The Perfect Storm

1
The Perfect Storm

• Sybil Phillips
• Portfolio Risk Management
• Federal Student Aid
• Department of Education
• April 4, 2005

2
(No Transcript)
3
What was the Perfect Storm?

• In the late October of 1991, a confluence of
  unforeseen weather conditions combined to form a
  killer storm in the North Atlantic. The
  Andrea Gail had left Gloucester to face an
  event that had never occurred in recorded
  history.
• No one was prepared for this storm with waves
  higher that a ten story building and wind speeds
  greater than 120 miles per hour.

4
What was the Perfect Storm?

• Meteorologists look at the big picture in an
  effort to forecast weather patterns using
  sophisticated tools like Doppler radar and super
  computers.
• Sailors and fishermen also look at the big
  picture, but must deal with the microenvironment
  of the visible signs of the seas they are
  sailing.

5
What was the Perfect Storm?

• How does this mini lesson in meteorology
  relate to our weathering ebbs and tidal surges of
  the risks associated with our portfolios?

6

• Like the meteorologist, we need to look at the
  Big Picture in order to forecast pending changes
  in our risk of loss or increased default rates.
• Rising consumer debt, rising interest rates,
  inflation, low job and wage growth, an many other
  factors are swirling to combine conditions to
  form a Perfect Storm for increased default rates.

7
Take a Look at the Storm Conditions (Doppler)

• Overburdened consumer According to a fund
  manager interviewed for CNN Money, consumer
  spending accounts for two-thirds of gross
  domestic product.
• Interest rate increases could slow consumer
  spending, which leads to further job loss.
• Jobs despite recent reports of hundreds of
  thousands of jobs gained, we have experienced the
  longest period of job loss since the Great
  Depression.

8
Take a Look at the Storm Conditions (Doppler)

• Debt Service according to the Chief Economist
  for CBS Marketwatch, consumer debt has reached a
  record 9.2 billion or 110 of peoples
  take-home pay adjusted for inflation, also a
  record. Ten years ago it was 85 of disposable
  personal income twenty years ago it was 65.
• School year 1991-1992 average cost of attendance
  was 7,100.
• School year 2002-2003 average cost of attendance
  was 12,100 - a 71 increase in a decade.

Source for cost attendance-Department of
Education NCES
9
Look at the Surrounding Sea

• Approximately 340 billion in outstanding student
  loans.
• Approximately 30 million borrowers.
• More than 46 of the outstanding loan balance is
  in consolidation.
• Average outstanding loan balance in
  consolidation is approximately 18,350.

Source NSLDS
10
Composition of the Outstanding Loan Portfolio
Source NSLDS and CSB Data Mart
11
Composition of the Outstanding Loan Portfolio
12
Composition of the Outstanding Loan Portfolio
13
Look at the Surrounding Sea

• In 1989-1990 21 of undergraduates received
  financial aid under Title IV.
• Average loan size for undergraduate was 2,400.
• In 2003-2004 46 of undergraduates received
  financial aid under Title IV.
• Average loan size for undergraduate was 5,100.
• In 2002, 25 of medical students left school with
  a debt greater than 150,000.

Source U.S. Department of Education/NCES NASFAA
14
Waves on the Sea

• 58,750 consolidated loans in 1990 - 15 loans had
  an underlying defaulted loan and 2 of
  re-defaulted (13).
• 2 million consolidated loans from 1995 2001-
  16 with an underlying defaulted loan and a 40
  re-default rate.
• Consolidated loans in FFELP increased 240 from
  2001 to 2002 from 430,000 to over one million or
  9.4 billion to 22.9 billion.

Source NSLDS
15
Waves on the Sea

• Higher debt burden.
• The increase in alternative loans.
• The advent of distant learning.
• College drift out rates.
• Consolidations are rising rapidly.
• Potential interest rate increase in July.
• Fixed rate versus variable rate

16
What Can You Do to be Prepared?

• Know the borrower through the life of the loan.
• Identify borrower attributes throughout the life
  cycle of the loan that impact performance of the
  loan.
• Look for patterns, trends or changes in behavior
• Identify significant patterns and trends of a
  delinquent borrower.
• Develop a targeted approach to understanding the
  borrower.

17
Who is Impacted During Repayment/Recovery Cycle?
In School
In Grace
In Repayment
Technical Default
Default
270 day
1 day
360 day
6 months
School, Borrower, Lender, Servicer and/or
GA, Tax Payer
Borrower, GA, Taxpayer
School, Borrower, Lender, Taxpayer
18
Who is Impacted During Repayment/Recovery Cycle?

• You are a common thread throughout the
  repayment/recovery cycle with the borrower.
• You potentially have three roles during the
  cycle.
• Servicer
• Guaranty Agency
• Taxpayer
• You have a stake professionally and personally
  insuring that the investment is well managed.

19
Strategies for Survival Skills for the Perfect
Storm

• Use data mining to find patterns and subtle
  relationships in data and rules that allows the
  prediction of future results.
• Build tools to focus on the risk factors and
  proactively attack the risks.
• Communicate consistently and effectively with the
  borrower.
• Assist in improving financial literacy.
• Develop strategies for your portfolio mix,
  borrower behavior, past performance, current
  environment and the forecast.

20
It is Up to You to Weather the Perfect Storm

• We reaped the rewards of a proactive stance with
  low default rates during a good economy wave.
• The economy continues to slow down, unemployment
  is up, the stock market is on a roller coaster,
  and interest rates are rising.
• You have heard the forecast How do you prepare
  to ride out the Perfect Storm?

21
(No Transcript)
22
Clear Sailing