Title: Steering A Divergent Course: DTC vs. Traditional SchoolCertified Loan Channel
1Steering A Divergent Course DTC vs. Traditional
School-Certified Loan Channel
- Walter Witthoff, Sr. VP
- Iowa Student Loan
- Brad Williams, President
- Strategic Resources Alliance, LLC
- Dick Bellows, Ex. Dir. Financial Aid
- Butler University, Indianapolis
2School-Certified Loan Channel
- Walter Witthoff, Sr. VP
- Iowa Student Loan
3Advantages of School Certification
- Compliance with the federal Customer
Identification Program under the USA PATRIOT Act - Protection against fraud
- Prevents over-awarding
- Prevents over-borrowing
4Direct-To-Consumer Loan Channel
- Brad Williams, President
- Strategic Resources Alliance, LLC
5Why DTC vs. School Certified Loans?
- Three factors driving DTC growth
- Environmental
- Demographic
- 3. Motivational
6Differences between DTC School Channel
Product
- School channel loans typically have lower
interest rates and fees - DTC loan information is more readily accessible
to the consumer - Marketing collateral sent to the home
- Internet based information is available
7Private Loans Environmental
- Academic 2005-06
- Federal Loan volume approx. 69 billion
- Private Loan volume approx. 16 billion
- Projected growth rate 2003-2008
- Stafford 8
- Private 25
- Institute for Higher Education Policy Dec.2006
Future of Private Loans
8Private Loans Environmental
- Private loans accounted for 11.4 of total
student funding in 2005-06, up from 2.4 in
1995-06 - College Board as cited in February 5,2007 Fitch
Report An Education in Student Lending
9Private Loan Borrower CharacteristicsDemographic
- Private Loan Portfolio Breakouts
- 83 Undergraduate
- 9 Graduate
- 7 Professional Students (Medical, Law)
- Professional students more likely to borrow (25)
than undergraduate or graduate students (5) - Institute for Higher Education
Policy-Dec.2006 Future of Private Loans
10Private Loan Borrower CharacteristicsDemographic
- 2003-04
- 80 of dependent undergraduate students also
received Federal Stafford loans, and - 76 of independent undergraduate students
-
- Institute for Higher Education Policy-Dec.2006
Future of Private Loans
11Private Loan Borrower CharacteristicsDemographic
- Household Incomes
- 53 of borrowers had household incomes of
60,000 - 20 of borrowers had household incomes of
40-50,000 - NCES 2004
12Private Loan Borrower CharacteristicsDemographic
- FICO Scores
- Minimum cut-off for single borrowers 640-650
- Historical average FICO scores in range of
700-720 - FICO trends are a function of capital markets
prerequisites - Fitch Report An Education in Student Lending
February 5,2007
13Private Loan Borrower CharacteristicsDemographic
- National Collegiate Student Trust 2007-1
- Securitization issue offered by First Marblehead
and closed in March 2007 - 729 million
- 82.8 Co-signed
- 74 of portfolio was DTC
- 26 of portfolio was school channel
14Private Loan Borrower CharacteristicsDemographic
- National Collegiate Student Trust 2007-1
- Weighted average interest rate LIBOR 5.09
(10.42) - Average Principal Balance per borrower 11,548
- Weighted average FICO all loans 714
- Statistics have been consistent during 31
securitizations since 1991
15Motivating FactorsDTC
- Environment
- Rising cost of attendance (average tuitions at
public 4 year schools rose 234 from AY 80-81 to
AY 94-95) - Avg. cost of attendance rose an additional 36.2
from AY94-95 to AY 04-05 (Public 4 year
schools-undergraduates only) - GAO 1996
- Fitch Report 1/26/06 Private Student Loan ABS
16Motivating FactorsDTC
- Environment
- Net need gap continues to widen
- Stagnant Federal Stafford loan limits (3,500,
4,500, 5,500) - Student attendance patterns
- Caps higher with private loans (130,00 vs.
23,000-46,000 Stafford Undergraduate)
17Motivating FactorsDTC
- Consumer Perspective
- Rapid approval turnaround
- Less paperwork
- Consumers perceived need not filtered through
financial aid perspective - Choice of school
- Plus loans in parents name only (except grad
professional) - Private loan in students name (albeit with
parent as co-signer)
18Motivating FactorsDTC
- Bank/Lender Perspective
- Highly profitable compared to other consumer
product lines - More control over information delivery to
consumer - Product line is attractive to the capital markets
- Product line is highly liquid
- Establish an early basis for future relationships
with the consumer
19Risk FactorsDTC
- Consumer
- Increased level of financial sophistication will
be needed when bypassing financial aid office - Poor understanding of pros and cons of federal
versus private loans - Long term impact of consumer cash flow during
repayment periods
20Risk FactorsDTC
- Lender
- Continued attractiveness of student loans as a
viable ABS vehicle - Legislative impacts i.e.. Sunshine Act
- Added marketing costs will be potentially passed
onto consumers in form of interest rates - Added administrative burdens to lender and
financial aid staffs
21Conclusion
- Private Loans are a permanent and growing element
of education funding - The DTC channel is gaining prominence
- Simpler Process
- No Bureaucracy
- Faster Turnarounds
- Channel is conducive to sense of urgency
- Process may be perceived to be more convenient
- Online application
- No justification needed
22DTC vs. School Certified A View From CAMPUS
- Richard Bellows
- Executive Director Financial Aid
- Butler University, Indianapolis
23KEY issues on campus
- Goal- student /customer service
- High expectation from families that aid office
staff can assist them
24Types of Institutions
- 4-Year Public
- 4-Year Private
- Community Colleges
- Technical or Trade Schools
- On-Line Program
- Different approaches to DTC
25Impact of the WWW
- The Web is our friend and our own worst enemy.
- Many parents gather information from as many
sites as possible, then are over loaded with
facts.
26Impact of the WWW
- Families worry so much they end up in a loop of
what to do. - Others think they are now experts on how to
finance a college education.
27- Two other groups
- Have not read anything
- First time college parents, worry they will mess
up something and jeopardize the aid.
28Types of Students / Families DTC Might Appeal To
- New student families, so many choices, so little
time - Adults in distance learning programs
- Graduate students (part time)
- Jr and Sr undergrads, parents cutting back on
support, or students life style.
29- New student families
- Many decisions to make from April Aug
- Life changing events for parents and student
- The whole aid process was complex,
- Afraid to ask about options
30TYPES of DTC programs
- All transactions between borrower and lender
- Loan that is certified by school and check comes
to school
31Over awards FA concerns
- When total aid is more than the cost of
education. - This happens when the Aid Office processes aid
and is not aware of all resources the student has
been awarded or applied for. - The Aid Office has the responsibility to adjust
aid when aid from all sources (federal or
institutional) is greater than cost of education.
32Over awards FA concerns
- It is the Aid Officer that has to deliver the
message. - Many times the family has made assumptions about
external aid types and how it fits with other aid
they may have from the campus.
33General Comments from the Campus Aid
Administrator
- Student /parent debt for higher education is an
issue - KEY is INCENTIVES TO SAVE FOR COLLEGE
34General Comments from the Campus Aid
Administrator
- Aid offices will need to consider additional
staffing and service issues in the years ahead - Aid Office is obligated to track each students
loan application and disbursement, more lenders
more coding is required
35Concerns from the Campus Aid Office
- Congress (and AG) focus on cost of the loan
- We are concerned about service for the life of
the loan for our students - FA offices want debt management and counseling
for the student and family
36Concerns from the Campus Aid Office
- Institutions are judged by our default rates and
repayment history of our graduates
37- Another whole session topic for me is
- DTC for FFELP or Private loans
38