Navient Corp Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Navient Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President, Investor Relations. Please go ahead.

Hello. Good morning, and welcome to Navient's earnings call for the second quarter of 2024. With me today are David Yowan, Navient’s CEO, and Joe Fisher, Navient’s CFO. After their prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. 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 financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and the reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2024 earnings release, which is posted on our website. Thank you, and I now will turn the call over to Dave.

Thanks, Jen. Good morning everyone. Thank you for joining the call and for your interest in Navient. I will start by providing an update on the three strategic actions we announced six months ago. I'm pleased that we've completed several key steps in our journey to becoming more focused, flexible and efficient. Further, we're aggressively and deliberately making meaningful progress on future milestones. We remain confident that we can achieve the significant expense reductions we presented in January. These are in the hundreds of millions of dollars annually. We're already beginning to deliver on these planned reductions and believe we can attain these expense goals within the original 18 month to 24 month time frame. During the quarter, we're pleased we completed major steps in our first strategic action, our servicing outsourcing agreement with MOHELA. Outsourcing is a key facilitator of our ability to achieve lasting expense reduction. Nearly 900 Navient employees have now transferred to MOHELA and our variable cost servicing model is in effect. Our more than 2 million borrowers will continue to use the same account numbers, phone numbers and payment plan. We've transferred several proprietary and customized technology tools and solutions to MOHELA. As we've previously shared with you, we will provide a limited number of services and activities under transition services agreements. We expect to complete substantially all of this initiative by the first half of next year. Moving to our second strategic action, we remain engaged in active and encouraging discussions about the divestment of our business processing solutions division. At this point, the interest we have received from potential acquirers gives us confidence that we will achieve our objectives. We're actively evaluating our options to finalize the strategy designed to maximize shareholder value. We expect to be able to provide more information about the divestment process, potential proceeds, and the implications for our expense reduction timeline during the second half of this year. We did not wait for the BPS divestment process to be completed to get started on our third strategic action, to reduce our shared service infrastructure and corporate expense footprint. With outsourcing well underway and the BPS divestment process becoming clearer, we took decisive action during the second quarter to deliver on this initiative's objectives. A new organizational structure was effective on July 1. This management structure is flatter, with fewer management layers and a smaller executive team. It establishes a clear path and accountability for accomplishing the servicing and BPS transitions and expense reductions, some of which have begun to be realized. It also establishes the organization needed to manage our going forward businesses, including substantial reductions in our corporate footprint. Our going forward organization is preparing for an employee count that is 80% to 90% lower than when we announced the strategic actions. The MOHELA transfers that have already occurred represented roughly 20% of that workforce. Our results for the quarter reflect restructuring expenses, largely for transfers and job eliminations that are part of these organizational changes. We're also taking steps to reduce our facilities and IT footprints. Most of our operating expense categories will be smaller, although not at the same magnitude as the employee count. Now, turning to our Earnest business. Earnest continues to efficiently generate high quality private student loans, both refinance and in-school loans. We also continue to explore opportunities to deepen relationships with students and college grads that deliver attractive lifetime economics. We're on track to hit our growth target for lending for the year. As is always the case, we would expect further increases in refi volume if rates drop before year-end. We described six months ago the potential for a substantial amount of cash flow from the combination of our loan portfolios and the divestment of our business processing division. At the same time, the elevated level of FFELP prepayment activity has accelerated the timing of a portion of those loan cash flows. This cash will be available over time to invest, reduce outstanding debt or distribute to shareholders. We will invest that cash deliberately only if we have clear visibility in our opportunities to earn returns in excess of our cost of capital. We will also be guided by the relationship between tangible book value and market value per share. At the end of Q2, our shares had a tangible book value of $18.81 per share. Our recent share price reflects roughly a 20% discount to that tangible book value. During a period when our investment in a substantial volume of FFELP loans is being monetized at book value, we believe that discount represents an opportunity to deliver more value to shareholders. In closing, I'd like to thank my colleagues, especially those who learned this quarter that their roles will no longer be with the company as part of these strategic actions. All colleagues have contributed with commitment and resilience to our progress on these complex undertakings. Next, Joe will show our results for the quarter, which reflects strong performance against the items within our control. With that, let me turn it over to Joe. I look forward to your questions later in the call.

Thank you, Dave, and everyone on today's call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2024 and provide updated guidance underlying our outlook for the remainder of the year. In the second quarter, we reported GAAP EPS of $0.32. On a core basis, we delivered second quarter EPS of $0.29. The results included $0.08 of regulatory expenses primarily related to the CFPB lawsuit in our ongoing effort to put this matter behind us and $0.11 restructuring expenses. The restructuring expenses were driven by the strategic actions we are undertaking to reshape and right-size the expense base of the company. We are updating our full year guidance to a range of $1.35 to $1.55. This change is primarily driven by the $0.19 impact of these items. It does not include any potential future regulatory and restructuring expenses that may be incurred in the remainder of the year. I'll provide additional detail by segment, beginning with the federal education loan segment on Slide 5. The net interest margin declined 36 basis points from 55 basis points in the first quarter as prepayments increased to $2.5 billion, compared to $1.6 billion in the first quarter and $600 million a year ago. As a reminder, loan prepayments reduce future net interest income but accelerate loan principal payments within our life of loan cash flow projections. This contributed to the higher cash balance in the quarter. The main driver of the decline in net interest margin in the quarter was the write-off of unamortized loan premium that accompanies higher than expected prepayments. The FFELP portfolio continues to perform as expected from a credit perspective. Compared to the prior year, our greater than 90-day delinquency rates improved to 7%, the charge-off rate improved to 14 basis points and forbearance rates increased to 16.8%. Slide 6 illustrates the rise of prepayments over the last few quarters as borrowers consolidated to the direct loan program. We continue to encourage borrowers who are experiencing or have historically experienced difficulty repaying their loans to take advantage of beneficial programs that are only offered to direct loan customers. Looking forward, some of the policy actions that clearly incurred consolidation have expired. The administration continues to propose and implement additional loan forgiveness and debt reduction programs on a regular and frequent basis. Consolidation requests we receive have declined very recently since the expiration of some of these policies. We cannot predict whether this decline is temporary or reflects a change in prepayment trends. Our EPS guidance reflects a high level of prepayments over the second half of the year that is comparable to what we experienced in the first quarter of this year. As a result, we expect full year FFELP net interest margin in the high 40s. Now let's turn to our consumer lending segment on Slide 7. Net interest margin in this segment was 289 basis points in the quarter compared to 297 basis points a year ago. Originations grew over 40% to $278 million compared to $197 million a year ago and are in line with our expectations as we remain focused on generating growth from high quality borrowers. Credit metrics in our consumer lending portfolio performed as expected with late stage delinquency and forbearance rates relatively flat from the prior quarter at 2.2% and 1.8%, respectively, while the charge off rate improved to 1.65% from 2.4%. You can see on Slide 8 that at the end of the second quarter, our allowance for loan loss for our entire education loan portfolio is $898 million. We released $2 million for FFELP loans during the quarter as a result of the elevated prepayment activity and new private education loan origination volume contributed $6 million to the allowance. Let's continue to Slide 9 to review our business processing segment. We achieved total fee revenue of $81 million in the quarter with an improved EBITDA margin of 25% compared to 10% a year ago. The results this quarter demonstrate the ability to operate this business at attractive margins while we continue to explore strategic options. The improved margin compared to the year-ago quarter is a result of recently implemented efficiency initiatives as well as a decrease in expenses associated with new contract start-up costs which impacted the year-ago quarter. Turning to our capital allocation and financing activity that is highlighted on Slide 10. We continue to maintain disciplined asset liability and capital management strategies with 84% of our education loan portfolio funded to term and an adjusted tangible equity ratio of 8.2%. During the quarter, we issued a $728 million asset backed securitization at a targeted advance rate of 94% with spreads that were nearly 60 basis points lower than our previous refi asset backed securitization. In the quarter, we reduced our share count by 2% through the repurchase of 2.5 million shares. In total, we returned $55 million to shareholders through share repurchases and dividends. Turn to expenses on Slide 11. The strategic actions we are undertaking present opportunities over the next 18 months to meaningfully reduce expenses. We finalized our servicing agreement with MOHELA that will transition us to a more variable cost structure as the legacy portfolios continue to amortize. Total expenses for the quarter, excluding regulatory and restructuring expense, were down nearly 15% to $154 million. The amount and timing of other operating expense reductions, including certain shared service and corporate footprint reductions, depends on the nature and timing of a BPS transaction. In summary, our updated full year 2024 core earnings per share outlook from $1.35 to $1.55 reflects the strong progress we have made on our strategic actions to date while taking steps to address regulatory matters and enhance overall value for shareholders. As I close, I'd like to express my appreciation to Navient team members for their hard work delivering for our customers while executing these strategic actions. Thank you for your time and I will now open the call for any questions.

Our first question comes from Rick Shane with JPMorgan. Your line is now open.

Hey guys, thanks for taking my questions this morning. And look, clearly working very hard to execute the initiatives you have. Interesting to hear to get the context on the size of the employee base going forward, but it does really sort of raise the ongoing question of ultimately, like, where do we see or where do you envision the growth at Navient coming from? You're playing the cards that you've been handed as well as you can, but I'm curious what the next step is going to be.

Hey, Rick, good morning, and thanks for your question. Look, I think I'd go back to, we're still on the path that we laid out back in January, and we said then, and would say today that the first order, the first imperative for us is to get the expense reduction initiatives behind us. Those are complex undertakings. I'm really pleased with the progress that we've made and the milestones that we've achieved. Through the loan cash flows and through the potential divestment of BPS, we continue to expect a substantial amount of cash, and we have three alternatives with respect to that cash, largely speaking. Again, investor growth that would largely be within Earnest. We can reduce our unsecured debt footprint or we can do shareholder distributions. We'll have more to say about that when we get a clear sense of what the BPS proceeds look like and try to lay out a clear path for investors on what that is. At Earnest, we continue to originate and grow high quality loan originations. The biggest piece of that is in refi, but also in the in-school product. In the background, you don't see it in our results, we continue to build engagement with students and college graduates. We're really pleased with some increases in engagement through our financial counseling platform that we've seen in the first half of this year. We continue to believe that that presents an opportunity for us to attract customers at a relatively low acquisition cost, either for the existing products or for potential product extensions. We have some more work to do on that. And we continue to say that we've got to be clear before we make those investments that we think we can generate returns that are in excess of our cost of equity.

Got it. Okay. And thank you for the transparency on this. I realize it's a very complicated and challenging situation, and you guys have been very clear about the path you're taking, so thank you.

Thank you. Our next question comes from the line of Terry Ma with Barclays. Your line is now open.

Hi. Thank you. Good morning. On the updated FFELP NIM for the full year, can you kind of remind us how many rate cuts are contemplated in that? And then for the elevated prepayments on a FFELP portfolio, do you think there will be any impact from the recent court decisions on the SAVE program?

On the first part of your question, thank you, Terry. I would say we are expecting one rate cut in the latter part of this year, but that is not the primary factor affecting the net interest margin for the second half. It's the ongoing prepayments and their implications for our portfolio, particularly regarding the acceleration of any premium amortization expense or deferred financing fees. This factor contributed to our performance in the first half of this year, in both the first and second quarters. As for the second part of your question, initial indications show a notable decrease in consolidation requests. Compared to the levels observed in April and May, requests have significantly declined in early June. However, this decline is not included in our guidance. Our guidance for high 40s net interest margins still assumes those elevated prepayment levels similar to what we experienced in the first quarter.

Got it. That's helpful. And then the restricted cash from loan prepayments after paydown of ABS debt, I think in your slide you called out some excess. Can you maybe just talk about your priorities for that?

Yeah, I would just echo Dave's comments from his prepared remarks and then just his response to Rick Shane, we look at it in terms of those three priorities of investing in the business, reducing our overall unsecured debt maturities, and then anything else would be capital distribution.

Okay, got it. Thank you.

Thank you. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.

Thanks. Good morning. Hey, Joe, on your point on the slowing of consolidation requests, I guess what's the risk that it reaccelerates? I'm just trying to think, is it just that they extend the program because it's expired already or do they announce a new one? I'm just trying to think about the risks to it accelerating again.

So, that's really what the volatility is and that's what makes it so challenging from the first quarter to the second quarter is the extensions of these programs. And then to Terry's last question, the stays that we're seeing. So we're trying to, despite what we've seen so far, in terms of early indicators in late June and July where that consolidation activity has fallen, we're trying to capture that risk. If there is some type of new proposal or an extension here that brings those prepayment levels back to the first quarter and potentially second quarter. But I would say in terms of overall risk with that, the way I think about it is for the premium amortization expense itself, there's about $350 million on our balance sheet. Think about that for every $100 million that you're amortizing it's about 1% of that, that would ultimately be accelerated. And that is the pressure that we get in terms of the basis points. And happy to take that offline with you, Sanjay, if you want to get more technical. But that's a general good rule of thumb.

Okay, great. And then I guess I have a two part question. Sorry. One is on the BPS sale. Understand that you guys are having constructive discussions and you guys mentioned sort of all the options you have in terms of what to do with any cash proceeds that you get from it. Is it fair to assume though that anything you do would be accretive to the earnings number? I'm just trying to think through the earnings impact of something that happens there. And then secondly, on that CFPB accrual that you made, I mean, like, what does that mean? Like, where are we in the process there? Because it's seemingly happening still for quite some time. Just trying to get an update there. Thank you.

Hey, Sanjay. Good morning. Thanks for the question. I think with respect to BPS, look, I think we feel like the macro environment for exploring strategic options and divestment is a, benign if not supportive one. As we've gone out and solicited interest in those businesses on kind of a micro perspective, I think we have been really encouraged by the level of interest that we've seen. We're pretty far along in the process and we're in active discussions with multiple buyers, and we're trying to sort through that process and hope to be able to give you the conclusion on that sometime in the second half of the year. I think with respect to the earnings piece, I'd say a couple of things. One is, remember back in January that the outsourcing and BPS divestment are both facilitators and enablers of our expense reduction objective. We've got a lot of shared service infrastructure between servicing and BPS, and particularly in BPS within our government services segment of BPS, the healthcare segment in BPS is much more standalone than the other. So, you have to think about them in terms of a package. When we talk about taking out those expenses, obviously the revenue from BPS would go away as well with the seller. And so the numbers back on a 2023 basis, 2023 actuals was, we would take out roughly $400 million of expenses across all the initiatives. And the BPS revenue for 2023 was, I think, $320 million. So that's sort of an operating impact. Again, those are 2023 actual numbers. What we're saying today is we're committed to, we're confident in our ability to take out those expense numbers. They'll be different than the 2023 actuals, for example, BPS expenses, because the business is growing, will be greater than the $280 million that they were in 2023. We don't view that as an overdeliver. We view that as we're taking out all that category of expense. So there's a accretion on an operating basis and then the use of proceeds, if we either invest the combination of investing, reducing unsecured debt, or shareholder distributions could also have an accretive impact as I'm sure you can appreciate. On the CFPB part, our total reserve now is in excess of $100 million. Those reflect the developments in the discussions that we're having during the quarter. And as I'm sure you can appreciate, I'm not going to go any further than that. But that's where we are at the moment from a monetary perspective.

Thank you.

Thank you. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

Hey, good morning. Thank you for taking my questions.

Hey, Jeff.

Could you provide us with the latest thoughts on the timeline for achieving the expense reductions you've mentioned? I assume that finalizing your strategic actions related to the BPS sale will play a role in this. Regarding the 80% to 90% reduction in the employee base, should we anticipate a similar reduction in your compensation expenses, excluding restructuring costs?

Sure, let me address your question about timing and the amount of expense reductions. We have three initiatives to consider, each with different timelines. We're progressing well on outsourcing, though there’s still work to be done, especially with important borrower transitions and some services that need to be transferred to MOHELA. While these transitions are significant, they may not take as long as some other initiatives. It's important to note that we mentioned before that outsourcing would not lead to immediate substantial expense reductions. Instead, by adopting a variable cost model, we expect to significantly lower our loan servicing expenses over time. The smaller the loans and borrower accounts become, the quicker and larger these savings will be. We plan to complete the outsourcing initiative in the first half of the year. For BPS, the timing and nature of any related transactions will determine our progress, so we'll need to monitor that. A recent example is our transfer of 900 employees to MOHELA, which reduces our costs associated with those employees—this benefits us, MOHELA, and our colleagues. However, we still need to clarify the nature of BPS deals before discussing specifics. The more costs we can eliminate with these deals, the quicker we can remove remaining expenses. The third initiative focuses on corporate expense reduction and shared service infrastructure. With MOHELA established and BPS becoming clearer, we've begun to act. We have made significant changes to our organizational structure, which is reflected in our employee count. We anticipate needing some of our existing colleagues until the end of 2025 to effectively manage the first two work streams and support our goal of reducing corporate expenses. Regarding the amounts, we previously indicated a target of $400 million in expense reductions for 2023. We’re confident we’ll achieve reductions in the same proportions as the 2023 expense categories. We’ve already taken some steps towards this goal. For instance, BPS segment operating expenses were $280 million in 2023 and will increase this year due to business growth, but we plan to reduce more than that amount. Although we may not see greater reductions in total expenses since the loan count has decreased, we will eliminate all planned expense categories in the amounts we've outlined in January. I hope this provides clarity on our timeline and approach.

That's really helpful. Thanks for all the color. And if I could just follow up on the in-school origination channel. I know, David, late last year, you sort of talked about kind of reevaluating the capital contribution of that business, not exiting, but sort of reevaluating. Wondering if you've given any more thought to that business and have recent developments from exit of a very large player there and what that's done to the origination channel and competition changed your thinking on that sort of pause on capital allocation?

We are currently pleased with our loan originations and feel confident about growth for the full year across both refinancing and in-school lending. Refinancing is closely tied to the interest rate environment, and while we are optimistic at present levels, the in-school lending segment is less predictable and tends to be concentrated during a brief period. In terms of our strategy, we focus on a specific customer segment that has distinct characteristics. This applies to both refinancing and student loans. We aim to leverage our competitive advantages to optimize our overall economics, including capital and funding costs, to achieve our desired returns. The key characteristics of our targeted customers are high credit quality and relatively high balances, which help keep servicing and credit costs low, along with a low cost of customer acquisition. We are selective in our lending practices, for instance, we do not lend to for-profit schools. Our borrower demographics are predominantly graduate students rather than undergraduates. We continue to receive inquiries about competitors exiting the market. To that end, we will remain focused on our established lane; we have no intention of venturing into areas vacated by others. Instead, we see their departure as an opportunity to strengthen our position in our current segment. We are now listed as approved lenders at over 1000 schools and our team is dedicated to operating effectively within this space to generate strong returns for our shareholders. This approach will remain our focus moving forward.

Great. Thank you for taking my questions.

You bet.

Thank you. Our next question comes from the line of Bill Ryan with Seaport Research Partners. Your line is now open.

Thank you and good morning, Dave and Joe. A couple of questions. First, in the appendix, it did show a little bit of reduction in the expected cash flows, both from the FFELP portfolio and from the consumer portfolio. Joe, if you could kind of address what gives you comfort on the FFELP portfolio, i.e. kind of like, what are the embedded assumptions now in the updated cash flow outlook? And then if you can maybe talk about some of the revisions as it relates to what's happening in the consumer loan portfolio as well.

So, I'll start with the consumer lending portfolio and then go back to the FFELP portfolio. So, the biggest driver of the decline that you saw in the out years here in '25 and '26 is some of the refinancing activities that took place during this quarter. So not only did we do the securitization that I mentioned, but also we refinanced a number of repurchase facilities. That generated over $300 million worth of cash, that gets accelerated into this period. So, that is taken from those outer year or those next few years here and accelerated into this period. So, that's the biggest driver of that movement from first quarter to second quarter on the consumer lending side. On the FFELP portfolio in itself, in terms of the confidence in the numbers, I said there's obviously a lot of volatility in terms of what we're seeing from prepayments. At the end of the day, that's an acceleration of cash into those near term periods. So, we did benefit again in the quarter in terms of cash that was coming into this period, but that comes with the expense of the outer year. So you see that across each year in terms of where that's being pulled from, why those are lower from '25, '26 and on, versus what we saw in the first quarter. So it really is driven by that prepayment activity. Now, having said that, cash flow, just to be clear, in terms of the FFELP portfolio, we are not assuming in that appendix slide that this prepayment activity that we saw in the first two quarters continues third quarter and fourth quarter. But that is included in our guidance. So I just want to be clear on that in terms of what those assumptions are for the cash flows versus what our EPS guidance is.

Okay, and thanks for that color. Second question, just on the expense side, I mean, very impressive expense reduction year to date down to $154 million in the second quarter. It sounded like from the prepared remarks that that may be kind of a baseline until there's a divestiture of the BP unit, but then it's also indicated there's a new organizational structure went into effect on July 1, but that we may not really see the full benefits of that until 2025. So, is the $154 million kind of like a good baseline for the next couple of quarters until we get resolution at the BP unit?

Yeah, I think that's a good way to think about it. Obviously, Dave went through the various moving pieces and the timing component but as we think about the next couple quarters, you don't get the full benefit of the restructuring expenses. That has to do more with timing of departures. So some of those departures have not yet occurred. So you will still see similar expense levels in that third and fourth quarter. One thing I would say, though, just from a seasonality perspective, is on the consumer lending side. There are expenses associated just with the in-school origination. So, outside of that component, I would say that your model should be fairly consistent with what we saw in the second quarter.

Okay. Thanks for that.

Our next question comes from Moshe Orenbuch with TD Cowen. Your line is now open.

Thank you. To follow up on a couple of those questions, it was mentioned that a reduction in marketing was a key factor in the expense reduction for your private lending segment. If you had historical levels of originations, where would you expect those marketing costs to be compared to their current levels?

So, I would say that that impact was under $10 million in terms of the lower origination costs and marketing cost side.

Got it. Thanks. And I think, Dave, when you talked about the BPS objectives, maybe you could kind of just lay out for us what the objectives are of that sale over and above kind of outsourcing the, or getting the expenses out. Like, are there any guidelines as to the, like the level of value that you're going to achieve and any kind of broad strokes about the thought of the use of proceeds, because obviously you've got needs for debt repayment, but we have no way of knowing how you're thinking about it. So maybe is there some way you can kind of give us any sort of broad strokes on those two?

There are three main reasons for considering the exploration of BPS status. First, we've mentioned the importance of reducing expenses. After deciding to outsource servicing, we examined our expense structure and found that a large portion of our shared service costs is related to both servicing and BPS, as they involve similar activities like call centers and multichannel telephony. By outsourcing servicing and moving to a variable cost model, divesting BPS allows us to address our shared service infrastructure comprehensively and efficiently. Second, we believe that the EBITDA and earnings for our businesses are currently undervalued in the market compared to standalone or similar companies. Our aim with the divestment is to close this gap, maximize value for Navient shareholders, and secure a higher valuation for these businesses. Third, there's a question of scale. In discussions with interested parties for these businesses, we've been encouraged by the interest from both strategic buyers and sponsors. Strategic buyers, in particular, have the potential to bring additional scale to the organization and enable acquisition opportunities that might not be feasible for us under our current valuation. These are the key points I wanted to highlight.

No, no, I apologize. I didn't mean to cut you off.

I don't have anything more to add regarding the use of proceeds. There are three main areas to consider. We plan to develop a comprehensive strategy with clear principles for addressing these three uses, which may involve a mix of options. Our approach will be thoughtful, but it's currently reliant on understanding the specifics of the BPS divestment to effectively pursue our primary goal of expense reduction.

Got it. If I could quickly add a third question related to Bill's inquiry about the prepayments and cash flows on the FFELP portfolio. At year-end, there were $38 billion in FFELP loans with an expected $6.2 billion in cash over their lifetime. Now, that has decreased to $33 billion with an anticipated $5.9 billion over the same period. The difference of about $300 million aligns with what you actually received in the last six months. How should we consider the risk that the nearly $6 billion in prepayments might accelerate in the remaining life, potentially falling below the $5.9 billion?

I think the main points to consider are that there is about $3.2 billion related to the FFELP securitizations or secured funding, along with just under $200 million of unencumbered FFELP. This can be viewed as principal return. The primary risk is the difference between that amount and the figures you just mentioned, which stem from servicing fees and additional interest earned. If that amount is fully accelerated into the period, you would effectively receive around $3.4 billion in principal returned to you, and the potential loss in a 100% scenario is what is at stake.

Got it. Thank you.

Thank you. Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

Hey guys, thanks very much for taking my questions. First one, sort of just a modeling one. In the private student loan portfolio, the ALL has dropped a little bit over the past year. I'm wondering, are we at a level where you think it'll be stable, or should we expect more reductions as credit improves, or how do we think about that?

In terms of the allowance for loan loss, we feel pretty good about where we are. The components obviously broken out on the slide. New originations will continue to add to that. So as we originate on the in-school side and the refi side, there would be a continued build just the way that the CECL accounting works. We take that all upfront. But that's something that we're reviewing quarterly. And as you can see, we added $16 million in the quarter. $6 million of that was related to new originations, $10 million was just overall outlook of the total portfolio and the credit.

Okay. And then the second question is, I guess I'm trying to just figure out how sensitive the business, the originating side and the private student loan book would be to reductions in interest rates. Does 25 basis points start moving the market or do we need a more significant move for the refi business? And then similarly, what happens to kind of the in-school opportunity as rates go lower?

I don't think 25 basis points really moves the needle that much and that's reflected in our guidance in terms of what we expect to achieve for the back half of this year or for the full year. I think where you start to see a more significant pickup is as you get to 75 basis points, 100 basis points, as that becomes more meaningful to the borrower in terms of the terms that they have today in the federal programs, and taking advantage of that, whether it's 75 basis points, 100 basis points or more lower opportunity. I think that's where you start to really move the needle. And you can see just three years ago obviously how much more significant our loan originations were on that refi space as a result. And so that's where I think the real opportunity starts to come into play. And today, you just don't see that a lot of borrowers are waiting on the sidelines to see any rate move and also just for updates in terms of any loan forgiveness proposals that may or may not be implemented going forward.

Great. That's very helpful. Thanks.

Thank you. I would now like to hand the conference call back over to Jen Earyes for closing remarks.

Thank you, Shannon. For everybody on the call, please contact me if you have any follow-up questions. We'd like to thank everyone for joining us on today's call. This concludes the call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.