INSIDE STUDENT LENDING

June 2008
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Welcome

Welcome to the June 2008 edition of Inside Student Lending, a monthly newsletter published by Student Lending Analytics (SLA). This publication provides financial aid professionals and lenders with analyses and current trends in the Student Lending industry.

This month, Inside Student Lending focuses on growing concerns about the availability of alternative loans. A recent SLA survey found that 2 out of 3 financial aid administrators are concerned about this critical funding source. Our second article shows how the financial markets continue to deteriorate which is having a broad impact on tightening the supply of consumer credit, including credit cards and home equity lines of credit. To capture the collective wisdom of the financial aid community, SLA recently launched its Student Lending Analytics Blog. This week the blog hopes to capture feedback on strategies for dealing with the threat of limited alternative loan availability. Finally, SLA research shows the dramatic impact that the College Cost Reduction Act, the credit crunch, and the Education Department's liquidity plan all have had on borrower benefits for Stafford loans.

Contents

Student Lending Analytics Launches Blog

SLA is happy to announce the launch of the Student Lending Analytics Blog. The SLA Blog will be a useful tool for financial aid administrators in many ways, including:
  • Receive timely feedback from your peers. While there are numerous listservs available to you today, this blog will be unique in reviewing your comments and synthesizing the key insights into summary reports.

  • Access comprehensive research on topics that matter to you. Analysis of new regulations, peer-to-peer lender sites, best lender list disclosure are all examples of the research you will find on the blog.

  • Get insightful analysis on the student lending capital markets based on our market intelligence gleaned from conference calls, press releases, market commentary and attendance at industry conferences.

  • Read SLA summaries of recently released research studies on student financial aid.

Please check back each Monday morning for a new topic for you to comment on and read the comments of your peers. Go to the Student Lending Analytics Blog now and comment on how you are addressing issues with the alternative loan market.

Capital Markets Update: The Pain Continues

As we near the one year anniversary of the credit crunch which began in July 2007, financial service firms continue to suffer significant pain as writedowns on their sub-prime and other consumer credit portfolios continue. While most student lenders are divisions within diversified financial institutions, the overall flight from risk and deleveraging within these institutions will impact both the availability and cost of alternative loans this season.

What does this risk aversion stem from? Here are just a few statistics to indicate the severity of this crisis:

Taking a Google Perspective on Alternative Student Loans

A recent SLA study found that 63.5% of financial aid administrators are providing an alternative lender list for their students. For those curious about how the students at the other 36.5% of schools might find an alternative lender, SLA decided to put Google to the test.

Type "student loan" and be amazed first by the 13.9 million responses that Google is able to return in 0.12 seconds (much faster than a blink of an eye which occurs about once every 6 seconds). Here are the top ten sponsored links on the first search results page:

Top 10 Sponsored Links (paid by advertiser)
1. CampusDoor.com
2. ScholarPoint.com
3. FindStudentLoans.com
4. ThinkStudentLoans.com
5. MyRichUncle.com
6. NextStudent.com
7. DiscoverStudentLoans.com
8. TuitionBids.com
9. SimpleTuition.com
10. AxiomDirectLoan.com


Here are the categories which these lenders fall into:
  • Two financial institutions that provide school-certified loans:
    • CampusDoor and Discover

  • Five companies that appear to be Direct-to-Consumer:
    • ScholarPoint and MyRichUncle
    • Three websites refer borrowers to the same lender, Lehman Brothers:
      • Think Financial, NextStudent and Axiom Direct

  • Three companies provide comparisons among set of lenders who pay referral fees for placement:
    • TuitionBids.com, SimpleTuition and FindStudentLoans.com

Here are some of the statements used by the lenders to capture the attention of your student and parent borrowers. Notice how they highlight the speed and convenience of applying for a loan:
  • "Get an answer online in 60 seconds (CampusDoor)."

  • "Check Sent In 7 Days (ScholarPoint)."

  • "Get Your Check in About a Week. Don't Pay a Cent Until Graduation (Think Financial)."

  • "No Co-Signer, No App Fees, Get Your Money Fast (NextStudent)."

  • "Let Us Find You a Student Loan That Fits Your Needs. Free, Fast & Easy (TuitionBids.com)."

Implications

So the choices appear to be pretty clear: create an alternative lender list for your students or let Google take care of it for you. For those choosing the latter, do not be surprised by the high volume of direct-to-consumer loans taken out by your student borrowers.



SLA Survey Finds 65% of Financial Aid Administrators Concerned about Availability of Alternative Loans

Sixty-five percent (65%) of Financial aid administrators are concerned about the credit crunch impacting the supply of alternative loans based on a recent survey conducted by Student Lending Analytics (SLA). These results are based on a flash survey of 263 financial aid professionals conducted between June 10 and June 11, 2008.

Based on recent College Board data, alternative loans have become an increasingly important component in financing a college education, growing at annualized rate of 28.1% over the past five years. Students use these alternative loans to cover their financing gap after taking into account their family's expected financial contribution, grants, scholarships and all forms of federal aid. H.R. 5715, which increases the limits for the Federal Stafford loan program, may slow the growth of alternative loans. However, rising costs to attend educational institutions, recent exits by alternative lenders such as Bank of America and a deteriorating economy seem to all concern the financial aid community.

Here are several highlights from this survey:
  • Administrators at higher-cost 4-year schools tended to be most concerned about alternative loan availability, however there was also a sense of unease among their 2-year counterparts too.

    • Administrators at 4-year private schools expressed the greatest concern with 27.8% being “very concerned” and 46.0% being “somewhat concerned” about the availability of alternative loans (see chart below).

      • It is important to note that 69.6% of 4-year private schools had COA over $30,000 vs. 17.2% of 4-year public schools.

        Graph 1
    • Given their lower cost of attendance (COA), aid professionals at 4-year public institutions showed significantly less concern than their 4-year private school peers.

      Graph 2
    • Despite their lower cost of attendance, administrators at 2-year public schools signaled higher levels of concern than might have been expected; 19.6% indicated being "very concerned" and 31.4% said that they were "somewhat concerned."

      • This concern may to be linked to the ongoing exodus of several large FFEL lenders from the community college market.

        graph 3
    • Financial Aid Administrators are providing the following strategies to address the issue of alternative loan availability with their students and their families. Go to the Student Lending Analytics Blog to comment on how you and your institution are addressing this critical issue.

      Strategy Percentage of respondents
      Encourage parents to use Parent PLUS loans 77.6%
      Encourage students to get co-signer on application 68.1%
      Build alternative lender list 63.5%
      Seek additional institutional loans/grants 18.6%
      Encourage students to apply to multiple lenders 16.0%
      Recommend peer-to-peer lending networks 2.7%



SLA Analysis Finds Borrower Benefits Provided by Top 10 Stafford Lenders Reduced by 62.5% Since Passage of College Cost Reduction Act

The recent liquidity plan to provide capital constrained lenders with the option to sell their student loans to the Department of Education will further reduce the borrower benefits that these lenders may offer students. SLA's analysis of the top 10 Stafford lenders found a 62.5% reduction in the Stafford borrower benefits these lenders offer as compared to benefits provided prior to passage of the College Cost Reduction Act last fall. SLA calculates the value of borrower benefits utilizing probabilistic models which also incorporate the timing of when such benefits are earned.

Here are the highlights of the analysis:

  • While 100% of these lenders were waiving the 1.5% origination fee for 2007-08, none of these top 10 lenders are waiving the reduced 1.0% origination fee for 2008-09.

  • The only upfront benefit that a borrower can now earn is the waiving of the federal default fee of 1% which is charged by the guarantor.

    • It was not uncommon in 2007-08 for guarantors to waive the fee or for the lenders to pay down all or a portion of this fee for the borrowers. Two guarantors that appear to be waiving this fee on a broad basis are TG and ECMC.

    • None of the top ten lenders are currently advertising or offering to pay down this fee on a broad basis.

  • Only two of the top ten lenders are offering benefits beyond a 0.25% interest rate reduction earned when a borrower allows the lender to automatically debit their monthly loan payment from their bank account.

    • Citibank is offering two benefits: 0.5% interest rate reduction at repayment in addition to last six payments free in addition to the auto-debit. The first two benefits require consecutive, on-time payments in order to be earned.

    • U.S. Bank is offering a 1% principal reduction for 12 on-time payments in addition to the 0.25% auto-debit benefit.

The recent round of borrower benefit cuts came about due to the Department of Education liquidity plan. As a recent electronic announcement from the Department of Education (June 12, 2008) indicated:
"One of the eligibility requirements for a loan to be purchased by the Department, or placed in a participation agreement as described in the Secretary's letter, will be that the loan carry no committed or implied borrower benefit other than the two benefit programs noted above or those which are expressly provided for in the statute or in the promissory note..."

Visit Student Lending Analytics at Booth #419 at NASFAA Conference in Orlando, Florida

Student Lending Analytics will be both presenting and exhibiting at the upcoming NASFAA conference in Orlando. Please stop by our booth #419 and say hello. We will also be presenting our "Trends and Best Practices in the Lender Selection Process" at the following times:
  • Monday, July 7 at 9:00am - 10:15am in Europe 4
  • Tuesday, July 8 at 1:15pm - 2:30pm in Europe 4

We look forward to seeing you at the NASFAA Conference!


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Disclaimer

The information and analysis in this email newsletter and any attachments is intended for informational purposes only. The analysis is based on information available from publicly available documents and we do not represent its accuracy. Student Lending Analytics, LLC assumes no liability for the use or interpretation of the information provided herein. This publication is provided "as is" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability, fitness for a particular purpose or non-infringement of third party rights.