All right, good afternoon, good afternoon, everyone. Thank you for joining us. For those who don't know, I'm Mihir Bhatia. I cover consumer finance and payment companies here at Bank of America. Right now on stage, we have Sallie Mae. I'm delighted to welcome Peter Graham, CFO of Sallie Mae, here. Welcome to the conference.
Thanks for having us.
As you guys know, Sallie Mae is a leader in the private student lending space. They provide financing and resources to support college kids, and they help customers achieve their educational goals. So over the next 35-40 minutes, I'm going to ask a few questions. We'll try to keep some time at the end for questions. But if anyone has a burning question during this, please feel free to raise your hand, and we'll get your question in too. But Peter, again, thank you for coming to the conference. Maybe to get started, just talk to us a little bit about how are you thinking about the year? How are you maybe the next few years at Sallie Mae? You guys are going through a little bit of a transformation of the business model. Maybe just talk about that a little bit.
Just what are you looking to achieve in the next couple of years?
Sure. We're excited about sort of this next phase of the company. We believe that students will continue to pursue higher education to attain the skills that they need to compete and win in the economy of the future. The backdrop of the federal reforms in the student lending that was passed last year provides us a big opportunity to expand our reach and originations into different parts of the market that we haven't competed in before. And we're excited about that. And then kind of the third piece of it really is the new strategic partnerships business that we're creating, starting with the first agreement that we signed with KKR in the fourth quarter of last year. That gives us an additional capability to really fund that acquisition opportunity in a very durable and capital-efficient way.
So we feel like all of those building blocks are there for us to really have a really impactful, but also a good run in terms of the financial profile of the company over the coming years.
Great. I want to dig into some of that over the next half an hour or so. Maybe let's just start with 2026 guidance. You laid it out a few weeks ago, asking for 12%-14%, or hoping for, expecting 12%-14% private loan originations year-over-year. Maybe walk us through some of the moving pieces of that. Obviously, there's Grad PLUS in there. But how much of that is Grad PLUS versus maybe the rate backdrop? Help us break that down and put some parameters around it.
Yeah, sure. We gave our guidance sort of knowing the impact of Grad PLUS reform will start to filter through beginning in the peak season of this year. I think it's important to kind of highlight that a component of that will come through just a broader market for our traditional products and funding undergraduate students. And then obviously, the newer or bigger part of the market for us is going to be the grad opportunity. The thing to keep in mind, although we have estimated that that's a $5 billion opportunity for us once it becomes fully scaled, really, this first year is only going to be half of the first year of that opportunity, just given the way that the rules were structured. They go into effect for new enrollments beginning in the second half of this year.
So think about it like at the beginning of the next academic year. And because of that, it will be either new freshmen or new entrants to grad programs. And it will just be that first fall semester of that first academic year. So that will be the smallest sort of portion for us. And then that will build into 2027 and into 2028 as the rules fully kick in and more and more students become subject to the modified rule.
So maybe to put a little bit of numbers and just to make sure we're all on the same page, $5 billion is the total opportunity on Grad PLUS. You're saying this fall, you start with $2.5 billion, and then even $1.25 billion even.
No, it's $5 billion once it's fully scaled. So think about it from a perspective of a traditional four-year undergrad. Only the new freshmen are going to be subject to the new rules here. And then next year, those students plus the new freshmen next year. And then the next year, those students plus those two years. So for undergrads, it'll take four years to be fully phased in. Grad programs tend to be shorter duration. So on balance, we think it phases in over kind of a two- to three-year time frame to get up to that sort of full $5 billion number.
All right. That's helpful. Then when we think of the origination guidance, 12%-14%, what gets you to the high end of that range? Is it execution? Is it market share gains? Or is that more just like let's.
I think it's kind of all the above. It's the opportunity that's coming to us in terms of new to firm, particularly in the grad space. And then it's the other components that are going to be feeding into the traditional sort of undergrad because of caps that have been placed in the undergrad space. And so it's kind of all baked into that overall guidance. If you think about our kind of normalized run rate, originations growth would be kind of mid-single digits. And so the delta between that and the guidance we've given this year is that sort of incremental opportunity that we view as coming from the changes in the programs.
Got it. And then just maybe turning to the loan portfolio, I think the guidance is for loan portfolio to be flat to slightly down. I understand you have the inaugural partnership in there. How are you thinking about balancing that opportunity for more partnerships there versus portfolio growth that you probably want to achieve just for name and earnings purposes?
Yeah, that's a good question. I think the thing to think about is the framework that we've laid out for how we're going to sort of manage the different sources of funding that we have to go after the originations. We want to maintain a healthy and well-functioning bank. We'll always have that as a key part of our business model. We've historically had seasoned portfolio sales as kind of like an additional sort of funding source and also to sort of manage the rate of growth of the balance sheet. Now with the strategic partnerships, we've got an additional source that gives us a more durable and programmatic way to capture the origination opportunity in a very capital-efficient way and will drive meaningful capital-like fee income over time.
We think about sort of balancing all three of those elements as we go after the total origination opportunity that we have in front of us over the next few years. As we're starting to ramp up the partnerships model, we'll begin to put more new originations into those programs and also potentially do seasoned portfolio sales like the one we did in the fourth quarter to get the KKR partnership started. It'll be kind of an all-of-the-above strategy kind of with those levers in mind. We've given guidance on expectations for this year. We expect, because we've sort of jump-started the KKR partnership, we expect to be slightly down to flat-ish in terms of overall loan portfolio size year-over-year.
We'll kind of step back into growth kind of 1%-2% each year and ultimately get to kind of a mid-single digit kind of rate of growth of the bank's balance sheet. But that can always be adjusted by the lever of sort of the seasoned portfolio sales.
Got it. In terms of the partnerships, obviously, you have this jump-starting of the KKR partnership going on. I guess, is that just when we think of a typical partnership, as you talk to other partners, is that generally going to be what happens? You're going to have to have something to jump-start a partnership and then go? Or is that unique to this inaugural partnership?
Well, if you think about it, we've shifted from selling a seasoned portfolio of loans which have typically been sort of funded via securitization takeout. What's different about this partnership with KKR is we're selling newly originated student loans. In fact, we're selling them before they're even fully dispersed. And so without having a kind of seed portfolio of seasoned loans in there, the structure really wouldn't have any cash flows for an extended period of time. So I think it kind of is a way to balance out the need to get cash flow flowing in the structure so that leverage can be applied to that. And so our expectation is as we move forward and if we create new structures like this, that there would be some element of a seed portfolio needing to go in with that.
Any way to think about a potential timeline on adding more partners? Is that something you're actively very interested in?
Well, I think the thing to understand is this first partnership really was started before we knew about the PLUS opportunity. It was really structured as kind of taking a portion of the loan sales that we would have done via traditional portfolio sales and putting it into a new originate-to-sell kind of model with the opportunity that we have over the coming years around the PLUS volume, coupled with our desire to expand credit box to be able to assist as many students as possible. My expectation is that within the next 12 months, we'll either announce another sort of expansion with KKR or we'll add another partner or some combination thereof.
I think I'd be remiss not to ask. Obviously, there's been noise on the private capital side. Has any of that flowed through to you guys? Or just too early? Not really on the consumer side?
I think that noise is really in specific parts of the private credit ecosystem. I mean, from our perspective, the amount of funds flow that's coming into private credit that's really kind of long-duration insurance and annuity-type money, our asset class is really fit for purpose for them building those portfolios. So we see that as a kind of continued support for demand for the student loan asset class.
Got it. And maybe just staying last question on this partnerships piece, maybe just on the inaugural partnership, talk about the steady state economics. Once this KKR partnership or the inaugural partnership is up and running, how are you thinking of that? How does that compare to just holding the loans on the balance sheet?
Yeah, this partnership structure really is superior in terms of total economics to holding on book or to the traditional sort of seasoned portfolio loan sales. It creates a long-term, stable, and durable source of fee-based income. It's a way for us to, in a very capital-efficient way, fund originations while still keeping the customer relationship because we maintain all of the servicing on the loans that are going into the portfolio.
Yeah. In terms of the risk, there's no risk retention. Is there risk participation?
Exactly. It's structured as True Sale and full risk transfer. The fee structure does give us. There's a secondary fee that is performance-based. It's the smallest portion of the total fees. And it has reasonable sort of return on asset thresholds that if we hit, our underwriting sort of hurdles will meet those thresholds and get the supplemental fees. If we don't, then KKR doesn't have to pay us for those fees. But there's no clawback of any of the other economics that are in the structure.
All right. Maybe just staying with credit, talk about credit performance expectations for 2026. Particularly, one question we've been getting is just any comments, any kind of way to think about when you'll have the releases versus rebuilds with some of the sales, the macro overlays, modifications, everything moving around?
Yeah, I think I'd start by saying the guidance we put out on net charge-offs really is consistent with stable credit this year versus last year. And the metrics might shift a little as the sort of balance sheet classification of things moves around with this new originate-to-sell model. But overall, the environment we feel is pretty consistent with last year in terms of our expectations around credit. In terms of reserve builds or releases, I would never want to get in the game of forecasting CECL. I don't think that that's a reasonable thing for me to try and do. What I would say over time, we expect that sort of the grad cohort is going to be a higher credit quality on average, probably a shorter duration than our core undergrad product. And so it should tend to result in, over time, a lower absolute reserve requirement.
But it'll take some time for that to sort of filter and phase in. In terms of the partnership impacts, really, the fact that we're originating or selling new originations, it'll have a modest impact on the reserve rate just from a perspective of those newer originations carry an overall lower absolute rate than the broader portfolio. But I would expect that to be at the margins rather than anything that's really noticeable.
All right. The credit quality of the sales that you're doing in the inaugural partnership, is it very comparable to the rest of the portfolio? Is there any contribution?
Yeah, it's really designed to be a sort of representative portion of originations that we do each month. It's really structured around concentration limits that are in the rating agency models for securitization. So it's kind of, think about a grid like that that has different components on fixed versus floating or payment status deferred versus being in the IO or fixed pay and the like.
Got it. Yeah. Maybe let's turn to expenses for a second. Obviously, our investment year for you all, also a big origination year. So not surprising that expenses are expected to be higher. But I think one thing that would be helpful for investors is to really understand some of the strategic investments you're making this year. I don't know if there's a way to dimensionalize it, but at least talk qualitatively about where are you investing? What is that setting up for next year or the year after?
Yeah, so if you think about kind of call it 16% roughly to the midpoint of guidance, year-over-year increase, I'd say 40% of that increase is things that we would deem investments. So think about that as the work we're doing around product design to go after the various programs of study in the grad space, everything from market research on features that we should build to building new credit models to sort of embedding that in the customer experience through technology investments, as well as at the margins, some extra headcount associated with running those new programs. But once we get through that build phase, that'll really become more like run rate part of our business and not subject to the same year-over-year increase after the first year.
Probably 20%-ish of the year-over-year increase is normal kind of inflation that happens in any business that we would have had even without this grad opportunity. And then the other sort of remainder, 35%-40%, is increased marketing that we anticipate we'll need to spend to go after a completely new consumer profile. So if you think about an undergrad enrolling freshman, high school senior thinking about going to college, and their parents making decisions, that's a very different consumer profile than somebody who's graduated, maybe worked for a couple of years, has their own sort of life, and is making that decision about, do I go to grad school? Is the investment going to be worth it? What's my course of study and the like? So that's going to be a very different exercise for us and one that we're being very thoughtful about.
How do we build the right products that are going to be differentiated that'll attract them? And also, what are the right strategies to build to go and drive new-to-firm customer relationships?
That last one, maybe talk a little bit about what Sallie Mae is right to win. Why would someone choose Sallie Mae over, there’s obviously competitors who’ve also identified this opportunity.
Sure. I think our existing position in the undergrad space is probably a key kind of differentiator. The sales force that we have that's out building relationships in the financial aid offices around the country is the largest in the industry. We've got relationships with over 2,100 schools currently. And so that's a good base to be starting from when going after another segment of the higher education market. And because the primary provider of funding into that space has been the federal government and they're getting out of it, nobody else has the experience either. And so we're starting from a pretty strong point. But we expect it's going to be a competitive marketplace. There's been a number of participants in the current market that have said that they're going to go after the space. And we expect competition to be pretty strong.
The competition in the undergrad space is very strong as well. I think that's good for a healthy functioning market and will result in good outcomes for the students as well.
Do you worry about competitive intensity driving down returns?
Well, I think in the first year, we know that our marketing is going to be inefficient. I think everybody's marketing is going to be inefficient. I think that's the biggest lever that we will have after the first year is to continue to optimize on that marketing and drive that cost down in the same way that we've driven efficiency into the marketing that we do in the undergrad space. But my expectation is we'll be pretty inefficient in the first year as new-to-firm customers are always less efficient. You get a big benefit from serialization once you get that customer the first time. And so we'll build into that over time.
Is there anything inherently different about the population where you wouldn't get the benefits in the securitization in the seasoned as they're following years?
I mean, it's a situation where kind of generally, once someone starts a course of study, they're committed to finishing it.
Right. But are they committed to Sallie Mae?
They're not committed to us. But I think it's on us to build a product that is differentiated and that resonates with them. And we'll always have some element of pricing competition each year as they come up to make that decision on what do they do for the next loan for the next year. And I think, in general, probably grad students are probably a little more price sensitive, a little more savvy about that than maybe an undergrad borrower might be.
Got it. I want to go back to the investor forum for a second. You had laid out quite, and I thought, impressive path, $14 billion of originations, $7 billion of loan sales. What are the building blocks to get there?
Well, again, I think this year is going to be kind of a really strong proof point. And so it's on us this year to execute on our strategies in terms of going after that first tranche of the origination opportunity, being ready for that by building out the right products and product features that are going to be attractive to the different programs of study that we believe will be important to stand out in a competitive marketplace. We've got the funding capacity for that in place now, particularly with completing this inaugural partnership with KKR. And that builds a base for us to kind of build upon as we move forward and the origination opportunity really starts to scale next year and beyond.
Yeah. And then maybe when you sit and you look at the, you meet with your team, you understand the business, you know where the opportunity is, you know how you're attacking it. What is maybe the one or two big risks from an execution standpoint that you're really like, this is the beat we really need to hit?
Yeah. I mean, in terms of execution, I'd say the marketing and having the right product set is the thing that we're most focused on because that's what's really different going after this new-to-firm customer. The operating elements are very similar to what we've dealt with for years in the undergrad space. So we've got a well-oiled machine in terms of servicing student loan product. And again, we've got a variety of different levers for funding that gives us capacity to really maximize that originations opportunity.
Maybe on the opportunity and competition, we talked a little bit about others have identified the same opportunity. I guess just overall, if you took a step back, I mean, you look at the industry over time, what is competitive intensity like today? Is this as competitive as it's ever been? Is it stable, gone down a bit?
I think it's the same intensity that has always been there. I mean, if you think about the undergrad space, over the last five years, we've had big competitors exit the space. We and others that remain in the space have stepped in and competed to win that market share. I would say the intensity is pretty similar here. This is a big opportunity. A lot of those same players that have been competing in the undergrad space have signaled their intention to go after this new opportunity. I don't think it's going to be more intense than what we've seen before. I think it's going to be about the same level of competitive intensity.
But I do think that sort of in terms of investment in marketing in the first year is really going to be important for us to really build that new-to-firm customer base in the first year.
On the earnings call, I think you talked about high teens, low 20s, EPS growth in 2027. What gives you confidence that you'll be able to achieve that kind of acceleration?
Yeah, I think that was really grounded in. And I think John, in those prepared remarks, gave some caveats of if the TAM opportunity that we've identified from PLUS Reform does come to fruition. And that's really what gives us confidence in that. We feel like we've built the base of funding and capacity and operating capacity to go after this opportunity. And given the scale of that growth over the next few years, that's what gives us confidence to give sort of soft guidance like that on an earnings call.
Maybe turning to the forward curve, interest rates. I think generally, in your guidance, how much have you baked in from consolidation activity towards loan growth? Do you think that's going to move the needle on growth?
Yeah, we have seen as the rate cuts started kicking in, we've seen some uptick in consolidations year over year. But keep in mind that's from an absolute low base. And so we always expected that as we got a couple of rate cuts in, that we would start to see that step up. We're kind of about at the level that we had anticipated we'd be at this point in the cycle. I think the thing to keep in mind is even if we have another one or two rate cuts, we're not going to be on a trajectory to go back to the ultra-low rates that were present when consolidations were at their peak. So I don't view it as really anything that we're terribly concerned about in the context of this year. But we continue to kind of watch it and monitor it.
Are you seeing from competitors or new entrants, any kind of uptick towards that?
In the consolidation space in particular?
Yeah.
I mean, we track it by who the loan is being consolidated to. We haven't really seen any meaningful new entrants into that market. The majority players are the ones that you would expect that have been in that market for some period of time.
Maybe let's broaden it beyond consolidation. Yes, the existing players are going to go for the Grad PLUS offer. But everyone sees it. Is there anything you're hearing? Any rumblings, anything of new players coming in, anyone?
I haven't heard anything of significant new players that are planning to enter student lending space. I think it's one where even though it's a big opportunity, call it 70% growth when it's fully scaled, it's still a relatively small market. So banks like B of A or JPMorgan are not; that's not big enough. That's like a breakfast snack for them. They're not going to spend the time to go really get into that market.
What about fintechs or some of the are you seeing? With all the private capital out there, are there anyone from that side?
Yeah. I mean, I think really, as a product, the features that are embedded within the product, the deferral periods and the like, I mean, it's not impossible, but it's a complicated product or service. I think that's why some of the banks that exited, got out of the space was because of their servicing complexity. So I would never sit on stage and say it's not ever going to happen. But we haven't seen any evidence of really any kind of new entrants into the market in that way.
Let's turn to capital return. Just the business is evolving. Just remind us, how are you thinking about capital return from here? I don't know, maybe call it a three-year time horizon.
Sure. I think I would be remiss if I didn't remind of kind of our history. So over the last five years, we have, through our various types of share repurchases and bought back a little over 55% of the outstanding flow to the company. We just, concurrent with earnings, announced a new $500 million authorization that covers a two-year period. So we're committed to capital return. And we feel like, particularly with the opportunity that's coming and the growth that's coming and the creation of the private credits partnership model, which provides a really capital-efficient way of going after originations growth, that will provide a significant opportunity for us to return capital continuously into the future.
Yeah. And then another question we get from investors is around NIM, particularly as we think about the low to mid 5% range. What are the moving pieces as we think about it, both from a funding cost side, portfolio transition, and then just to the extent rate cuts come through, what kind of impact would that have?
Yeah, we run a pretty matched book. And that's what gives us sort of confidence in giving longer-range guidance like that. I think in our kind of planning for this year, we've got, I think, two rate cuts baked into the overall plan. So that's pretty much down the middle of what I think consensus is for what the Fed's going to do. And so we feel confident that we'll continue to operate in that zone.
Got it. Maybe unemployment, particularly new grad unemployment. That's a big topic always. I guess, what's your view on that conversation around new grad unemployment? What are you seeing in your data? Do you have a thought on what that looks like as we approach May, June graduations?
Yeah, sure. I think there's been a lot of focus on that, obviously, a lot of headlines around AI and its impact on the white-collar economy and lots of stories about recent grads having difficulty finding jobs. I think if you look at the underlying data, admittedly, the new college grad unemployment rate was modestly higher this year than the year before. It tends to have a seasonal pattern where summer, following spring graduations, that unemployment rate is the highest. And then it kind of drifts down over the course of a year as those grads find jobs. I think if you look at the sort of months to find jobs post-graduation, it's extended by a month or two over sort of historic levels. But it's not the same doom and gloom that you would infer from some of the headline articles that you read.
So it's something that we've got our eye on. But the thing to remember is our product and our business is built around that stress that is always there in student lending. The highest stress that we have in our portfolios is the first 12-18 months post-graduation when these new grads are finding their way in the world and getting their first jobs and kind of getting set on a good financial footing. That's why our product has built-in deferral period. Our assistance programs we have available to new grads, an extended grace program that gives them a little more time if they need it. And then ultimately, if they need assistance beyond that, we have a variety of loan loss mitigation programs that they can qualify for to give additional assistance beyond that.
Got it.
Oh, and the cosigners.
That's what I was going to ask.
90%+ cosigner rate on the new originations. So for the most part, they've got parents who are vested in their success and will help them get set up.
I guess, how often do you go back to the cosigner and the cosigners to step in?
I mean, it's a tool that we have. If we get to a point where we're in a collection situation and there's a cosigner on the loan, then certainly we'll go and speak with the cosigner. I think that's part of sort of why we believe that our 30+ delinquencies aren't really a strong indicator of net charge-offs. Because what tends to happen is a student or a new grad gets into delinquency. And as soon as that starts to happen, we're not just reaching out and talking to the grad. We're reaching out and making sure that the cosigner on that loan understands that there's a situation they need to be focused on.
And so whether that's the student getting their feet under them and getting like, oh, I didn't know I needed to set up direct deposit to get my payments going, or that's the parent stepping in to help kind of ease the way, we don't always have good visibility into that. But that's a contributing factor to why we have a high self-cure rate of 30-day delinquencies that don't always roll into the later stages.
Any changes to that, how that has been happening?
We haven't seen any material change in that. If you look at the sort of late-stage delinquencies and roll rates, that's been pretty stable. We gave some data on the earnings call around kind of the lend ratio. That's another sort of mathematical description of that phenomena that 30 days doesn't always translate into charge-off.
Sure. I do see that we've just got five minutes left. So if anyone has any questions, happy to open it up right now. Does anyone? OK, I'm not seeing any hands. So I'll ask my next question. In terms of credit behavior, a lot of people, you see headlines around federal student loans and delinquencies. When you look at your population, any difference in—I mean, I don't know how many people have a private loan without a federal loan. But is there any difference in people who have private loans versus have federal loans versus don't?
Yeah, I think the important distinction to make there is because of our role historically as a gap funder, the vast majority of our borrowers have a federal loan already. But the converse is not true. So most federal borrowers don't have private student loans. And so we do monitor behaviors of our borrowers in the context of what's being reported in terms of delinquencies in the federal space as the restart kicked in over the last couple of years. We have not seen any meaningful impact in our borrower base in terms of payment patterns or anything like that as the restart has happened.
Got it. So I'll end with this one. You do these meetings. You talk to investors, not just here, but in your day-to-day job at part. As you talk to them, maybe talk a little bit about what do you think is maybe a little underappreciated about Sallie Mae or maybe misunderstood where people are worried about something where it's not really that big? You mentioned the 30-day delinquency thing right now. But anything that any gaps that you see are very persistent, consistent?
Yeah, I mean, we're a consumer finance company. And so credit is always something that people are going to be concerned about and focused on. But I don't think we're an outlier in that regard. In terms of sort of investor understanding, particularly in the last, call it, six months as we've rolled out the new structure and we've done the investor day and done the earnings call and all of the investor meetings that we've had, I feel like investors really understand the potential for us to deliver here. They're generally supportive of the strategy that we've articulated. And so as a result, we're really excited about the coming years. As I started with, students are going to continue to pursue higher education. And we'll see that support originations growth in the future.
This PLUS opportunity is kind of like a once-in-a-career opportunity in terms of scale of originations growth in a business. And we're pursuing that very diligently to be ready for that growth in terms of product design and features and marketing strategies and the like. And the funding capabilities that we now have that are complemented by the strategic partnerships business is going to be a really important tool for us to really maximize our ability to go after originations and do that in a way that is very capital-efficient and creates long-term, durable, fee-based income. So we're excited about the next few years. It's going to be a fun ride.
Great. Thank you so much for time.
Thanks for having me.
Thank you.