I would like to introduce Milliman’s independent and transparent student loan consulting services. Milliman’s Credit Risk Group, headquartered in Brookfield, Wisconsin, has focused on analyzing credit risk for insurers, banks, investors, and other financial companies since the early 1990s. Milliman is an independent party and does not buy, sell, or make markets with respect to private student loans and associated securities. Moreover, Milliman offers a transparent analysis with detail sufficient enough to enable any professional qualified in student loan default modeling to determine the reasonableness of the results, methods, and assumptions. As you know, this level of transparency is demanded by management, practitioners, auditors, and regulators. Please find an informational brochure on Milliman’s student loan consulting services, along with an article on student loan defaults and a fact sheet about Milliman. I look forward to discussing this further with you in the near future. Please feel free to contact me at 262-796-3307 at your earliest convenience.

1. Milliman Student Loan Consulting Services
Independent and transparent analyses
of your private student loan default risk
WHO NEEDS AN INDEPENDENT EXPERT TO ANALYZE or sells these securities. Milliman’s independence prevents
DEFAULT RISKS ASSOCIATED WITH YOUR PRIVATE STUDENT potential conflicts of interest.
LOAN PORTFOLIO?
ƒƒ Investment banks who underwrite private student-loan-backed ƒƒ Credit focus. Our practice has been involved in credit
securities (SLBS) or who hold private student loan auction-rate analyses since the early 1990s with a strong emphasis on
securities (SLARS) on their balance sheet credit risk modeling.
ƒƒ Schools with private student loan funds MILLIMAN’S DEFAULT RISK MODEL
By analyzing the default risk of private SLBS or SLARS on your
ƒƒ Lenders who originate or service private student loans balance sheet, whole loans in your origination channel, or the risk
associated with your school’s fund portfolio, you will be in a better
You are part of an increasingly important private student loan position to understand your financial health. Our model uses the
market, yet may find yourself with a difficult task determining the following components to determine the overall default risk of your
default risk associated with your loans, particularly now during private student loans:
these troubled economic times. You can understand better what
this risk means to you and how you can address it by engaging ƒƒ Performance to date . Collateral persistency, loss, and
Milliman’s student loan consulting team and tapping into our delinquencies help gauge performance thus far for the
default risk services. collateral and can be used to estimate future performance.
BENEFITS OF THE MILLIMAN DEFAULT RISK MODEL ƒƒ Loan-level underwriting characteristics. Specific
What makes Milliman private student loan default analyses characteristics of borrowers, co-signors, and schools quantify
so valuable? credit performance by individual loans.
ƒƒ Improved decision making . With no government ƒƒ Economic environment . The model leverages economic
guarantee, private student loans are vulnerable to default risk. variables such as unemployment to capture external risk in
Understanding the terms of your risk is critical for making the market.
decisions regarding the profitability of your student loan
portfolio. Get the help you need to assess the default risk associated
with your private student loans. Contact Milliman today
ƒƒ Respond to SEC changes. On April 7, 2010, the SEC to find out more about how to put independent and
proposed changes to Regulation AB to help enhance the data transparent default risk analyses to work for you.
available to investors of securitizations. Rely on Milliman to
analyze this new information to provide the insight required to Figure 1: Select Illustrative Variables That Drive Private
attract potential investors. Student Loan Default
ƒƒ Enhanced transparency. Greater transparency puts your
company in a better position to access financial markets. School Type Interest Rate
Degree Origination Channel
ƒƒ Reduced overhead. Milliman’s expertise helps companies avoid
the onerous and expensive task of acquiring or developing in- FICO Dropout Rate
house expertise.
Co-Signer Unemployment Rate
Milliman distinguishes itself by offering the following:
Debt Performance To-Date
ƒƒ Independent valuation. Holders of SLBS or SLARS and
schools who have received outside funding all too often obtain Starting Salary
estimates from an investment bank or broker that also buys
Ken Bjurstrom Leighton Hunley Mike Schmitz
ken.bjurstrom@milliman.com leighton.hunley@milliman.com mike.schmitz@milliman.com
+1 262 796 3325 +1 262 796 3307 +1 262 796 3322 milliman.com

2. Milliman Credit Risk Brief
Understanding the student loan market
Leighton Hunley
If you or anyone you know has college-age children, then you are Risk and realism
likely familiar with the economic realities of an education nowadays. Where do private lenders in the student loan market find themselves
Some of the numbers can be very startling. According to the College now? One of the lessons of the recent economic downturn has been
Board, total costs at a private university, factoring in books and travel the simple reality that risk can bring a very tangible downside, and
as well as tuition, room and board, and other expenses, are now the private student loan market is no exception. Earlier this year, the
closing in on $40,000 for a single year.1 That’s nearly $160,000 for U.S. Department of Education (DOE) reported that the default rate
a four-year degree. for federally guaranteed student loans was 6.7% for fiscal year 2007,
as shown in Figure 1. That represents a 2.1% jump in the default rate
Where are today’s graduates finding their tuition funds? The growth over the 2005 fiscal year and the highest rate since 1998.7
in federally subsidized student loans, according to the College Board,
has slowed from an average annual rate of 10.8% in adjusted dollars Moreover, as troubling as the rise is, it probably still underestimates
for the 10-year period from 1977-78 to 1987-88 to 5.5% across much the magnitude of student loan defaults. This is because the DOE’s
of the first decade of this century.2 Given these circumstances, it’s no cohort default rate is calculated using the cumulative number of
wonder that private student loan lenders have stepped forward to fill borrowers who stop paying on their loans within the first two years
the gap. But now that they’re in it, do they know how to prepare for the after entering repayment, which is generally believed to be too short
potential downsides of the student loan market? a timeframe to make an accurate assessment. Defaults can and do
occur at later times, according to a 10-year follow-up study by the
The opportunity National Center for Education Statistics (NCES), a part of the DOE,
The evidence for the crying need that drives this market is more which found that students typically default on their loans four years
than ample. Published college tuition and fees soared 439% after graduating from college.8
(unadjusted for inflation) from 1982 through 2007, while median
family income increased 147% over the same time period, according Another important point: The NCES study, which tracked the debt
to the National Center for Public Policy and Higher Education, a status of 1992-1993 college graduates, found the default rate to
nonpartisan organization.3 be nearly 10%. But this figure is an overall rate. Some sub-groups
had decidedly higher default rates, as can be seen in Figure 2. For
Yet federal student loan options available offered by the William D. Ford
Federal Direct Loan Program in many cases cover only a fraction
of college costs. The current Stafford four-year limit of $27,000
covers only roughly 65% of a public four-year institution’s tuition National 1:
Figure
Student Loan Default Rates By Cohort Year
and fees, or 30% of a private college’s costs, if the schools’ National Student Loan Default Rates by Cohort Year
prices were frozen at today’s levels (less if prices continue 8
to increase). Subsidized Stafford loans, which are available
to students who can show financial need, fell to 34% of total 7
student loans in the 2008-2009 academic year, down from
6
49% 10 years earlier. The proportion of non-subsidized Stafford
Cohort Default Rate
loans has also declined slightly.4
5
4
Private lenders have seized the opportunity. As reported
by the College Board, the proportion of non-federal loans 3
swelled to 25% in 2007-2008, up from 9% in 1998-1999.5
This increase in non-federal loans has occurred over a time 2
when total education loans more than doubled.6 Private
1
student loan originations did slow in 2009 amid widespread
concerns about the economy and securitization funding, but 0
this retrenchment may be only a temporary pullback from a 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
market that has exploded.
Source: US Department of Education
June 2010

3. Milliman Credit Risk Brief
example, graduates with $15,000 or more in loans
had a default rate that was slightly more than twice 10-Year Default Rates Among 1992-93 Bachelor's Degree Recipients
Figure 2:
the average.9 (No 10-Year Default Rates Among 1992-1993 Bachelor’s Degree Recipients
additional degree enrollment an
SALARY IN 1994
Staying safe in the student loan market
Highest
On one level, the implications for lenders are all too
evident. A lack of income or depressed earnings due High Middle
to high unemployment clearly reduces a graduate’s
Low Middle
ability to repay loans. But the more important
question is: By how much? To price properly, a Lowest
lender needs the ability to assess the overall effect
TOTAL AMOUNT BORROWED
unemployment changes would have on its unique
student loan portfolio. >= $15,000
$10,000 - $14,999
This is true for other variables that drive default rates.
$5,000 - $9,999
For example, debt levels can have an effect on a
student’s ability to pay. But does the tipping point <$5,000
occur at $10,000 in student loans? $20,000? Or
more? Credit scores, interest rates, college dropout 0 5 10 15 20
rates, and the presence of a cosigner on a student Cumulative 10-Year Default Rate
loan can each have an impact on default rates. Some
40% of students fail to complete college10 —which Source: US Department of Education, National Center for Education Statistics
frequently puts them on an earnings path that
doesn’t support the debt levels taken on in college. Only in this way will lenders be able to underwrite and price their
However, student loans with a cosignatory are much less likely to products in a way that reflects the true risk of student loan defaults.
default than other loans, all other factors being equal.
How do these variables interact to drive default rates? What
Leighton Hunley is a financial consultant with the Milwaukee office
effect do they have on a lender’s portfolio? How should pricing
of Milliman. Contact Leighton at leighton.hunley@milliman.com or
be adjusted to reflect high unemployment? How can changes in
262.796.3307.
pricing and underwriting impact future defaults? These questions
are difficult to answer, but an advantage can be gained with an
assessment of the factors that make up credit risk.
1 Baum, S. et al. (2009). Trends in college pricing. College Board, Trends in
Higher Education Series. Retrieved May 28, 2010, from http://www.trends-
Looking ahead collegeboard.com/college_pricing/pdf/2009_Trends_College_Pricing.pdf.
With tuition continuing to rise and with high unemployment— 2 Baum, S. & Ma, J. (2007). Trends in college pricing. College Board, Trends in
Higher Education Series. Retrieved June 8, 2010, from http://www.collegeboard.
especially among recent graduates—the recent increase in college
com/prod_downloads/about/news_info/trends/trends_pricing_07.pdf.
loan defaults should not be too surprising. These macroeconomic 3 Lewin, Tamar (Dec. 3, 2008). College may become unaffordable for most
factors are likely to persist for the foreseeable future, reinforcing in U.S. New York Times. Retrieved June 8, 2010, from http://www.nytimes.
the trend toward rising defaults for student loan lenders. This com/2008/12/03/education/03college.html?_r=1.
4 Baum, S. et al. (2009). Trends in student aid. College Board, Trends in
dynamic is reinforced because many of the relief mechanisms Higher Education Series. Retrieved May 28, 2010, from http://www.trends-
such as forbearance that allowed students to suspend payments collegeboard.com/student_aid/pdf/2009_Trends_Student_Aid.pdf.
for a period of time are now more scarce. 5 Trends in student aid, ibid.
6 Trends in student aid, ibid.
7 U.S. Department of Education (2009). National student loan default rates. Federal
An assessment of student loan characteristics is imperative to Student Aid, Default Prevention and Management. Retrieved June 8, 2010, from
gaining a handle on default rates. Some variables that drive default http://www2.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html.
rates are more qualitative than quantitative. But today’s technology 8 Choy, Susan P. & Li, Xiaojie (June 2006). Dealing with debt: 1992-93 bachelor’s
degree recipients 10 years later. National Center for Education Statistics.
offers analysts the ability to create models that incorporate key Retrieved May 28, 2010, from http://nces.ed.gov/das/epubs/2006156/index.asp.
determinants of default rates, which can be used to set interest 9 Choy & Li, ibid.
rates at a level commensurate with the associated risks. 10 Clark, Kim (April 8, 2007). Run the numbers. U.S. News & World Report.
Retrieved June 8, 2010, from http://www.usnews.com/usnews/biztech/
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Copyright © 2010 Milliman, Inc.
Understanding the student loan market milliman.com
Leighton Hunley

4. Milliman 2010 Factsheet
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