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Executives

Steven J. McGarry - Senior Vice President of Investor Relations

Albert L. Lord - Vice Chairman, Chief Executive Officer, Member of Executive Committee and Member of Strategy Committee

Jonathan C. Clark - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

John F. Remondi - President and Chief Operating Officer

Analysts

Michael Tarkan - Topeka Capital Markets Inc., Research Division

Mark C. DeVries - Barclays Capital, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

SLM (SLM) Q2 2012 Earnings Call July 19, 2012 8:00 AM ET

Operator

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Steve McGarry, Senior Vice President, Investor Relations. Sir, you may begin.

Steven J. McGarry

Thank you very much, Nicole. Good morning, everybody, and welcome to our second quarter earnings call. With me today are Al Lord, our Chief Executive Officer; Jack Remondi, President and COO; and Jon Clark, our CFO. After their prepared remarks, we will open up the call for questions.

But before we begin, let me remind you that in our discussion, we will make predictions, talk about expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors, and listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures that we call our core earnings. A description of core earnings and a full reconciliation to GAAP measures and our GAAP results can be found in the second quarter 2012 supplemental earnings disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com.

Thank you and I will turn the call over to Al.

Albert L. Lord

Good morning, all and thank you for your interest in Sallie Mae. I'll take a few minutes of your time to discuss our quarterly performance, talk a little bit about future earnings and then share some thoughts with you about our business, the student lending business.

With respect to the quarter, I would give us a decent grade for the quarter, certainly a strong B, although I read a half-dozen analyst reports which reminded me that we missed -- that's -- which is actually something I hadn't been thinking about.

For the quarter, our origination volume was good. Our credit quality remains high with high FICO scores and cosigner rates, and we got our operating expenses down into a more reasonable range from Q1. The company is focused on sustaining cost control and continues to seek more productivity.

As you all noticed, our earnings are reduced again by another so-called one-timer and that was a $50 million premium amortization, acceleration into the second quarter as a consequence of having some $4 billion or 3% of our portfolio consolidated into direct lending. Those -- that number is actually a little higher than we anticipated. That program ended June 30. Somewhat offsetting that premium amortization were $20 million of debt repurchased gains in the quarter.

So our second quarter charge-offs were $235 million, that actually beat our full year plan. I personally was mildly disappointed after a very good first quarter and -- which really surprised us. But the second quarter was not the first quarter, and our charge-offs were higher and our delinquencies backed up a little bit.

Sallie Mae's provisions, which are outsized at the moment, will come down significantly, but not yet. Progress has been frustratingly slow. There's seasonality in our collections, and therefore Q2 is normally worse than Q1, but ultimately collection success follows the economy, and the economy obviously is backed up.

Our net interest line is actually the line that gets most of my attention, it's our top line. Obviously in Sallie Mae's situation, it diminishes as our FFELP loans run off and they run off more quickly than our private loans grow. At some point, you will see growth in that line, but it will be a little bit of time.

Our second quarter bore that $50 million charge that I talked about and so Q2's net interest was well down. In addition to that $50 million, it was also down another $27 million relating to FFELP volume going away, as expected. And also as expected, our margins have been tightened by higher cost of funds and a variety of other factors that Jon will cover with you.

Fee income at $192 million was roughly flat with 2011, and very much as we expected it. It's holding up nicely considering the FFELP wind down pressures on the businesses. We are committed to growing this income source. Earnings per share, of course, are helped by share repurchases. Our share count's down 4% in the second from first and some 9% below where we were at this time in 2011.

Last time we spoke, we told you we would freshen our outlook for 2012. I must say that I commend our current sell side analysts. Their numbers are very close to ours, or ours are close to theirs. I'm going to credit our guys for the transparency of our disclosures, which I -- which obviously helps you make your projections. I think we originally projected around $2 for this year. We're moving that up, as I think you've seen in our press release, to $2.15. I'll also tell you that we'll grow again in 2013 and -- with a caveat or 2. I'm not very uncomfortable with the kinds of numbers that are out there now with respect to 2013. One of the caveats, as I said, I'm not as precise as you guys are and we've got to caveat the economy. We're very pleased with our asset performance and the assets are looking strong, stronger than in quite some time, and that even includes our remaining nontraditional loans. But the real variable, obviously, in our credit costs are the direction of the economy.

So I'll take another minute or 2 of your time and just talk a little bit about our business. During the quarter, we conducted it by -- at least by my count, our 40th annual meeting. We were visited by an unusual combination of folks. Some were demonstrators, all were shareholders and we had a combination of demonstrators, shareholders and customers. So that was an interesting meeting. The young persons that visited us were polite. They observed the rules of the meeting. We had a brief opportunity to hear their points of view. At least on a personal level, I'm -- I struggle a little bit philosophically with some of the points of view and am not in total accord. But then again, all of us were once 22 and anxious about starting our careers.

I am in accord that recent grads face the toughest job market challenge in a generation and a half. There has been a lot of national attention on student debt. The fact is it's a tough job market, there's no question about that. Young people may take 6 months, a year to find a job. I guess one of the things of -- the good things about being around for 30 or 40 years is that you've seen it before. College graduates will have success.

So it's a tough job market in the early '80s. We had 11% unemployment at one point. But those graduates repaid their loans. They were paying interest rates of 8%, 9% on federally subsidized loans against -- versus today's 3.4%. I'll add a few more of my own thoughts here with that. Student loan numbers are big, we've all seen the numbers. The issues tend to be a little less complex and they're sometimes painted. There's certainly responsibility on both parts of the lender and the borrower. Lenders have an obligation to inform borrowers of the risks of borrowing. We have certainly renewed and enhanced our commitment to inform our borrowers over the years. And, certainly, the borrowers' obligation to themselves and to their family to understand those risks. But in the final analysis, they're still student loans. And while we've heard -- we've all heard that it's now a $1 trillion industry, the success or failure delineation is quite simple. And this -- and the answer is graduation. After 40 years, we understand that college graduates default at plus or minus 3%. One would say that the flip side of that, that's 97% success. NIM [ph] graduates default at about 5x -- a 5x worse rate. And those numbers get even worse in the nontraditional sector.

Stresses of the recent economic prices have rededicated -- we've rededicated ourselves to default prevention and we were already the leading member of our industry in default prevention. We've reconstructed all of our private loan products, loan products which for years before were designed to match the federal loan to provide customers with convenience. That was a construct that worked pretty well for 35 years, in fact, until the financial crisis. We created a Smart Option loan whose key difference to other loan structures is that it for the most part requires payment while students are in school. Some 60% of our Smart Option loans pay while in school. The other distinction, and in part it's because of the required payment in school, is that the students are aware of their debt at all times before graduation. They don't graduate with a 4-year cumulative surprise of significant debt.

Federal loans are owned by taxpayers and require no payment in school. Often interest is not accrued in school, and in certain cases, and in many cases, create negative amortization on student loans and even on parent loans. We've all heard that there are some $120 billion a year being lent in the student loan area. About $10 billion of that is private. If it's private, it is also underwritten. We expect our private loans in the Smart Option portfolio to charge-off at maybe 1% to 2% per year. We expect the federally subsidized loans, and they are subsidized by taxpayers, obviously, to default perhaps into the double digits.

We've heard that student loan debt and credit card debt now are approximately the same at $1 trillion. That balance is about the only similarity that I've been able to find. Credit cards finance groceries and gasoline and Home Depot purchases and a variety of other things. Student loans finance a young person's long-term success. The only collateral is human capital and students believes in -- is him or her self.

I will just wrap up by saying, I've been talking about this business for at least the last 20 years and rarely do I talk about it without saying, "We love this business and we're very good at it." I'll leave my thoughts there until we get to the Q&A. Jon?

Jonathan C. Clark

Thank you, Al. Good morning, everyone. I'll be referencing the earnings call presentation available on our website during my prepared remarks.

I'd now like to turn to Slide 3. In the second quarter, we generated adjusted earnings of $0.53 per share. Our loan originations grew 22% with higher FICO scores and we exceeded our financing goals, issuing multiple FFELP and private credit ABS deals. We also increased our share buyback program by an additional $400 million and continued to purchase both shares and FFELP portfolios.

Turn to Slide 4. For the quarter, core earnings were $243 million or $0.49 per share compared with $260 million or $0.48 per share for the year ago quarter. Second quarter 2012 EPS included a $0.07 negative impact from the Department of Education's recently completed special direct consolidation loan initiative, partially offset by a $0.03 gain from debt repurchases. Excluding these items, core earnings EPS was $0.53 for the quarter. Operating expenses in the quarter were down significantly from the prior year, primarily was the result of our cost-cutting efforts. We are targeting operating expenses to be below $1 billion for the year.

Slide 5. Earnings from our Consumer Lending segment were $85 million for the second quarter, a 73% increase from the second quarter of 2011. The increase in earnings is the result of lower provisioning for loan losses and higher net interest income. The private education student loan net spread improved to 4.55% from 4.53% in the year ago quarter, but was down from 4.65% in the prior quarter. Principal driver of the decline from the first quarter was our funding of $2 billion of private education loans in the asset-backed term market. This was consistent with our long-term plan of term funding the majority of our student loan assets, as well as our goal of achieving a pretax ROA of between 3.5% and 4%.

Private credit portfolio characteristics continued their positive long-term trend. 90-plus day delinquencies declined from 4.5% -- from 4.6% in the year-ago period. Forbearances also declined to 4.3% from 4.7% in the prior year. Net charge-offs as a percentage of loans and repayment for our entire portfolio improved to 3.09% from 3.71% in the year ago quarter. As you can see, delinquencies and charge-offs ticked up 0.1% from the prior quarter. We attribute this to seasonality, as loans that are recently entered repayment tend to have a higher level of delinquency. This trend was dampened in recent years due to the significant improvement in credit quality between 2009 and 2011. Given the challenging macroeconomic environment, we'll continue to watch this closely.

We continue to expect long-term improvement in the portfolio performance. The Q4 2011 retake cohort is performing better than the Q4 2010 cohort due to improving demographics for these loans. As a result of the year-over-year decline in charge-offs, our loan loss provision declined materially from the year ago quarter, dropping to $225 million from $265 million. We expect the provision to continue to decline as charge-offs and delinquencies improve.

Finally, the Consumer Lending segment was more efficient than a year ago, with operating expenses as a percent of average managed assets dropping to 69 basis points from 80 basis points in the year ago quarter.

Slide 6. We originated $321 million in private credit loans in the quarter, an increase of 22% in the second quarter of 2011. The loans we originated had a FICO score of 746 and 81% of the loans had a co-borrower. This compares to 736 and 81% in the second quarter of 2011. We're very pleased with the high quality of the loans that we continue to originate. Smart Option loans continue to be an attractive product that offers both competitive pricing and repayment choice, with 44% of our borrowers choosing the deferred option, 22% choosing fixed pay and 34% choosing full current interest payments in the quarter.

On May 21, we began offering a fixed interest rate option to our undergraduate and graduate students starting at rates as low as 5.75% with no origination fees. This added option enhances an already excellent product offering, providing students and families with a choice of payment plans at competitive prices that meet their needs.

In the Consumer Lending segment, we're in a position to significantly increase our earnings and loan originations while maintaining a conservative approach to our loan loss reserve and credit underwriting.

Slide 7. In the Business Services segment, core earnings were $138 million in the quarter compared with $140 million in the second quarter of 2011. The company now services 3.8 million accounts under the Department of Education's servicing contract. Servicing revenue from this contract was $22 million in the quarter compared with $15 million in the prior year.

Slide 8. FFELP core earnings were $44 million for the second quarter compared with $108 million for the second quarter of 2011. FFELP student loan spread declined to 80 basis points from 96 basis points in the prior quarter. That decline was principally driven by the runoff of an estimated $4.5 billion of FFELP loans that will be consolidated into the direct loan program primarily over the second and third quarters as a result of the recently completed Special Direct Consolidation Loan Initiative. Of the $4.5 billion, $2.2 billion of consolidations were completed as of June 30, with remaining volumes still in process. We recorded a $50 million acceleration of loan premium amortization related to the $4.5 billion we expect to consolidate. It is important to remember that this is a noncash item. This onetime event reduced the student loan spread by 15 basis points. We expect the FFELP student loan spread to be in the mid to high 90s for the remainder of 2012. The net impact of this consolidation activities did not have a material impact on our FFELP cash flow projections.

In the quarter, we purchased $1.9 billion of FFELP loans at more attractive spreads than those consolidated under the Special Direct Consolidation Loan Initiative. This brings our FFELP acquisition total for the year to $2.8 billion. We have already exceeded our goal total for last year, and we'll continue to actively and aggressively seek to acquire additional portfolios.

Slide 9. So far this year, we have issued $2.6 billion of private credit ABS in 3 separate transactions. The ABS market continues to strengthen, enabling us to execute our long-term funding strategy of originated new loans at our bank, and term funding more seasoned originations in the ABS market at attractive levels. We have also completed 5 FFELP ABS deals for $5.6 billion. We will continue to regularly issue FFELP ABS to meet the wind down of this trade aid FFELP facility. At quarter end, we have under $16 billion of FFELP loans in that facility, down from a high of $24 billion.

Slide 10. Turning to GAAP. We recorded second quarter GAAP net income of $292 million or $0.59 per share compared with a net loss of $6 million or negative $0.02 diluted earnings per share in the year ago quarter. The primary differences between the second quarter of 2012 core earnings and GAAP results are the marks related to our derivative position.

I'll now turn it over to Steve McGarry.

Steven J. McGarry

Thank you. Nicole, we're ready for the Q&A session.

Question-and-Answer Session

Operator

.

[Operator Instructions] Your first question comes from the line of Michael Tarkan with Topeka Capital Markets.

Michael Tarkan - Topeka Capital Markets Inc., Research Division

So just getting back to the NIM. If we strip out the onetime impact this quarter, we're still looking at a decline sequentially in terms of core's FFELP spread. And I'm just wondering and I know you mentioned that we could expect it back maybe in the mid-90s, mid to high 90s, for the rest of the year. Can you just walk us through your assumptions there and how we start to see some improvement?

Jonathan C. Clark

Sure. This is Jon. If you add 15 basis points back, you're back up to 95. Granted, March was 96, but there's obviously a lot of noise that moves through here and I would caution people from getting too hung up on a quarter-on-quarter movement of 1 or 2 basis points. So that's how you get, in a current 1 month, 3 month swap environment, you get up to 95. And the difference between 95 and higher 90s is what happens to that 1 month, 3 month spread going forward for the balance of the year.

Michael Tarkan - Topeka Capital Markets Inc., Research Division

Okay. And then I guess longer-term beyond this year, you had mentioned in the past the 90, I believe the 90 basis point number for core FFELP NIM overall. Is that still intact?

Jonathan C. Clark

Yes. There's been no change. If the question is, has the special consolidation program or anything in the environment changed our expectations going forward, the answer is no.

Michael Tarkan - Topeka Capital Markets Inc., Research Division

Okay, that's fine. And then just real quick on consumer lending NIM, just how should we think about that going forward? We had a little bit of compression this quarter sequentially. Is this a good run rate now going forward?

Jonathan C. Clark

Yes. I feel confident that we're in, let's call it the 4 50s, going forward for the balance of the year.

Operator

Your next question comes from the line of Mark DeVries with Barclays.

Mark C. DeVries - Barclays Capital, Research Division

For your comments on the seasonality of some of the delinquencies, was the increase primarily driven by borrowers that just entering repayment or are you also seeing some weakness from borrowers who were previously current?

John F. Remondi

This is Jack. On the delinquency side on the private credit portfolio, it's principally new loans entering repayment and -- that drive that numbers. But we have seen a little bit of, I would say, stability or steady rates in delinquencies across all of the seasoned buckets.

Mark C. DeVries - Barclays Capital, Research Division

Okay, got it. In the past, you've indicated private loan charge-offs could reach 2 75 or lower this year. Does that still seem reasonable given the recent trends?

John F. Remondi

Oh, I'm sorry. Yes, there is no change in our expectation for private credit going forward, no.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then finally, could you give us a little color on what some of the assumptions are around margin and provisions embedded in your 2 15 EPS expectations for the year?

John F. Remondi

The margins that we've -- that I just referred to were mid to high 90s on FFELP and 4 50s-ish for private credit.

Operator

Your next question comes from the line of Brad Ball with Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Your buyback programs have been, I think, faster than a lot of folks expected coming into this year, and it looks like share repurchases, if you keep up this pace, will reach a payout around 100%. Could you just talk about your sort of payout targets and what your buyback plans are as you look out into next year?

John F. Remondi

Next year.

Albert L. Lord

Yes, let me give that a shot, Brad. I think we've -- we've got -- my recollection is we've used about 40% of the existing authorization, the most recent $400 million authorization. You're well aware that we generate a fair amount of capital, most of it is liquid capital. And that we have expressed an interest in returning a fair amount to shareholders and that we return it both by share repurchase and by dividend. And, well, I don't -- we don't -- I don't have a pure rule of thumb, but we also capitalize ourselves at around 12.5% give or take, maybe a little more than 13% for our private credit. So to the extent we have capital that exceeds what we believe to be appropriate, we then decide how to distribute it to shareholders. We've talked over the last year plus of trying to grow other parts of the business. But at the moment, with the roughly a 7x earnings PE, it's very difficult to find alternatives that are that profitable to us. We will -- we probably will reconsider shareholder distributions much later in this year and really, in the end, depends on share price, business opportunities, and that's probably those 2 things.

Bradley G. Ball - Evercore Partners Inc., Research Division

Great, that's helpful. And just as a follow-up, Al, would you care to share your thoughts or expectations around the CFPB's expected white paper on private student lending? Any thoughts about what they might reveal or whether or not it would have any impact on your business?

Albert L. Lord

Well, look, we don't know what's -- we don't -- I think I've heard recently this is -- it may be as soon as tomorrow. Is that right, Steve?

Steven J. McGarry

We expect it to come out today and there's going to be a conference call tomorrow with [indiscernible]

Albert L. Lord

Oh, today. Yes, we expect it near term. Other than rumors that I'd rather not speculate on, we don't know what's in it. And look, the CFPB, I mean, stands for Consumer Finance Protection. So presumably, they are on the same page as we are. I mean, that's what we do. And so we look forward to what they have to say, and hopefully there is something there for us to improve even more than we have in the past, our relationships with our customers. That was pretty good, wasn't it, Brad?

Bradley G. Ball - Evercore Partners Inc., Research Division

Fair enough. That was great, Al. Perfect.

Operator

Your next question comes from the line of Scott Valentin with SVR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just on the G&A side. You guys, you performed a little better than we expected on G&A. It was down year-over-year as a percent of assets then down linked quarter. Is this kind of a new run rate going forward or you found more cost savings or it's just reflective of it's kind of seasonally slow period for originations?

Jonathan C. Clark

This is an ongoing effort for us, right. We're targeting under $1 billion. We feel good of about what we accomplished in the quarter. But we're not going to be satisfied. We're going to continue to scratch at this, see where we can take out costs.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay, all right. That's helpful. And then, on the Education Department, the servicing contract, I guess, the review, I guess the new allocations coming up, do you guys expect to take more market share based on the review or is that -- do you think you'll stay -- I think you're at 20% right now?

Jonathan C. Clark

Well, I think if you look at where we are year-to-date, we would actually lose a little bit of share. And we don't know what the final score will be or how much that would move. If we finish the year with the current score, we'd be awarded 21% market share. So we hope to improve on that 21%. I can't tell you where we'll come out, because we had -- although I know we have performed better, we don't know how everybody else has performed.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then, assuming 21% is what you work out, is that -- I mean, is that reflected in the guidance number?

Albert L. Lord

Yes.

Jonathan C. Clark

Yes.

Operator

Your next question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

I think somebody -- I apologize. I was jumping on and off. If somebody asked already about the costs, I do apologize. But the cost performance was quite good. Could you just talk a little bit about your plans kind of over the next several quarters as to whether there's more of that to come, or how do you think about the cost relative to general size of the company?

Jonathan C. Clark

Yes, Moshe. We haven't changed our -- this is Jon. We haven't changed our perspective. We're still targeting under $1 billion. We did well this quarter. There will be some ups and downs, it won't be -- as you know, there's seasonality involved. We still feel good at the fact that we're going to target less than $1 billion.

Moshe Orenbuch - Crédit Suisse AG, Research Division

But over the -- I'm sorry, go ahead.

Albert L. Lord

Moshe, this is Al. We've made such a target of the operating expenses as if they are somehow separate from everything else and we've made a big deal about this $1 billion target. The real issue that transpires here inside the company is that -- I look, at least I look at operating expenses as short -- very short-term investments in your revenue generating capacity, and we'd like to shift that operating expense up and much more toward areas that we know can grow and take some out of the areas that are not growing. And so there's a lot going on beneath the surface. And ultimately, that number, if it starts going up, should generate additional revenue. If you don't see revenue going up and you see operating expenses going up, something's going on here that shouldn't, so -- it's -- we do manage it a little bit on its own, but mostly, it is designed, obviously, to generate revenue.

Moshe Orenbuch - Crédit Suisse AG, Research Division

On a separate note, I mean, you've talked a little bit about financing transactions. Can you just talk about the environment now and how you see -- the release mentioned that you've done one FFELP ABS deal already in the third quarter, like and whether that has any implications for your capital return strategy over the balance of the year?

Jonathan C. Clark

Well, the ABS transaction, we do, do not. That's merely excluding our strategy of match funding longer-term our asset base. The ABS market is getting stronger. We're encouraged, quite frankly, which, when you think about the fact that FFELP and private credit securitization has been around for quite some time, that we are still bringing in new money, folks that haven't invested in FFELP in the past that from, at least where I sit, have some pretty deep pockets. So I think people in this low yield environment, people are seeing very attractive spreads on both our private credit and FFELP transactions. So I'm quite encouraged about the strength of that market. We've done quite a bit this year and although I can't say we'll do as much in the second half as we did in the first half, we'll continue to be quite active both in private credit and FFELP.

Operator

[Operator Instructions] Your next question comes from the line of Sameer Gokhale with Janney Capital.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

I just had a question in terms of the applications for loans for Q3. Do you have any sort of early read on demand for loans? And then more specifically, your fixed rate loan product, what kind of response are you receiving from borrowers?

John F. Remondi

Sameer, this is Jack. So, it's still early in the peak season. We're about 4 weeks into the 10-week kind of cycle we go through. Applications are up over last year into the double-digits in terms of percentage increase, and we are seeing a higher quality applicant, as well, as a percentage of the mix. So that all bodes well for peak season. But it is still early and so we're continuing to watch that trend. The fixed-rate option, I think, has been extremely well-received by our customers, principally schools. They like the fact that we offer a variety of options for our customers and we continue to promote our responsible repayment products. The schools have been big fans of helping customers graduate with less debt by making their interest payments while in school. And so the fixed-rate option is a good complement to that. We're also seeing some schools and both at the parent and the graduate-level take a look at the fixed-rate option as a favorable alternative to Grad PLUS and PLUS. And so we're optimistic we'll see some more volume from that as well.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

Perfect. That's good color. And then in terms of this -- the CFPB. Obviously, you commented a little bit on that. But I think you had published an interesting study in conjunction with, I think it's a company called Ipsos, if I'm pronouncing that correctly. But in that study, it seemed to suggest that only 1% of students who really borrowed using only private loans and 65% did not borrow at all. There were some other stats, also 98% of borrowers had filed out a FAFSA form. And I thought those numbers are very interesting because from -- compared to a few years ago, there was a study out from the Department of Education suggesting that a large percentage of students didn't take out federal loans even if they were available and cheaper than private loans or didn't fill out FAFSA forms. So I mean, is your sense that the behavior of borrowers has really changed that dramatically? And if that's the case, then there really -- it's unlikely to be a surprise on that front for coming out of the CFPB. I mean, is that your view as well? I just wanted to get your thoughts on that.

John F. Remondi

Sure. Well, we are very active in promoting responsible borrowing to our customers. So when customers come in to our private loan origination, our application process, they are encouraged to shop for lower cost federal loan alternatives at least 3 times during the process. So, and that gives them the opportunity to make sure that if they're eligible, or remind them, particularly if they're eligible for subsidized Stafford loans, that they should borrow there first. I do think the other piece that's changed the dynamic a bit is that federal loan limits have increased significantly over the last 5 years and that has driven the need to borrow from the private student loan arena down. And so that shift -- that increase in federal loan availability is partly responsible for that shift as well. But each time we are recommending to students that they consider all the options that are available to them and take the one that is the lowest cost. We principally refer to our private education loan business as family loans not student loans, and you see that in the high rate of cosigners associated with them. And so, I think, what you saw in the How America Pays for College study is that families are more -- are getting more engaged in the process and helping make the decisions, not only as to what they can afford to pay for school but the loan products that they use to help finance that in a responsible way.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's terrific. And then just a couple of last quick ones if I may. In terms of the unencumbered private student loans at the parent, so excluding the unencumbered private loans at the bank. To model out the liquidity available as those loans pay down, what kind of -- I think that portfolio would be about $11.5 billion or so. Should we roughly assume a pay-down rate of about 10%, 9%, 10% consistent with the overall private loan portfolio? Should that be much lower? Could we get a sense for that?

John F. Remondi

That's...

Albert L. Lord

I think it's about right.

John F. Remondi

Yes, I think it's about right.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

About 9%, 10%?

John F. Remondi

Yes.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And the last question I had was in terms of the issuance of unsecured debt. I think year-to-date you've done about $1.5 billion or so and then, of course, you've been buying back stock as well. So how should we think about the issuance of unsecured debt? Is that just to maintain access to the market? Is that to generate additional liquidity while you use some cash to buy back stock? Is that issuance to fund some of the buyback of the stock just to accelerate some of the cash that's going to come back to you from your -- as the FFELP portfolio pays down? I mean, how do we think about that?

John F. Remondi

I think it's highly, I'd call it, event-driven, right? And to the extent that we start buying a number of FFELP portfolios, you can -- obviously, there -- we can finance a significant percentage in facilities, but there's always some measure that we have to fund with liquidity. And depending on the kinds of loans that we buy, sometimes we have to fund them with our, I'll call it our on-balance sheet liquidity, for some period of time. So a lot of it has to do with that kind of flow. And as you know, we've been looking at a number of acquisitions, potential acquisitions on the servicing side. Obviously, we want to maintain a fair amount of liquidity for opportunities like that. And as we move forward, I think the way to look at it is that we will be paying down year in, year out, as a rule, our level of outstandings will be going down and unsecured. But there will be some measures that we would be refinancing and extending.

Operator

Your next question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

All of our questions have been answered.

Operator

Your next question comes from the line of Jordon Hymowitz with Philadelphia Financial.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Oh, I'm sorry. My questions have also been answered.

Operator

And there are no further questions at this time. I will now turn the call back over to management for any closing comments.

Steven J. McGarry

Thank you very much, Nicole. That concludes our call. If you have any follow-up questions, call myself or Joe Fisher. Thank you for joining us.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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