a private eye for private loans
TRANSCRIPT
A Private Eye for Private Loans Finding Smart Funding for your Students
Alec Reinstadtler, Education Finance Partners
Presentation Date: May 20 — VASFAA Conference
2
A Year of Volatility
Wall Street
• US Economy
• Consumer Finance Markets
Main Street
• American Savings
• Students’ Needs
On Campus
• How to Equip Students and Families
• Why a Lender List is Important
• Looking Forward
3
Wall Street US Economy
Mortgage Market
• Record numbers of mortgages go into default and foreclosure
Foreclosures have skyrocketed 57%
1 out of every 538 homes is now in foreclosure
Housing Market
• The housing market depreciates on a national level
Home values have depreciated 8.9%
Home sales have declined 21.4%
4
Wall Street US Economy
The Federal Reserve Steps In
• In an attempt to reactivate capital markets and alleviate consumer debt burden, the Federal Reserve begins a series of key rate cuts
Since August the Fed has cut key rates 3.00%
Probable Recession
• In addition to the breakdowns in the housing and mortgage markets, other sectors begin to slow down and shrink
Retail
Manufacturing
Service
Stocks
Currency
Unemployment
5
Wall StreetConsumer Finance Markets
Deteriorating Mortgage MarketAs mortgages go into default and foreclosure, investors in the mortgage market see record breaking losses.
Widespread LossesInvestors are taking sizable write downs
Fearful & Reluctant InvestorsInvestors have transitioned large portions of their investments into Treasuries to shield their portfolios from further losses.
ConsumerFinance
ConsumerFinance
Student Loans
Student Loans
Personal Loans
Personal Loans Credit CardsCredit Cards
Debt Consolidation
Debt Consolidation
MortgagesMortgages
Auto LoansAuto Loans
Home EquityHome Equity
6
Wall StreetStudent Loans
Lending to the Student
• Credit Underwriting
• Pricing
• Benefits & TermsLong Term Funding
• Securitization
• Balance Sheet
Short Term Funding
• Credit Lines
7
Wall StreetSecuritization Market Breakdown
6,000,000,000
5,000,000,000
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108
Private Student Loans — Securitizations
8
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108
Wall StreetCost of Funds Soar
Tre
as
ure
Sp
rea
d (
BP
S)
100
90
80
70
60
50
40
30
20
10
0
Private Student Loans — Cost of Funds
9
Wall Street
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108
Private Student Loans
10
Wall StreetStudent Loans
Lenders Face Tough Times
• Capital markets remain closed
• New credit lines are difficult to get
• 45 loan providers have suspended or exited student loans
• 11 private loan programs have ceased—more to follow
Loan Programs Change
• Borrower benefits have been reduced
• Private loan costs have and will continue to rise
• Risk tolerance has diminished
11
Wall StreetStudent Loans
Effect on the Borrower
• Increased rates
• Increased fees
• Higher credit quality required
• Reduced ability to get all the funds needed
• Less choice
• Shorter repayment periods
Main Street
“Savings failure: American college savers get a “D””Reuters
“Economic woes could put college students in a bind”Waterbury Republican American
“College bound students may have a hard time getting a loan”KWTX
13
Main StreetThe Funding Gap
Federal Loan Aid35%
Grants andScholarships
25%
Employment and Work Study
20%
Funding Gap20%
Source: College Board, October 2007
14
Main StreetThe American Family
America Does Not Save
• In 2006, America’s Personal Savings Rate was negative 1.0%1
• Only 18% are “very confident” they have enough to retire
• 54% aged 45–54 have saved less than $50K towards retirement2
• 3% of US households have saved enough to pay for college3
• 22% have saved nothing
1 US Dept. of Commerce, The Organization of Economic Cooperation and Development
2 “2006 Retirement Confidence Survey,” Employee Benefit Research Institute
3 The OFI Private Investments College Savings Index, Oppenheimer Funds, 2008
15
Main StreetThe American Family
Home Values Dropping
• 66.2% of Americans own their homes1
• Home values have dropped 8.9% in the past year2
Costs Rising, Income is Flat
• Household incomes rising at less than 2%
• Inflation growing at 4%
• Tuition is increased 6–8%
1 US Census Bureau
2 Q407 vs Q406, S&P/Case—Shiller Home Price Index
16
Main StreetThe American Family
Tough Choices for Families
• 70% of families finance education
• Home equity shrinking and unavailable
• 24% of students turn to credit cards to finance tuition1
1 “Undergraduate Students and Credit Cards,” Nellie Mae, May 2005
On Campus
“How to Head Off a Potential Student Loan Crisis”Inside Higher Education
“Lenders Drop Out of Student Loan Market”Business Week
“GWU Prepares for Student Loan Scare”The GW Hatchet
18
On CampusPreparing & Equipping Families
• Educate borrowers on the importance of cosigners with strong credit profiles
Private loans are credit based — borrowers need established credit
Distribute credit education materials
• Recommend lenders that offer consumer loan expertise
• Have borrowers shop for the best loan for them
Availability
Rates and Fees
19
On CampusWhy a Lender List is so Important
• Helps families make informed decisions
• Opportunity to insure they have exhausted FFEL resources
• Prevents students from applying for a loan they have zero chance of receiving
• Prevents students from obtaining loans from direct mail or online searches
20
On CampusWhy a Lender List is so Important
• Insert Google Page
21
On CampusLender Lists: What Should Families Know?
• Is there a minimum income requirement?
• Does the loan require a co-signer?
• Does the lender disclose rates and fees up front?
• Who gets the lender’s best advertised rates?• “Less than 10% of borrowers get the best advertised rate on private student loans and more than
2/3 get the worst rates...” Mark Kantrowitz- Finaid.org
• Can the student defer payment in school?
• Is full-time enrollment and/or SAP required?
22
On CampusLooking Ahead
A Strong Lender
• Navigates intelligently
• Adjusts as necessary
• Stays committed to students
23
On CampusLooking Ahead
A Smart Borrower
• Maximizes federal & state aid
• Does their research
• Has a cosigner