22 Minutes on The Big Beautiful Bill + Student Loans

Speaker A: Credit to the private market. There's plenty of lending capacity. The private market will easily absorb the money from the government this year. We know that. We've looked at it. Um, I also believe that most consumers, you know, will get a better deal.

Speaker B: Welcome to 22 Minutes in Lending. Your go to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, Vince Pasillon connects with industry leaders to to discuss the latest trends and happenings around the lending industry. Let's dive in to the latest in lending.

Speaker C: Welcome to 22 Minutes in Lending. I'm your host, Vince Pasione. And today we're getting into what might be the most consequential moment in student lending in a generation. My guest is John Volpini, Vice President of Relationship Management at Sallie Mae. John has spent 20 years working at the intersection of schools, students and the lending market. And for the past decade specifically, he, he's been building and leading school relationships teams across undergraduate, graduate, career and international programs. He also chairs the board of ELM Resources, a private student loan management platform. Few people have a better read on how the education finance ecosystem actually functions in practice. John, it is great to have you on the show. How you been?

Speaker A: Great, Vince, how are you?

Speaker C: Really, really great. Now, John, just so we get it on the record, Sallie Mae is not a government entity anymore. It's not a gc. It is a private company. It's a publicly traded firm.

Speaker A: Right, Right. We're publicly traded. We have been for well over a decade. And I believe the actual year that we converted to a bank was, uh, 2005. And in 2006, we became under our new charter.

Speaker C: So, John, before we jump into the big beautiful bill itself, I wanted to start what's happening in the Department of Education. We were sort of talking before the call and, you know, we saw what happened with doge. Right. So the Office of the Federal Student aid lost about 300 staffers, which I think was about roughly half, uh, of the entire organization disappeared. So now you've got the fsa, which oversees about, I guess it's a trillion and a half dollars of student loans in the middle of implementing probably one of the biggest reforms in decades. And it has to happen all by July 1st. So from where you sit working with schools every day, how's this playing out? I mean, are they getting guidance? We talked about many of them didn't believe it was going to happen. It's happening, and now it's happening with a department that oversees the program. It's like half the size. So what are you seeing and what are they telling you as far as the support they're getting?

Speaker A: Uh, well, we've talked to many schools and we've seen several challenges, you know, making sure they understood how to process and how things were going to be calculated. With all the recent changes, that was the first hurdle. Many of them have received that guidance. Now they're still waiting on guidance if a student drops down to less than full time. And that's supposed to be out shortly from the department. Um, we check on our schools, but it is highly stressful for them. I was on a recent, um, webinar back in, I believe in November and December about this with several schools and they are very stressed and this is creating anxiety. I think what people also kind of lose track of is that the department is responsible for all the reporting that goes out about certain, you know, that's on ipeds and other databases that's out there and that's curious about whether that will be updated and how that will all kind of help schools in the future and help lending partners know about things like cost of attendance and other borrowing. But yes, you know, there is stress right now with the schools as a result of the change. They are working through it. Um, but it will be a challenging year for them as they go forward.

Speaker C: Yeah. Now, John, there's also this long term structural question about where the federal loan program is ultimately going to live. And uh, the administration started floating around, moving it to treasury. And we've heard about Project 2025. It kind of called for it to revert back to this federal government as a guarantor role. And you and I both know that kind of takes us back to where we were sort of pre2010 with the Faul model, right, where the private lenders are, the originating of the government guarantees a loan. How seriously should the industry take that scenario and what would it mean to the schools and students in navigating the system going forward?

Speaker A: Honestly, Vince, I don't really know if the government has that infrastructure available to it as it once did. I mean, I think that would be a significant undertaking. I know that, you know, we support the current government position on what the changes they've made. So I really don't know if they could pull that off in a very quick period of time. But you know, they made significant changes this year. They might make significant changes going forward.

Speaker C: And John, just, just so our listeners understand that, I mean, the system was guaranteed by a bunch of state guarantors back in the day, right. Whom are still around, they're just, they've just changed their roles. Um, so is that one of the big pieces of complexity you think that you'd have to reestablish these state guarantors? Do you think the government would say, I don't need the states, I'll do this ourselves, the federal government will stand behind it, um, and do it?

Speaker A: Is that, that's where the question I think really remains is what would it look like? Would they retry to reconstitute what they once had, or would they come up with something new? I think those are all the components that people would have to really step back and evaluate. And the one thing I will say is when the lenders were involved, they took great, uh, effort and to make sure things like servicing was done well and the processing was done right. Because they had a vested interest in the end borrower.

Speaker C: So, John, let's get to the big beautiful bill. Policy changes and some of the school impacts. We've talked about this in the past, so let's go through some of them. So major changes, right? Grad plus is basically eliminated, right. For all new borrowers, starting July 1, graduate unsubsidized, um, loans are now capped at 20,500 per year with a high $100,000 lifetime limit. Professional students, those are medical, dental, law, they get about $50,000 per year and up to $200,000 lifetime. And Parent plus is capped at $20,000 a year with a $65,000 lifetime limit per student. So those are sort of. When I went over the bill. Now, every one of those programs previously allowed the borrower to borrow up to the full cost of attendance. So when you're talking to the schools, right, and we talked about this, what are, uh, what, what are their reactions to the changes and what are they going to be doing as far as changing financial aid packages, cost structure, what are they telling you?

Speaker A: So when we meet with schools right now, the big piece that's changing is many schools are stopping the packaging of plus loans and grad plus loans because clearly they're not available anymore. And for years, many schools would package Grad plus. So the borrower and the consumers would think, oh, I'm going to take this

Speaker C: now, John, let's let me stop you. For those that don't understand that what that award letter looks like, when you say packaging, you mean it shows up on the award letter, Right?

Speaker A: Correct. Right. When you put it on the award letter, many people would think that that was what they would take. And um, they didn't know all the private loan options were available. We've been successful in talking with schools and having that process stopped at many schools. And when you do that and you bring opportunity for people to shop and compare, you end up getting more diversification in the volume. And the schools that have done that are actually very well positioned going into this year. Now, other pieces of the things that we look at with schools, we talk to them about which programs need the most help still, and we prioritize those programs. And we've been out meeting with them and discussing what Sallie Mae plans to do to help those schools. So we're looking at, you know, focusing on, um, medical and dental and vet and working our way through all the programs. Why? Because even though they have access, they still have big demand, big need. Beyond that, because those programs are expensive. It is still expensive to become a doctor or a dentist or vet all the way down to a lawyer. And they're likely going to go beyond their traditional borrowing need from, you know, the government programs. With Grad plus being gone on the undergraduate side, it's important to note that the Average, you know, parent plus loan is between 21,000 and 24,000. But there are schools with average loan sizes of 34,000. That means they know they're going to have a segment of consumers that will have a gap immediately year one, and they're going to be out looking for those solutions in the private market as well. Now, credit to the private market, there's plenty of lending capacity. The private market will easily absorb the money from the government this year. We know that. We've looked at it. Um, I also believe that most consumers will get a better deal in many aspects from the private market. They just don't know that those deals were available. And those are the positive things. And when we talk with schools, that's what we focus on. We literally show schools how their volume would break down to credit and that there's a push, great opportunity for them.

Speaker C: Now, John, when you said great deal, just help our listeners understand that. Right. You know, we facilitate, as you do, helping credit unions offer these products to their, to their members. But you hear a lot on the Hill coming from a whole bunch of different politicians that private loans are bad. Private loans basically charge exorbitant interest rates. Give us your sense of, hey, if you're talking to one of our credit unions saying, well, actually these consumers would get a better deal on the private side, give us a little data behind that.

Speaker A: So when we look at it, Vince, we always Take a look at where the average consumer is going to fall. Now remember, there is a fee associated with PLUS loans. Today it's 4.266. And then when you look at that and you factor in the average interest rate on that loan, that brings that loan up on an APR basis pretty high. And we know that most people in the top two or three credit segments will be more better or at that same rate. And then when you start to drop down lower credit segments, they will be a little higher. I think the people lose track of is that the private banking industry, we do risk adjusted pricing. And so if you're a good quality consumer, you should always look and see where you can get the best deal. You know, there are some people who will be challenged with credit and then they, you know, they, they may get a better deal to the federal government and that's just one of those things that lenders look at. But that is truly the case. That's what we sit with schools and talk about. Quality consumers will end up in a much better place. People with more challenging credit will have those challenges that will persist.

Speaker C: No, agreed. I think the data helps. It helps establish the rationale behind the scene. Hey John, there's been a lot of research that says, and certainly I personally feel like this as well, that these caps could actually put some downward pressure on. Just take the programs that are hit the most, these graduate and professional tuition costs. Do you buy that argument and do you really think the schools will respond by lowering costs or do you think they're just going to find other ways to bridge the gap?

Speaker A: I think that we're going to hopefully see an influx of more money coming in. So either reduction in ability to raise tuition, but also just more scholarship money and other funds that can come in to help mitigate these gaps. This year I've met with many schools to say they're not worried about it, they're going to meet unmet needs and that's what you really hope for. Now there are going to be schools who can't do that and I think that will be the challenge. I don't think it's a broad brush. It's going to go up or it's going to go down. I think it's really going to be on a case by case basis and schools will have to each solve this in their own way. You know, I think it would be great if it did lower tuition like you. We are a gap financing company and you know what? We don't want tuition to keep going up every year. We would like it to become sustained. I also think that there are schools who will do the right thing and step in. I think there are schools who will have the challenge that they can't. And then they might rely on the private market a little bit more. But I think when people broad brush these schools, I think that's you kind of do them a little bit of a disservice because their schools are going to solve these solutions, uh, based on what the institutional needs truly are.

Speaker C: Now, John, do you think that the cap would change the way families make decisions about what schools to attend? I mean, I always used to joke around and say, you've got these. Some families say it's all about the bumper sticker, right? And maybe that's not the best choice for their family member, their child, right, to go to that school. Maybe it's best they go two years of community college before they go to a four year private institution. Do you think it's going to change the way families make choices about schools?

Speaker A: What I can say, Vince, is being in this industry for as long as I have, every year the phone rings and I get to do that personal one on one conversation with consumers, right? And for the last five years, when those calls happen, it's always people saying, I just want to find a really good deal that fits my son or daughter or I don't want them to graduate with $100,000 in debt. And those are the conversations you love to have. The one I don't like to have is I've got no money and my son got no other school. It costs $40,000 a year. Then, um, oh, um, my God, this isn't going to help. You know, it's a little that's late. But what we're seeing is, what I personally have seen is people trying to make a very good financial decision. I think this will help this situation. I think people will be forced a little bit more to make those financial decisions and evaluate different products to making the best financial decision to pay for college.

Speaker B: Hello, I'm Vicki Roscoe Erickson, Senior vice president and Chief Marketing Officer at uh, Topline Financial Credit Union in Minnesota. We've been working with Lendkey and member student lending since 2010 to offer private student loans and student loan refinancing to our members. As the cost of higher education continues to rise, students and families are seeking new financing solutions. And that's where our partnership comes in. It provides us the opportunity to assist members and their families with affordable education loan options. So far, we've been able to help nearly 800 members with over 1500 loans totaling over 2 million million. This is an amazing opportunity to support our members at the beginning of, uh, their financial and education journeys.

Speaker C: So John, let's talk a little about repayment. So also in the big beautiful bill, right, there used to be, uh, a whole bunch of different options, almost too many, for how a student could repay a federal loan. But starting July 1st now, they just have, they have two choices, right? They can do this fixed payment plan or they can do this new repayment assistance plan, I guess they call wrap, where the monthly payment is tied to what you earn, which seems to make a lot of sense. But for someone that's graduating into repayment for the first time, you know these different choices, right, is simpler necessarily better? I mean, what's your experience? Do you think it's better? Do you think that all the choices confuse people? And this just makes it real easy for that graduate to figure out how they pay back their federal loans?

Speaker A: So like you, we've experienced that, uh, too many options makes it very difficult for any servicer to execute. So streamlining does help in a lot of respects. On that end, you're always simplifying the process, giving these services an opportunity to kind of make sure they're connecting with people. I think the big thing isn't so much the options is to make sure that the consumer is connecting with the servicer and understanding what those options are and what they mean, if it's tied to your income. And that's great and it helps you get through. What do we always talk about, Vince, is, you know, it's the first two and three years when they gets out where they need the most help, right? They may have a hiccup down the road, but it's those first couple of years. If you can get people through those early stages, then they kind of flow through and they get in a good cycle and then you're fine. Look, you can never, you can never really Prepare for a COVID 19 where everything shuts down. That's going to happen. But the government has programs for that. We have forbearance options, and the private market has options for that as well. Uh, you know, what I look at is at Sallie Mae, we actually work with a lot of consumers and like you do at Lenke, that when they go into repayment, you help them figure, figure out repayment solutions, but you don't have an endless amount of options. Why? Because at some point you just have to be able, whether they can make the payment or they can't and if they can't, then you have to figure out what you're going to do with those consumers.

Speaker C: Now, John, we've talked about when this was all sort of on the drawing board, the impact of, um, this big change with the Big Beautiful bill. So, you know, if you look at the research, right, it looks like the changes introduced by the Big Beautiful bill will probably reduce for a loan volume from 8 to 10 billion dollars annually. And the entire private education market on an annual basis originates somewhere between what, 12 to 15 billion a year. And obviously Sallie Mae originates about half of that. So congratulations on that, John. Um, but that's a pretty big funding gap. And you've kind of said it a few times earlier in the podcast. You think that gap is easily filled by the private lending market, wouldn't have a problem absorbing it. And do you agree that's about the size of the market, that the market could almost get close to doubling as a result of this change?

Speaker A: Well, we look at it as like in 2026, we think there's about $1.2 billion that will come into the space. And if you look at the lending capacity between Sallie Mae and so, you know, so far yourself and Citizens bank, just the top three or four lenders alone will be able to absorb most of that. But there's actually a very large number of lenders in this space. It's going to give many entities the opportunity to kind of grow. And that's, that's a good thing. When we look at the state agencies that are still in, like MIFAR and Rizla, and you know, they're gonna, they're gonna grab their share as well.

Speaker B: Mhm.

Speaker A: Next three years, that ramps up to $5.2 billion. So you have that opportunity where it will grow, but it will grow over time. And that's the benefit of it being a grandfathered approach that, you know, you're gonna have students rolling off, new freshman, new freshman class and new first year graduates coming in. But there are about 4 million graduate students. And yes, over the next three years, vast majority of them will need funding from the private market. And that's, that's okay. Private market stands at the ready. We'll be fine.

Speaker C: Now, John, we talked a little about credit, Credit, um, quality. There is this sort of credit access question underneath all this. Right. So I think the number is about 40% of federal student borrowers have credit scores that are too low to qualify for, for a private student loan. Um, I know Sally can sometimes kind of deal with even some of those lower FICO students. But private lending typically requires a cosigner. And last year, I know in our portfolio, I think yours as well, over 90% of our undergraduate loans were co signed.

Speaker A: So.

Speaker C: So the students most impacted by these federal caps may be the least able to access the private market. Is that a true statement?

Speaker A: And I mean it's hard to always say that those are true statements or false statements. Underwriting is about the through the door population who comes in. And right now in the graduate space, for years all the vast majority of that volume, 90% of it went to the government. And now for the first time, you're going to have the private space get the ability to have first shot at a lot of consumers. What we know is this, you're right, undergraduate loans, which is the vast majority of what everybody was doing, were 90% CO signed. And the vast majority of those are cosigned by parents. What we see in the future is the graduate space will have an inverse of that. It will be 60, 70% will not be CO signed. We think 20, 30% still might be co signed and that's where it will look and that's what we'll change, that will change the dynamics of the private space. We have history to fall back on. Back prior to this, that's what it looked like. We had better credit quality, we had access to the better credits in the graduate space. So we think the approval rates will rise.

Speaker C: Hey John, I'm going to roll you back a little bit. You made a statement and I believe it as you do because I've been in this industry for a long time and that is that hey, if you underwrite correctly, it uh, makes all the sense in the world to do this. Right? And the way we talk about doing, which is, hey, we're going to make a, we're going to make a loan to someone who is going to go out, achieve their educational dreams, obtain this degree and then enter the workforce. It just makes all the sense in the world, right? We believe in that dream. Um, but you and I both know when you go around and talk to lenders, there are a lot of lenders that don't believe in that, right? They're skeptical, they're very concerned. Is it they're just confused between what they hear on the federal side versus the private side or is it this asset is just so over regulated I'll fight any excuse not to be in it?

Speaker A: This is a highly seasonable space that has year round infrastructure. That's one thing for a bank, you know, this Isn't like mortgage lending or credit card lending or auto lending where it's year round and you can almost always do it and it moves with rates and fees and competitive environment. This is 80% of the volume comes through in one shot almost, you know, and then there's another secondary bump later on in the year. And that's really, I think, sometimes challenging for lenders from a marketing standpoint. In that second, you are asking the lenders to get behind a product where the vast majority of people don't make a payment for the first couple of years they get the loan. That's challenging for a credit committee and a bank to kind of get comfortable with as well, because, you know, they

Speaker C: book the accrued interest. I mean, come on, you guys do that.

Speaker A: I mean, um, we do that, but we also understand the loss curves and we have decades and decades of data. But you know, if you're a lender and you're standing back and you're sitting down and you're thinking to yourself, I'm going to make a loan where someone's not going to pay me before or five years. And if it's a doctor, that's seven years. And that's not comfortable for a bank to be in. You can be booking it all you want. You can however you track it. But that is one of the challenges. And so, you know, that's why I think a lot of these other options for lenders to get in and just, you know, help their customers by experiencing it through you or us and other entities are a great first step to get in. Because I think that they should be looking at that. But it is hard. Vince.

Speaker C: Yeah, no, fair point. So John, let's just talk about Pell grants before we end up here. So that was another big provision right in the big beautiful bill is Pell grants, the vocational and workforce training programs and that' that's an industry first coming from the government. So is that a good thing? Is that a good thing for students? I know, Sally, we always like an

Speaker A: increase in Pell Grants. They go right to the people who need it the most. And I encourage families always to get that fast friend, as fast as possible because the free money goes fastest. You know, as you know, that money runs out occasionally and we need to make sure people get that. But that goes to a large segment of consumers who do not get a lot of other financing options. So yes, we are a big believer in pushing people to get those Pell grants. We like the funding of Pell Grants. We like it when people go out and uh, uh, leveraging those programs, you know, for 30 years. Since I'm doing the same way. One of the things I love about the Sally, uh, mission is it aligns to my personal mission, which is get your free money first, get your federal money second, then you come and get your gap financing. And third, that is what you should be doing. And we always encourage that, you know, not just the Pell Grants, but get every scholarship dollar you can. As you and I both know, there are plenty of borrowers that need our help. Get your free money first now, John.

Speaker C: But they're expanding these Pell Grants for vocational and workforce strength. That's never happened before. And I guess is that a going to accelerate the shift away from four year degrees, you think? And I always think it's a good thing for certain population. Look, I mean, last time I checked, the plumber that shows up at my home, you know, he makes a pretty

Speaker A: good living, great living. You know, I, I always encourage people the same way. I, I believe. Listen, I think anytime the government steps in and will help people become, grab a trade, get a skill that helps. And it doesn't mean that because you have a trade or something, you don't go to college still or that you went to college and you still don't want to get a trade. I think that that mindset has to shift for a lot of folks. I think that sometimes people think it's an either or. But the fact is, you and I both know many times it's, it's one in addition, you know, it's one in one.

Speaker C: So. John, last question. Right, so you, I say you've been in this for two decades. It sounds like it's three, John, but you don't look that, that old. Uh, and you've seen like I have, you seen fell, you saw 2010 when the government introduced the direct student loan program and nationalized student lending. We both lived through the pandemic, the forbearance era. So in terms of structural significance, what, where does a big beautiful bill rank? And what's the, what's the thing you think the market's most underestimating right now?

Speaker A: So I think it ranks right behind when the government pushed the lenders out of the private, uh, out of the federal student loan space. I think that was such a significant change and it pivoted the entire industry and that made it very challenging for lenders, like the bigger lenders to stay in because the industry shrank down and became really hyper focused on just a small segment of consumers and a highly seasonal business. Uh, I think that's the critical. I think as we go forward, I think that will be the piece of that we're going to continue to kind of evolve on. I think that's going to continue to provide new opportunities. And I know that the private space will step up and I think you're going to see some great things to continue to happen. And we're going to be able to respond and show people that the private space has always been able to help students and families plan, pay and save for college. And I think this is just a great opportunity for many lenders to kind of really think and read about how they want to connect with students and families.

Speaker C: I agree. I agree. Well, listen, John, uh, as expected, always fascinating to talk to you. I, uh, think all this kind of underscores how much is emotion right now for students, for the schools and anyone working in education finance. So there's a lot ahead for the industry. And thanks so much for joining us.

Speaker A: Well, Vince, thank you for the opportunity. I always love catching up with you, my friend. Stay safe.

Speaker C: Awesome. To our listeners, if you haven't already subscribed to 22 minutes of lending, make sure you do so so you never miss an episode and we will see you back here next time. John, thanks again.

Speaker B: Thank you for listening to the 22 minutes in lending podcast. We hope you enjoyed today's episode. You'll find links to any resources mentioned in the show notes. If you're enjoying our show, please be sure to subscribe and leave us a five star review.