount deferred for 54
months, interest rate never changes, paid off
over 180 monthly payments.
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Student Debt Meet Sue

• Sue Needs an 8,000 Private Loan
• She Has
• Established Credit
• No Co-Signer
• Minor Flaws on Credit Report
• Made 3 Late Payments Last Year
• 665 FICO? Score
• Her Rate 11 Fee of 2
• Her Monthly Payment 138.66
• Total Cost Over Life of Loan 24,958.03

Based on an 8000 loan amount deferred for 54
months, interest rate never changes, paid off
over 180 monthly payments.
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College Payment Options
How do people pay for college?

• Home Equity Loans
• Investments / Savings
• 401(k) Funds
• Credit Cards
• Private Loans

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Paying for School
Undergraduates Credit Cards

• 76 have credit cards
• 24 use credit cards for tuition
• 56 graduate with four credit cards an average
  total balance of 6,400

Source Nellie Mae, 2005
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Advising Your Students
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This has Been a Production of

• Thank You for Attending!