Steering A Divergent Course: DTC vs. Traditional SchoolCertified Loan Channel

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Steering 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

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School-Certified Loan Channel

• Walter Witthoff, Sr. VP
• Iowa Student Loan

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Advantages of School Certification

• Compliance with the federal Customer
  Identification Program under the USA PATRIOT Act
• Protection against fraud
• Prevents over-awarding
• Prevents over-borrowing

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Direct-To-Consumer Loan Channel

• Brad Williams, President
• Strategic Resources Alliance, LLC

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Why DTC vs. School Certified Loans?

• Three factors driving DTC growth
• Environmental
• Demographic
• 3. Motivational

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Differences 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

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Private 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

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Private 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

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Private 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

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Private 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

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Private 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

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Private 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

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Private 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

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Private 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

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Motivating 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

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Motivating 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)

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Motivating 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)

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Motivating 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

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Risk 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

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Risk 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

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Conclusion

• 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

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DTC vs. School Certified A View From CAMPUS

• Richard Bellows
• Executive Director Financial Aid
• Butler University, Indianapolis

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KEY issues on campus

• Goal- student /customer service
• High expectation from families that aid office
  staff can assist them

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Types of Institutions

• 4-Year Public
• 4-Year Private
• Community Colleges
• Technical or Trade Schools
• On-Line Program
• Different approaches to DTC

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Impact 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.

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Impact 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.

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• Two other groups
• Have not read anything
• First time college parents, worry they will mess
  up something and jeopardize the aid.

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Types 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.

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• 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

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TYPES of DTC programs

• All transactions between borrower and lender
• Loan that is certified by school and check comes
  to school

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Over 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.

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Over 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.

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General Comments from the Campus Aid
Administrator

• Student /parent debt for higher education is an
  issue
• KEY is INCENTIVES TO SAVE FOR COLLEGE

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General 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

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Concerns 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

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Concerns from the Campus Aid Office

• Institutions are judged by our default rates and
  repayment history of our graduates

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• Another whole session topic for me is
• DTC for FFELP or Private loans

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• QUESTIONS?