Earnings Call Transcript - NAVI Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Navient Second Quarter 2025 Earnings Conference Call. 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, Head of Investor Relations. Please go ahead.

Jen Earyes, Head of Investor Relations

Hello. Good morning, and welcome to Navient's earnings call for the second quarter of 2025. With me today are David Yowan, Navient's CEO; and Joe Fisher, Navient's CFO. After the prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, 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 a reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2025 earnings release, which is posted on our website. Thank you, and I now will turn the call over to Dave.

David L. Yowan, CEO

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. This morning, we reported results that demonstrate our ability to generate high-quality loan growth, efficiently finance our lending activities, and deliver on our commitment to improve our operating efficiency. Also during the quarter, provision expenses are elevated due to several factors. Joe will take you through these results in a few minutes. Before I turn it over to him, let me touch on a few highlights in the quarter. First, we delivered another strong quarter of loan origination growth. We originated $443 million in refinance loans this quarter. This is twice the volume from the same period last year. As a result, our total refi originations for the first half of the year have more than doubled even while benchmark rates were generally comparable to the year-ago period. These strong originations underscore our ability to attract high-quality borrowers with high average balances. Second, I'd like to comment on recent legislation passed into law earlier this month. This legislation introduced changes to federal student loan programs, which will take effect over time, and we believe will expand our opportunities with our targeted customer segment across our product set. The change that has received most of the headlines is the way the government will lend to graduate students. The bill will eliminate the Grad PLUS loan program at the end of June next year. Grad PLUS originations were roughly $14 billion. The private in-school graduate market in which we participate was roughly 10% of the Grad PLUS originations. The elimination of Grad PLUS is one important change in the federal loan ecosystem that increases our future opportunities in a customer segment we know well. The bill also changes borrowing limits across federal loan programs. Although there are several moving parts, it is clear that demand for private in-school graduate loans will increase significantly over time. We've been leaning into graduate segments with high-quality borrowers and higher average loan balances across our in-school and refi products. In fact, for our in-school product, graduate students represented 48% of our 2024 volume and 56% of our year-to-date volume. In refi, 41% of our 2024 volume and 57% of our year-to-date volume were made to graduate students. There are a number of other changes to the federal loan system. Some changes are a result of the bill and others are due to modifications to the federal loan portfolio, including the resumption of loan payments post-pandemic and changes to loan forgiveness programs. These changes could significantly benefit Navient given our portfolio and product set. For example, the bill simplifies federal student loan repayment plans. We expect the repayment plan changes will reduce FFELP consolidation activity. Lower FFELP prepayments increase the life of loan net income and cash flows. The lifetime net income and cash flow increases are accompanied by increases in provision, as some loans that would have prepaid will default. You can see these impacts in our results this quarter. We expect the low level of consolidations to persist over the medium-term. The changes might also increase the attractiveness of our private refinance product to federal loan borrowers. For example, federal borrowers enrolled in the SAVE plan will begin to accrue and pay interest on their loans beginning August 1. We believe this upcoming change is a proximate cause of an increase in top-of-the-funnel traffic for our refi product over the last few weeks. We're working to convert this traffic into high-quality loans. It's too soon to know whether this increased interest is temporary or part of a larger and longer trend. Third, I want to highlight our recent ABS issuance. I typically do not call out capital market transactions on earnings calls, but the financing transaction completed in the second quarter is worth spending some time on from an equity and cost of capital perspective. In June, we issued our inaugural in-school ABS deal. This securitization was backed by a representative mix of Earnest in-school originations. We believe this transaction was also the first student loan ABS with a significant graduate component, representing 45% of the pool balance. Investors responded with enthusiasm to this offering, which was nearly 6x oversubscribed. More significantly, through the issuance and related private financings, we raised total gross cash proceeds of roughly 98% of loan principal while retaining, as we typically have done, a substantial economic interest in the pool. This highly capital-efficient financing structure compares quite favorably to our historical student loan ABS financing transactions. We believe the success of this transaction was driven in large part by the high quality of our loans and the substantial proportion of graduate loans. Thus, we are very well positioned to benefit from increased market opportunities in refi and in-school products with the graduate school customer segment. We have a differentiated value proposition through the strength of our Earnest brand, tailored products, payment flexibility, operating leverage, and positive customer experiences. We also have the operational and financial capacity to support higher volumes. Fourth, let me shift to our expense base. This quarter, we achieved significant milestones in our strategic initiatives to reduce operating expenses. We completed the transition service agreements that followed last year's outsourcing of servicing and the sale of our healthcare business. These were completed on schedule, leading to the wind-down of associated activities and planned expense reductions. We continue to provide TSA support related to the Q1 sale of our Government Services business. Last quarter, we indicated that the completion of that agreement and the related wind-down activities would occur during the first half of next year. We now expect to complete the TSA earlier than planned, allowing us to accelerate the remaining wind-down and expense reductions. These milestones are among the final steps in our Phase 1 transformation. While we are not across the goal line yet in simplifying and streamlining Navient, I am proud of the incredible work our teams across the organization have done to achieve the savings we are realizing. Their determination to complete the job gives me confidence that we will meet the ambitious $400 million expense reduction targets we established 18 months ago. Fifth, changes in the external environment are reflected in our results for the quarter. We continue to experience low levels of FFELP consolidation activity, which enhanced interest margins and increased lifetime cash flows. These low levels of prepayments are primarily driven by changes in the federal loan forgiveness programs pursued under the prior administration. The provision expense for the quarter reflects a higher level of refi originations as well as a weakening in both the macroeconomic scenarios we use to estimate life of loan defaults, as well as this quarter's trends in delinquency rates. The quarter end delinquency metrics reflect in part the impact of borrowers exiting forbearance programs we offer borrowers impacted by natural disasters. It also reflects in part changes in federal loan repayment and student loan repayment behavior in general. The macroeconomic outlook and delinquency trends contributed roughly equally to the provision expense on previously originated private and FFELP loans. During the quarter, we purchased $24 million of shares under our existing authority. We will continue to balance the opportunity to purchase future value at a discount to book value with opportunities to invest in growth. Finally, we are making good progress developing Phase 2 of our transformation. We continue to analyze opportunities to grow more rapidly and to identify additional significant expense reductions. As we indicated in January, we plan to provide an update by the end of the year. Joe will share our revised full year outlook shortly. It reflects an increase in our first half and expected loan originations and the upfront costs associated with them, low levels of FFELP prepayments, and the provision expense associated with them and the elevated provision expense we recorded in the first half of the year. It also reflects our disciplined operating expense. In summary, our operating results reflect our ability to drive meaningful loan growth, generate strong revenue and cash flows from our legacy assets, our capacity to efficiently finance our loans, significantly reduce operating expenses and invest in future growth, all while continuing to return capital to shareholders. I want to acknowledge and thank our colleagues in the organization who delivered these strong results. With that, let me turn it over to Joe.

Joe Fisher, CFO

Thank you, Dave, and everyone on today's call for your interest in Navient. In the second quarter, we reported core earnings per share of $0.20. Adjusting for regulatory and restructuring expenses, we earned $0.21 on a core basis. In the quarter, we demonstrated strong loan origination growth, experienced continued low prepayment speeds on our portfolio, and reduced our operating expenses in line with our long-term efficiency initiatives. Provision expense in the quarter reflects a less benign macroeconomic outlook and this quarter's trends in delinquency rates. I'll provide further detail on our results by segment, beginning with the Federal Education Loan segment on Slide 6. The net interest margin for Q2 was 70 basis points, 9 basis points higher than the first quarter. This exceeded the high end of our guided range of 45 basis points to 60 basis points. We now expect our full year NIM to range between 55 basis points and 65 basis points. The increase in the quarter was driven by a stable rate environment and historically low prepayment activity. Prepayments were $228 million in the quarter compared to $2.5 billion a year ago. Compared to the prior year, our greater than 90-day delinquency rates increased to 10.1%. The charge-off rate remained flat at 14 basis points and forbearance rates decreased to 12.8%. The provision expense for the quarter for the FFELP portfolio is largely driven by the increase in delinquencies and the expected extension of the portfolio as the prepayments remain at historically low levels. Now let's turn to our Consumer Lending segment on Slide 7. Total loan originations in the first half of the year doubled to just over $1 billion compared to a year ago. This is a strong start to the year, driven by the substantial growth in refi originations. These trends, including additional tailwinds we are seeing early in the quarter, give us confidence in revising our full year origination forecast from $1.8 billion to $2.2 billion. As Dave highlighted, we are well positioned for expanded future opportunities in the private education loan market. Net interest margin in this segment was 232 basis points in the quarter compared to 276 basis points in the first quarter. The pressure on net interest income this quarter was largely related to $112 million of loan that entered 91 plus days delinquency in the quarter that were previously in the disaster forbearance status. For these loans in the first 90 days of delinquency, we record an accrued interest receivable as we recognize net interest income. If these loans become 91 days delinquent, the accrued interest receivable is reduced in its entirety by accrued interest reserve, which reduces net interest income. The establishment of this reserve related to loans becoming 91 days delinquent created an additional drag of 32 basis points compared to the first quarter. We expect the NIM for the full year to range between 255 basis points and 265 basis points. Late-stage or 91 plus day delinquency rates increased from 2.6% in the first quarter to 3%, driven in part by disaster forbearance volumes. At the end of the second quarter, earlier-stage delinquency rates, both 31 to 60 days and 61 to 90 days are lower than they were at the end of the first quarter, also driven in part by the migration of disaster forbearance volumes to later-stage buckets. Delinquency rates, even accounting for disaster forbearance volumes, remain higher than expected. Our allowance for loan loss, excluding expected future recoveries on previously charged-off loans for our entire education loan portfolio, is $702 million, which is highlighted on Slide 8. The $8 million provision for FFELP loans and the $29 million provision for private education loans are driven by a variety of factors, including new originations, macroeconomic outlook changes, changes in student loan borrower behavior, higher-than-expected delinquency rates and the extension of the FFELP portfolio. Slide 9 shows the results from our Business Processing segment. In February, we completed the sale of the Government Services business. Under the terms of the sale, we agreed to provide transition services to the BPS businesses for a period of time. In the quarter, we completed all transition services for our healthcare business. The expenses and revenues from all of our transition services agreements, or TSAs, are reported in the other segment. Compared to a year ago, our total core earnings expenses for the quarter declined by $82 million to $100 million. The changes can be seen in greater detail on Slide 10. The substantial decrease was driven by our focused efforts to significantly reduce our expense base. The sale of our business processing services business contributed $62 million of the reduction, and we continue to focus efforts to greatly reduce corporate shared service expenses. We remain highly confident in our ability to meet our overall expense reduction targets. Let's turn to our capital allocation and financing activity that is highlighted on Slide 11. The first half of the year has been the most active period since 2021 for our capital markets team. In the quarter, we issued $500 million of unsecured debt near all-time tights to treasuries. We also raised over $500 million through the issuance of our first asset-backed transaction that consisted entirely of our Earnest branded in-school loans. As Dave mentioned, the high advance rate we achieved from this financing demonstrated the high quality of the underlying loan and was significantly better than any previous in-school loan transaction in our history. Both transactions were met with significant demand and demonstrate our expertise in generating high credit quality assets as well as executing cost-effective financing. In the quarter, we repurchased 1.9 million shares for $24 million as our shares remain significantly below tangible book value. Our balance sheet remains strong with an adjusted tangible equity ratio of 9.8% compared to 8.2% a year ago. In total, we returned $40 million to shareholders through share repurchases and dividends. Our current cash and capital positions provide ample capacity to distribute capital and invest in strong loan origination growth. Our results for the first half of the year have been characterized by faster loan origination growth, higher FFELP NIM, and better operating expense efficiency, offset by provisions related to higher-than-expected delinquency rates. Assuming the faster loan growth, higher FFELP NIM, and operating expense trends will continue into the second half of the year, along with moderately lower interest rates, we are revising our full-year guidance by $0.15 to a range of $0.95 to $1.05. Our revised guidance incorporates the upfront provision and variable costs associated with the revised loan origination volume. This range estimate includes $0.24 of net expense on a full-year basis that are not part of our continuing operations. Before I turn it over to questions, I'd like to thank all of our Navient team members for their contributions to the quarter. Thank you for your time, and I will now open the call for any questions.

Operator, Operator

Our first question comes from Bill Ryan with Seaport Research Partners.

William Haraway Ryan, Analyst

First question, obviously, kind of relates to the reserve true-up that you took in the quarter. Investors are kind of questioning, at this point, do you think you have everything kind of encompassed in the reserve rate? What's the possibility we might see some additional true-ups in the future? And kind of correlate that, if you can, into the delinquency because your FFELP delinquencies 30 plus actually improved a little bit quarter-over-quarter. The consumer looked, I believe it was flat quarter-over-quarter. So maybe you can talk about what you're seeing in terms of inflows as well.

Joe Fisher, CFO

Yes. Thank you, Bill. And you're correct. We are seeing positive trends in our early-stage delinquencies. So you mentioned the FFELP 30 plus, but both on the private side and the FFELP side in the 30 to 60 days and the 60 to 90 days, we saw improvements across the board there. So obviously, a large piece of what we saw happening in both the FFELP 90 plus day delinquencies and the private 90 plus day delinquencies is a result of the disaster forbearance. Having said that, we did see elevated levels of delinquencies versus our own internal expectations. And it's something that we'll continue to monitor. But at this point, we feel appropriately reserved from an allowance perspective.

David L. Yowan, CEO

Bill, the only thing I would add is there's also a change this quarter in the macroeconomic outlook. We get those scenarios as many firms do from a third-party provider. Those are a little weaker than they were in the first quarter. That's about half of the back book provision expense in the quarter. And so obviously, that's another variable in what the going-forward provision expense can be.

William Haraway Ryan, Analyst

Okay. And just as a follow-up question in terms of the EPS guidance, you sort of look at it, it kind of implies $0.50 to $0.60 in the second half of the year. I believe consensus right now, it's about $0.52. The TSA costs are $0.24 for the full year. Now that's down from $0.26 that you highlighted in Q1. But as I remember, MOHELA and Healthcare were slightly accretive to earnings, revenues offsetting is more than offsetting expenses slightly. So I believe the drag, if you will, on the TSAs is going to be a bit higher than '24 in the back half of the year. And if you could maybe quantify that amount because I think investors would like to know what a potential exit earnings run rate might look like.

Joe Fisher, CFO

Yes. So I'll try to answer that. And if you have a follow-up to my answer, please feel free. So in terms of the TSA expenses for this quarter, we had $13 million related to the TSAs, of which that's offset by $14 million of revenues, to your point. The healthcare services TSAs did end in the quarter as well as it was related to MOHELA. So going forward, the way I think about that is just a little over half of that expenses and revenues is actually associated with the government services TSAs. So call it about $8 million to $9 million going forward, and that's offset by the revenue. So we still anticipate that to occur through the back half of this year. Obviously, both parties are working to exit that TSA as efficiently as possible, and it's a benefit to both sides. But for modeling purposes, I would assume to just keep that through the back half of the year. As it relates to the $0.24 versus the $0.26 last quarter, that's because we have achieved some of those expense savings already into this quarter. And so as Dave mentioned, we set out with ambitious operating expense reduction targets. We have achieved some of that, and that's reflected in the update of the $0.24. But if you think about that going forward of what's going to come out, ultimately, that $0.24 will all be taken out.

Operator, Operator

Our next question comes from Sanjay Sakhrani with KBW.

Sanjay Harkishin Sakhrani, Analyst

I guess the first question is, can you talk about the Grad PLUS reform and sort of the specific opportunities that you guys see arising from that? What's your first cut at it?

David L. Yowan, CEO

Let me summarize and expand on some points from my initial comments. The elimination of Grad PLUS is a major and significant opportunity for us to expand our reach among graduate students. While there are varying views on the timing, size, and customer demographics of this opportunity, it’s evident that our expansion potential is in integer multiples rather than just a percentage of our current opportunities. We have focused on the graduate demographic in both our in-school and refinancing products, which account for about half of our loan origination volume. About a year ago, I was asked about the exit of a large competitor from the private sector and our capacity or willingness to capture some of that volume. I emphasized that the graduate student segment is our focus area and we've made that segment even more robust. We have the appropriate products, distribution channels, and customer experience tailored to attract graduate students. Additionally, this quarter's ABS issuance reflects strong investor demand for these originations. In terms of graduate school lending, roughly 80% occurs at around 200 institutions. Since re-entering the loan origination market, we have aimed to be on the preferred lending lists of numerous schools and currently are on about two-thirds of those lists. There are a few dozen graduate schools that don’t have private lending lists and depend solely on Grad PLUS at this time. We still need to assess the size of this opportunity, but it could be quite significant. Besides being on preferred lists, we offer user-friendly direct-to-consumer digital channels that many graduate students prefer over those available to undergraduates. Furthermore, changes in the federal loan landscape present additional opportunities across our product range. This includes adjustments in repayment options and a lack of loan forgiveness proposals under the current administration. We've seen a more than twofold increase in refinancing volume in the first half of this year, with the share from federal borrowers more than double compared to last year, though it's still below pre-pandemic levels. The SAVE program, a repayment initiative that was recently declared invalid by a court, has been appealed. Nonetheless, this means that interest on federal loans for borrowers in the SAVE program will start accruing from August 1. We believe this development has resulted in a rise in traffic since the July 9 announcement about the uptick in interest accrual. Many of these are highly engaged borrowers, especially among graduate students, who are closely monitoring their loan situations. We are putting effort into converting these opportunities into loans, although we are uncertain how long or how significant this trend will be. Finally, changes to federal loan repayment programs and the absence of loan forgiveness extensions effectively lengthen our FFELP portfolio’s lifespan. You can see this reflected in our NIM results, which indicate lower premium amortization among other factors. This also enhances lifetime cash flow, although it incurs some provision expenses due to the increased risk of default for loans that are not prepaid. So, Sanjay, Grad PLUS presents a notable opportunity for us, and we see various changes within the federal loan ecosystem that could lead to additional significant opportunities. We believe our product offerings in both in-school and refinancing positions us well to leverage these changes.

Sanjay Harkishin Sakhrani, Analyst

No, that's great. That leads me to my second question about the strategic actions update. I know you are expecting the Phase 2 update in the second half. Does that encourage you to lean in and invest in growth initiatives? I'm trying to consider these opportunities and how much additional capability you need to take advantage of them. Do you have that capability with your current resources? Or would you need to make investments to address this opportunity?

David L. Yowan, CEO

Yes, I'll refer back to what we discussed in January. The Phase 2 transformation review is really centered on three main areas. First, we need to identify our growth opportunities, which ties into the cost of equity valuation we've previously mentioned. It can feel like a catch-22 situation; investing a dollar when the value is less than that isn't very appealing. However, if we can showcase growth potential, create a compelling narrative, and prove that we can grow both profitably and rapidly, it may lower our cost of equity. Additionally, we still see chances to reduce further expenses. By the end of this year, we plan to return and share more on this. Regarding opportunities in the graduate loan market, we already have the necessary infrastructure. Most of the costs involved are variable expenses related to loan origination, which affects short-term profitability but ultimately contributes to long-term value. The required build-out for this isn't significant. If we pursue other opportunities that may need further investment, we feel very well-positioned with our current resources to capitalize on the available prospects.

Operator, Operator

Our next question comes from Mark DeVries with Deutsche Bank.

Mark Christian DeVries, Analyst

I would like to get more details on the opportunity created by the federal student loan reform. Can you estimate how much additional demand for private in-school student lending this might generate? Also, I would appreciate your thoughts on your share of the graduate market and your capacity to maintain that share. Our understanding is that you have nearly 20% market share. Could you discuss your confidence in capturing a similar share of an expanded market?

David L. Yowan, CEO

Thank you for the question, Mark. As we examine the situation, there are a few key points to consider. Firstly, the data on Grad PLUS loans isn't as comprehensive as we would prefer, leading to some uncertainty regarding that demographic's future. Additionally, changes to other loan limits create ambiguity around how consumers, parents, and students will react. While we can analyze the broader trends, the actual impact will depend on the specific decisions of individual families and students regarding their education financing. There’s also uncertainty surrounding the overall market size; for instance, we currently do not engage in for-profit lending, which results in varying market estimates, some of which include for-profit lending and some which do not. Our estimates focus solely on the non-profit sector. As we anticipate market expansion and analyze our market share, we believe that the characteristics of that expansion will align closely with today’s market. Currently, the private loan market stands at around $1.4 billion, which is 10% of the total $14 billion. Our present share is approximately 20%, and we feel confident in our ability to maintain this position based on our projections. The market size is undeniably growing significantly, but we expect the noticeable changes to take about a year to fully institute, giving us time to understand the evolving landscape, which is substantial for our business.

Mark Christian DeVries, Analyst

Okay. Great. And just a follow-up on kind of managing balance sheet capacity to meet that opportunity. I mean, it sounds like based on your commentary, the strategy for funding would be to securitize and then retain a lot of the economics. Is that accurate? And if so, do you need to start maybe reducing buybacks and payouts to kind of build capital for the coming opportunity?

David L. Yowan, CEO

Yes. First, I would say that it will be a significant challenge, but I am confident the team can handle it, ensuring we can finance any additional volume that comes our way. That is why I discussed the ABS transaction we completed in the second quarter, where we received an effective advance rate of nearly 98% of the loan balance. This allowed us to raise cash equivalent to 98% before turning to unsecured debt or equity in our capital structure. Currently, one reason we have unsecured debt on our balance sheet is that the effective advance rate on our private legacy and some of our other assets is not as high as what we achieved in our latest deal. To finance those, we have needed to explore additional sources of financing. The secured market's efficiency for high-quality, high-average balance loans provides us with a lot of potential, and the significant interest in that specific deal, which was six times oversubscribed, reinforces our confidence in the capacity to fund those types of loans in a capital-efficient manner. We have stated that our capital allocation strategy, balancing growth investments and shareholder distributions, will depend on the growth opportunities we identify and our ability to buy back future book value. In the second quarter, we successfully managed to invest significantly in growth and return capital to shareholders. We will continue to balance these two aspects and maintain this strategy for as long as we can. Our outlook remains unchanged at this time, and we will inform you each quarter about how we have utilized the capital we have generated and available.

Joe Fisher, CFO

And Mark, I would just add that from a capacity standpoint in the near-term, we have $1.9 billion of additional capacity at our disposal. So we're very well positioned, obviously, going into this upcoming origination year and have a long history with our providers of increasing the capacity as needed, especially for an attractive asset class such as this.

Operator, Operator

Our next question comes from Moshe Orenbuch with TD Cowen.

Moshe Ari Orenbuch, Analyst

I am curious about your long-term expense expectations. In this quarter, you reported $53 million in expenses for the consumer lending and federal loan businesses, along with another $32 million partially offset by $13 million in transition expenses, totaling around $72 million or just under $290 million on an annual basis. Your long-term guidance is for $204 million. How do you plan to reach that target if you're aiming to grow the consumer business? It seems unlikely that you can reduce spending in that area. Could you explain how this will work?

Joe Fisher, CFO

No, it's a good point, Moshe. When we talk about our long-term outlook, you'll notice that we do exclude the expenses related to our Earnest brand and the growth in that consumer lending. So the cuts that we've talked about in the past of that $400 million, obviously, a good portion of that is from the exit of the BPS business. That's just under $300 million that you see in terms of the takeout there. If you look a year ago quarter versus this quarter, we've taken out $10 million from corporate shared services. So just on an annualized run rate, that's $40 million of savings. To your point, there's another $13 million of TSA expenses that will ultimately go away. So those are a lot of the moving pieces to get us to that $400 million number. I would say and sort of touching back to Bill Ryan's comment about the $0.50 to $0.60 as well. Keep in mind, between the third quarter and the fourth quarter, we do have those origination costs upfront. So much like a year ago where you saw a tick up in the consumer lending, I would anticipate that you would see a similar tick up from the second quarter to the third quarter for those origination costs, much like you've modeled.

Moshe Ari Orenbuch, Analyst

Got it. Okay. Regarding consumer lending on the credit side, I'm a bit concerned. You had special provisions twice in both 2023 and 2024, and now again in one of the two quarters so far in 2025. It seems like it's roughly a 50-50 situation every other quarter. How should we view this? I know you've mentioned that you believe you're adequately reserved, but can you elaborate on that a bit, Joe?

Joe Fisher, CFO

I'd say one thing to back on to is that from the FFELP provision, the dynamic there of the CPR speeds changing, you've seen some of that volatility in years past where you had a bit of a release related to the prepayment speeds being much higher than anticipated. Today, we're in a very slow prepayment just environment. And so I would say that that's something that we'll continue to monitor there just in terms of as those prepayments either tick up or tick down, of which we expect them to be relatively flat will be one of the key factors in terms of the provision for the FFELP side. So just something to monitor on that front. For the private portfolio, as we do every third quarter as well, we just look at all of our assumptions. So just going back the past several years, we take a harder look. We've been obviously making those adjustments throughout the year here, but it's something that we do look at in the third quarter from a recovery rate perspective from a long-term CPR perspective, those are all things that we take into consideration to your point about feeling comfortable today, I would say we do in terms of what we've reserved. It's something that we're monitoring. As Dave mentioned, we did take the update on the macroeconomic outlook. And so that is something that could fluctuate from quarter-to-quarter. But overall, the trends we're seeing in the 30 to 60 day buckets, the 60 to 90 day buckets are certainly positive signs, but it's something that we're monitoring.

Operator, Operator

Our next question comes from Nate Richam with Bank of America.

Nathaniel Richam-Odoi, Analyst

I just want to follow-up on Bill and Moshe's question on credit and delinquencies in general. I appreciate the color that a lot of the weakness in 90 plus day was from disaster forbearance rolling off. But I recall that some of the weakness in previous quarters was due to like the legacy portfolio being a little weaker. So I'm just curious how the legacy portfolio is performing. And with DQs coming higher than initial expectations, is there a specific cohort that's kind of driving that weakness?

Joe Fisher, CFO

If you think about the legacy portfolio, all of those loans were made pre-2014. And even within that, nearly 99% of them were made before 2012. So obviously, a very well-seasoned portfolio. So I wouldn't point to a specific cohort on the legacy side as it is just very well-seasoned at this point. Delinquency rates while, as I said, improving on the 30 to 60 day and 60 to 90 days, it's something that is still elevated versus our original guidance and forecast for the year. So from that perspective, it's something, as I said, we're monitoring. It's good to see the improvement, but it is still higher than what our expectations were.

Nathaniel Richam-Odoi, Analyst

Okay. Got it. And then switching gears a little bit to origination volumes. They came in quite nicely this quarter, and you've already done over $1 billion year-to-date. So just curious how you're thinking about your prior guidance of $1.8 billion for the year and how you're thinking of that balance between refinance and in-school loans?

Joe Fisher, CFO

Yes. So we raised our guidance from $1.8 billion to $2.2 billion. If you go back to the original guidance we gave at the beginning of the year when we talked about 30% growth, that incorporated about 10% growth in in-school, excuse me, and that gets you to roughly about $400 million of in-school loans and $1.8 billion of refi loans. So the growth so far today that we're seeing in terms of exceeding our expectations is all coming from the refi book early on.

Operator, Operator

Our next question comes from Rick Shane with JPMorgan.

Richard Barry Shane, Analyst

The guidance for the year highlights the short-term challenges associated with an increase in volume. As you look ahead from a reserving perspective, I want to clarify something. Considering the opportunities on the graduate side, how will you manage that? Is there a chance for you to not only operate as a make and hold lender, but also to alleviate some of that earnings pressure by selling loans?

Joe Fisher, CFO

No, absolutely, Rick. So I think it's a good problem to have if we see the origination levels that certainly have been put in a number of those on the call in terms of their forecast. So if we see that occur, I think you'd see a significant rise in that graduate originations. And for us, the attractiveness that Dave mentioned in terms of the last deal that we saw, the investor interest, that's also there in terms of buying those loans. So I think there is a possibility to offset that through selling those loans. It's something that as we've done in the past in terms of being more opportunistic. But I would say in this environment, it's certainly an attractive opportunity for us, especially for the high coupon, high credit quality that comes with graduate loans.

Richard Barry Shane, Analyst

Got it. And then one follow-up on that and something we're wrestling with. Do graduate loans because of the higher income associated with graduates and the potential to repay more quickly, does that impact pricing on loan sales because of the potentially shorter durations?

Joe Fisher, CFO

That is factored in, and you can see that in terms of the last deal, how people view just the mix of the traditional undergraduate loans versus graduate loans and the prepay speeds they associate with them.

Operator, Operator

Our next question comes from Jordan Hymowitz with Philadelphia Financial Management of San Francisco.

Jordan Neil Hymowitz, Analyst

I have a couple of questions. If you have around a 20% market share and the current market for Grad and Parent PLUS loans ranges from $20 billion to $25 billion, some competitors have mentioned an eligible market of $8 billion, while others have suggested it could be over $10 billion. What do you estimate the size of the eligible market to be? If it's indeed $10 billion and you hold 20% of that, it would imply a $2 billion origination market. Do you understand what I'm saying?

David L. Yowan, CEO

Yes. Thanks for the question, Jordan. I'll go back to what I said earlier. It's still a little premature to say exactly what the size is going to be for some of the reasons I described earlier. It's very clear. It's substantial and significant, and we think that growth is going to have a significant representation of the kind of customers that are attracted to our products through our distribution channels, etc. You've added Parent PLUS onto Grad PLUS. Our estimates and our remarks are focused at the moment on the Grad PLUS elimination because that's the capacity that we have in place today. That's just putting more volume through the pipes that we've already built that we feel really confident in.

Jordan Neil Hymowitz, Analyst

And then to follow-up on Rick's very thoughtful question. If you're going to sell or at least potentially sell some, I mean, the gain on sale margins have raised anywhere from 5% to 13% in the undergrad market over the past 10 years or so that Sallie has been selling. Do you think the grad loans are similar? They're better credit but shorter-term? Has there been any loan sales at the same period of time to know what the range is on that?

David L. Yowan, CEO

Yes, I don't know of any sales, but I believe you have the dynamics right. Graduate loans generally have better credit quality and shorter durations due to that higher credit quality, especially when compared to the average undergraduate pool or those with a majority of undergraduate loans and lower coupons. The ABS issuance served as a good examination of how investors perceive that asset class, rather than a sale. It remains to be seen what the outcomes will be, but it will depend on the combination of lower coupons, higher credit quality, and typically shorter lives than the median undergraduate pool.

Jordan Neil Hymowitz, Analyst

And lastly, can you talk about your moat a little bit because a 20% share in the grad market is arguably as strong or stronger moat as the undergrad market because it's much tougher to get into those schools. Is it not? And hence, the ability to disintermediate some of that percentage is quite higher than if you had a 20% share in the undergrad.

David L. Yowan, CEO

Yes. So this is where we've built a set of products and a set of distribution channels. The graduate market is much more heavily online and digital than the financial aid office than undergrad is. We've got a set of customer experiences that Earnest has developed that is based on all the work that we do, surprises and delights customers. This is a different customer base than the undergrad. And so we feel really good about the capabilities that we've built and are ready to compete against others in that space and competing very successfully, and we're confident we could continue to do that in an expanded market.

Operator, Operator

Our next question comes from Jeff Adelson with Morgan Stanley.

Jeffrey David Adelson, Analyst

Unfortunately, I think Jordan took most of my questions already. But maybe just to sort of circle back, David, on your comment about you think that the market expansion should be similar in profile to where it is today. But I guess like one of the questions we get is why there's even really a meaningful graduate in school market today. Can you maybe just discuss why that is, what that profile looks like? And is that just like a combination of higher credit quality borrowers who are able to get a better rate in the private market and maybe some schools who aren't accepted in the federal loan program? And I guess the question on top of that is if we do suddenly see this influx or when we do suddenly see this influx of students with medical debt and law school debt, that does strike me as a different borrower with a different distribution than today. So I guess what gives you confidence that you can sort of maintain that 20% share?

Joe Fisher, CFO

Yes. So I'll handle that one, Jeff. And it's a good question because if you think about the $1 billion market or $1.4 billion market versus $14 billion, that $14 billion market historically also had debt forgiveness associated with it. So if you are a medical student or another profession where you thought that at some point you were going to get this loan forgiveness, that's obviously a very attractive option versus a private product. And so where I would say that we captured a lot of our volume and our competitors as well is from those more savvy borrowers that felt that they may not get loan forgiveness, but they were looking to rate shop and compare in terms of the rate that they would get from either working post their undergraduate degree had built up a credit score and went out and sort of shopped their loan versus what the government was offering as a rate. And so that's really where you saw us compete today because those borrowers no longer have that option of that debt forgiveness, that is not a factor really going forward, and that's where I think there's a tremendous opportunity for us to expand in that marketplace.

David L. Yowan, CEO

And we think that's what's driving some of the increased traffic in refi as well, as people that have taken out those loans and now interest will begin to accrue, the possibility of loan forgiveness is lower than they might have thought it would be at some point in time. And so now the relative value proposition between the federal loan and the private loan has changed, not because we've changed our value proposition, but because the value proposition for a federal loan has changed.

Operator, Operator

Our next question comes from Bill Ryan with Seaport Research Partners.

William Haraway Ryan, Analyst

I just have one quick follow-up. Could you remind us what the return profile looks like, specifically ROE on your in-school loans versus your refinance loans, given your capital allocations?

Joe Fisher, CFO

Yes. So certainly, we target low to mid-teens ROEs, and that's what our focus is on going forward. So from a credit quality, obviously, very attractive in both the refi and the in-school product. Our FICO scores today for the quarter were above 770. So again, it should give you comfort that these are very high-quality loans. And obviously, the coupon is going to somewhat fluctuate just with the overall interest rate environment and the funding that we receive. And Dave did highlight the fact that we received very attractive advance rates at 98%, some of the highest that we've experienced historically. And as I mentioned, in terms of our other financing from an unsecured debt perspective, they were at near all-time tights for us from a spread to treasury. So we feel very good about our financing capabilities, the coupon we're offering, and the credit quality to achieve that long-term target, I'd say, in the low to mid-teens ROEs.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Jen Earyes for closing remarks.

Jen Earyes, Head of Investor Relations

Thank you, Daniel, and thank you for everybody who joined the call today. Please contact me if we were not able to take your questions, and we can set up some time. And please contact me if you have any follow-up questions. Thank you. This concludes today's call.

Operator, Operator

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