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Student Loans and Capital Markets

Student Loans and Capital Markets. Thomas M. Graf Executive Director MEFA December 5, 2008. Capital Markets. Early Warning Signs Current Environment Continued Volatility. Capital Markets Early Warning Signs. Unprecedented Disruption Began With Sub-Prime Mortgage Crisis

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Student Loans and Capital Markets

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  1. Student Loans and Capital Markets Thomas M. Graf Executive Director MEFA December 5, 2008

  2. Capital Markets • Early Warning Signs • Current Environment • Continued Volatility

  3. Capital MarketsEarly Warning Signs • Unprecedented Disruption Began With Sub-Prime Mortgage Crisis • Headline risk evident • Large bank write-downs • Quality of underwriting concerns as performance shifts • Investor confidence eroding • Asset-Backed Securities Impact • Limited liquidity as financing channels begin to close • Increased funding costs for lenders and banks

  4. Capital MarketsEarly Warning Signs • Bond Insurers Under Pressure • Insured assets performance was deteriorating • Increased capitalization requirements to fulfill outstanding policies • Bond investors outlook diverging from published actions • Rating Agencies Scrutinized • Insurers on watch or negative outlook – downgrades were on the horizon • Investors looking through insurance wrap to underlying ratings

  5. Capital MarketsEarly Warning Signs • Education Lenders Exit the Market • Increased funding costs • Liquidity contraction by investors • Investors concerned that student loans will perform like sub-prime mortgages

  6. Capital MarketsCurrent Environment

  7. Capital MarketsCurrent Environment Education Loan Transactions Source: Bank of America, The Student Loan Report 11/18/08

  8. Capital MarketsCurrent Environment Interest Rates Source: Bank of America, The Student Loan Report 11/18/08

  9. Capital MarketsContinued Volatility Significant Impact on Families • Fewer education financing options • Tightened underwriting – FICO standards raised to improve risk management • Borrower benefits eliminated from loan programs • Increased borrowing costs in capital markets • Reliance on home equity limited due to housing price corrections • Stock market losses impact households net worth

  10. Capital MarketsContinued Volatility Pressure on College Campuses • Tightened operating budgets and fiscal policies • Impact on institutional financial aid • Shrinking endowments – losses likely to impact operating budgets and financial aid • Maintain access to broadest socioeconomic demographic

  11. Capital MarketsContinued Volatility Federal Government Intervention • Continue commitment to ensure students have access to federal loans • Ensuring Continued Access to Student Loans 2008 (ECASL) • Term Asset-Backed Securities Loan Facility (TALF) • Wait and see with new administration…

  12. Capital MarketsContinued Volatility Education Lenders Focus • Continued commitment to access capital markets to raise proceeds for affordable education loans • MEFA’s response in challenging marketplace • Spring 2008 – suspend FFELP participation • Fall 2008 – successful transaction to fund private education loans

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