Jamie Wolfe Chief Financial Officer Northstar May 2008

 

Has the student loan situation improved since we last talked two weeks ago?

 

It's mixed. H.R. 5715 was passed and signed. On the positive side, the law broadcasts a political desire to restore liquidity to the student loan marketplace. However, the devil is in details that are not yet formulated by the Secretary of Education.

 

Do any of the details trouble you?

 

The law enables the U.S. Department of Education to buy Stafford and PLUS loans at par, plus accrued interest, plus an unspecified administrative amount. However, these are existing 'warehoused' loans - not newly originated loans. If we do this for goodwill purposes, we may have to lose money on every loan.

 

Is there another troublesome detail?

 

If I sell $1 billion worth of existing 'warehoused' loans to ED, I do so with the responsibility to make new loans with that $1 billion. However, I still owe my warehouse lender $1 billion for them.

 

Is this newest law an all-embracing solution or is it more like a silo?

 

This law addresses three federal efforts. Direct lending. Lender of Last Resort. And loan sales. Together they will have the effect of re-introducing borrowers to multiple master promissory notes, multiple servicers, and multiple loan accounts. Secondly they will do so with thousands fewer customer service personnel. Perhaps some of the thousands of laid-off student loan service reps will be hired to service direct loans or last-resort loans.

 

What borrowing fact may be escaping attention?

 

I 'm looking at a Citigroup Global Markets report on consumer borrowing dated May 1, 2008. It shows a 98 percent drop in securitized home equity loans from 2007 to 2008. That's $127 billion in consumer liquidty, of which perhaps a quarter was formerly used to pay higher education costs. College bursars may be $30 billion behind from that source alone.

 

Can you comment on David Glezerman's expectation that Temple University may see a 10 percent reduction in credit-worthy private loan borrowers in September?

 

Though we have seen no increase in defaults in our private loan portfolio, marketplace conditions require us to raise our credit-worthiness criteria to the point that we will probably approve 30 percent fewer private loan applications than we did last year. Perhaps 10 percent is a low estimate. Meanwhile, those that we approve can expect higher interest rates and fees.

 

In what way could additional stakeholders make the private student loan attractive to students and their families?

 

Three potential stakeholders benefit from the college purchase. Only one of them - the student - has skin in the game today. If the college would take a stakeholder position while the student is enrolled, and employers would do so after he graduates, the credit possibilities would be significantly enhanced.