SLM Corp Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Third Quarter 2023 Sallie Mae Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Melissa Bronaugh. Please go ahead.

Thank you, Carmen. Good morning, and welcome to Sallie Mae's Third Quarter 2023 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Steve McGarry, our CFO; and Pete Graham, who will succeed Steve as our next CFO beginning October 27. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations and financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended September 30, 2023. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. And now I'll turn the call over to Jon.

Thank you, Melissa and Carmen. Good morning, everyone. Thank you for joining us to discuss Sallie Mae's third quarter results. I hope you'll take away three key messages today. First, we had a successful peak season highlighted by increased underclass demand. Second, we remain on track to deliver around the midpoint of our full year 2023 EPS guidance. And third, we are excited about the ongoing prospects of the company, in particular, as we start to look past the end of our CECL phase-in period. Let me begin with the discussion of loan sales. You will remember last quarter, we had expected to commence our next loan sale at the beginning of September and close in the third or early in the fourth quarter, depending on buyer preferences and market conditions. We are pleased to report that we were able to sell $1 billion of loans in our latest transaction, which closed on October 13. We have not changed the midpoint of our EPS guidance, which confirms that we were able to execute the loan sale at prices consistent with our full year 2023 expectations. We plan to use a portion of the gain and capital released from the sale to buy back stock while maintaining prudent capital and liquidity levels. As a reminder, we began the loan sale and share repurchase strategy a little over three years ago to take advantage of the price disconnect between loan sale premiums and our equity valuation and also to help manage capital during the CECL phase-in period. We believe the program has been very successful. We have bought back approximately half the company and have generated absolute and relative total shareholder returns during that time that have meaningfully outperformed certain key indices and competitors. While successful, we have always described this as a medium-term strategy that would evolve over time. While we believe there is still opportunity to take advantage of the loan sale and share buyback arbitrage, it is also exciting to think about the organic EPS growth and capital generation capability of the business as we contemplate pivoting to grow our balance sheet. We will continue to consider the appropriate level and timing of loan sales and our pivot to balance sheet growth as we develop guidance for 2024. Turning to the quarter's results. GAAP diluted EPS in the third quarter of 2023 was $0.11 compared to $0.29 in the year ago quarter. These earnings are lower than the prior year quarter, given that we sold $1 billion of loans in the third quarter of 2022 that generated $75 million in gains. If the loan sale had been completed in the third quarter, it would have added approximately $0.31 to our third quarter 2023 GAAP diluted EPS. Private education loan originations for the third quarter of 2023 were $2.5 billion, which is up 4% over Q3 of 2022. This wraps up a successful 2023 peak season. Through the end of September, we have seen 9% application growth over the same period in 2022 and the most application volume since prior to the pandemic. This has been fueled by a 10% increase in underclass applications, which is especially important given the greater serialization potential and lifetime value of this group. Credit quality of originations was consistent with past years. Our cosigner rate for Q3 of 2023 was 90%, up slightly from 89% in Q3 of 2022. Average FICO score at approval for Q3 of 2023 was 749 versus 747 in Q3 of 2022. We continue to focus on credit and our path back to normalcy and are pleased that our annualized net charge-offs as a percentage of average loans in repayment for the first nine months of 2023 is 2.44% and remains lower than our plan for the full year. We saw entry rates to delinquency decline in September and observed continued improvement in our later-stage delinquency buckets throughout the quarter. We have implemented a number of programs over the last several quarters to assist our customers, but recognize that there are more ways in which we can help borrowers who are facing financial difficulty. We are continuing to develop new programs and fine-tune existing strategies to help delinquent customers regain their financial footing. Steve will now take you through some additional financial highlights of the quarter. Steve?

Thank you, Jon. Good morning, everyone. Let's continue with a discussion of our loan loss allowance and provision. The private education loan reserve was $1.5 billion or 6% of our total student loan exposure, which under CECL includes the on-balance sheet portfolio plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of another $2.4 billion. Our reserve rate continues to improve as compared to 6.2% in the second quarter of this year and 6.3% at the end of 2022. Let's now look at the major variables used to calculate our allowance for credit losses under CECL. Economic forecasts and ratings drive quarter-to-quarter movement in the allowance. We continue to use Moody's base, S1, and S3 forecasts, weighted 40%, 30%, and 30%, respectively. We expect to use this mix going forward. Prepay speeds in Q3 2023 were essentially unchanged compared to the prior quarter, resulting in no meaningful reserve requirement changes related to this metric. However, prepaid speeds were lower than the year ago quarter, which is a contributor to the year-over-year change in the reserve. We continue to view slower prepay speeds as a real positive as our assets are expected to stay on our books for a longer period of time. New commitments are also important for the calculation. Q3 is our peak lending season, and we added $3.3 billion to unfunded commitments, which required a provision of $153 million. In comparison, we added $1.5 billion in unfunded commitments in Q2 of this year, and $3.1 billion in the year ago quarter, which required a provision of $58 million and $163 million, respectively. Our total provision for credit losses on our income statement was $198 million in the quarter, an increase of $180 million from the prior quarter, but a decrease of $10 million from the year ago quarter. This quarter's reserve increase was driven almost entirely by strong volume increases. It is worth mentioning that both disbursements and unfunded commitments have increased over the third quarter of 2022, but the reserve rate has decreased. This is again a positive sign and another indication of the improvement in credit that Jon has already mentioned. Private education loans in forbearance were 1.4% at the end of the quarter, a slight increase from 1.2% at the end of Q2, but unchanged from the year ago quarter. Private education loans delinquent 30-plus days were 3.7% of loans in repayment. That is flat compared to 2023 and the year ago quarter. In the quarter, net charge-offs from private education loans were $95 million, resulting in an annualized charge-off rate of 2.5%, down from 2.7% in Q2 and 2.7% in the year ago quarter as well. As Jon already mentioned, the annualized net charge-off rate for the first nine months of 2023 stands at 2.44% and continues to be better than our internal expectations. NIM for the quarter came in at a strong 5.43%, up from 5.27% in the year ago quarter. Our portfolio has continued to benefit from the rising rate environment with our interest-earning assets repricing faster than our cost of funds over the past year. We do expect our NIM will remain in the low to mid-5% vicinity for the full year of 2023. Third quarter operating expenses were $167 million compared to $150 million in the year ago quarter. Roughly $8 million of the increase over the year ago period relates to higher FDIC assessment fees. As we have mentioned in previous quarters, the increase to the FDIC assessment fee was expected and part of the cost of having access to high-quality, low-cost, stable funding. The remainder of the increase was caused by several factors, including higher originations, more loans on the balance sheet due to a slowdown in consolidations and an increase in staffing versus Q3 of 2022 in our collection center, and finally, the absorption of general inflationary pressure. Finally, our liquidity and capital positions remain strong. We ended the quarter with liquidity of 19.3% of total assets. At the end of the third quarter, total risk-based capital was 12.9%. Common Equity Tier 1 stood at 11.7%. I would also like to point out that GAAP equity plus loan loss reserves over risk-weighted assets was a very strong 15.3%. We remain positioned to grow our business and return capital to shareholders going forward. Back to you, Jon.

Thanks, Steve. Before we turn to guidance, as Melissa mentioned at the opening of the call, Steve and I are joined today by Pete Graham, who beginning tomorrow will become Sallie Mae's next Chief Financial Officer. Before offering Pete the opportunity to say a few words, I'd like to thank Steve for his many years of service and countless contributions to Sallie Mae and for his commitment to ensuring Pete's successful transition. Steve has been a most trusted adviser and, more importantly, a great friend to me during my time here at Sallie Mae, and I know he has played that same role for so many others during his years with the company. I am not alone in wishing him the best in his upcoming retirement and look forward to celebrating him appropriately over the next several months as he continues to be with us in an advisory capacity. With that, it's my pleasure to introduce you to Pete Graham.

Thank you, Jon, Steve and everyone on the Sallie team who have been helping me transition into the company. Like so many families that Sallie Mae serves, access to higher education was critical to my personal career journey, and I'm also the parent of two college graduates. So I feel a particularly deep connection to the company's mission. Steve has built a talented team. And since joining mid-September, I've had the opportunity to work alongside them and benefit from their experience and deep knowledge of the company and more broadly, student lending. I'm thrilled to be joining a team that powers confidence in students and families, while at the same time, driving meaningful growth, continued efficiency, and long-term value for shareholders. I look forward to getting to know the Sallie Mae investment community in the upcoming weeks and months ahead. I'll turn it back to you, Jon.

Thanks, Pete. Let me conclude with a discussion of 2023 guidance. While there have been several moving pieces throughout the year, we are pleased that our earnings outlook for the year is largely in line with our original expectations. As such, we are narrowing the range for diluted non-GAAP core earnings per common share to between $2.55 and $2.65 with the midpoint still around $2.60. As I mentioned earlier this morning, we are absolutely thrilled with the results of a successful peak season in terms of quality, quantity, and cost to acquire. And as such, we're revising the range for origination growth for the year. We now expect 6% to 7% origination growth for the full year of 2023. As Steve and I both discussed, we are also pleased with the continuing stabilization of credit and are committed to continuing our journey back to full normalcy. Overall, gross charge-offs are slightly better than expectations year-to-date, and we expect that we will finish the year slightly better than our original 2023 outlook. As you might remember, in the second quarter of 2023, we implemented a new recovery strategy for defaulted loans, shifting more of our effort in-house as opposed to selling loans sooner to third parties. The net impact of this change is that we expect to receive higher recoveries, but at a slightly later point in time. This timing impact has caused us to revise our outlook on recoveries for the full year of 2023. We now expect total loan portfolio net charge-offs to be in the upper end of our original range and are tightening our guidance to $375 million to $385 million. We still expect that net charge-offs expressed as a percentage of average loans and repayments to be approximately 2.5% or slightly better, driven by growth in our portfolio over the year. We now expect that our noninterest expenses will finish the year slightly above our original guidance and expect to end the year between $625 million and $630 million. Several factors contributed to this performance, chief among them meaningfully higher origination growth, which, coupled with the slowdown in consolidations has increased variable expenses. That, along with the acquisition of Scholly and other inflationary pressures informed the decision to increase noninterest expense guidance for the full year of 2023. While it's too early for us to declare specific 2024 guidance, the question undoubtedly on your mind is expense trajectory for 2024 and beyond. As context, approximately 40% of the growth in noninterest expense this year was driven by a significant increase in FDIC fees. While we cannot speak for the FDIC, we do not anticipate our FDIC premiums continuing to grow at this rate in the future. Expenses related to certain investments in restructurings, while individually insignificant, were collectively meaningful and represent approximately 20% of the noninterest expense growth in 2023. We do not view these expenses as being embedded in our future run rate. It is also worth noting that the inflationary pressures we felt a year ago have somewhat abated. As such, we anticipate noninterest expense growth in the future will be more consistent with longer-term historical averages. Of course, we will provide more detail on expected expense growth in January when we offer earnings guidance for 2024. The results we posted this quarter demonstrate that we are continuing to execute the business plan we have outlined for investors. We are focusing on strengthening our core business and maximizing the value of our brand. We are excited about the loan sale that settled earlier this month and are planning to put our loan sale share buyback arbitrage to work in the fourth quarter, while our stock is trading at what we believe to be a significant discount. As we look forward to the end of the year, we will continue to focus on operational execution, expense management, and NIM to drive results. With that, Steve, let's open up the call for some questions.

Operator Instructions. Our first question comes from the line of Michael Kaye with Wells Fargo.

I wanted to see if you could go over the provision expense for unfunded commitments. Looking at Page 33 in the 10-Q, I count the percentage of provision on unfunded commitments as around 3.5%, taking $116 million divided by $3.3 billion. This has way down from over 6% rate last year. It looks like this dynamic began last quarter too, with the percentage being way down. So I wonder if you could explain the step down, was this a change in accounting? And also, can you talk about that other provision items also in that teams schedule, that jumped to $37 million versus mid-single digits in Q1 and Q2. Was that due to the lower prepayment speeds?

Michael, you really got down into the weeds there. I don't have that schedule in front of me. What I have is that the reserve for unfunded commitments was $153 million or 4.6% compared to 5.35% in the prior year's quarter. There were no accounting changes in our CECL process or procedures. What we are seeing here is an improvement in credit and a lower reserve due to the tightening that Jon referenced in his prepared remarks and that we mentioned during the second quarter earnings call as well. And in terms of the real detailed questions you have there, again, this is my last call, so thanks for serving that one up. Why don't we take that offline with Melissa following the call?

Okay. That $153 million is really broken up into two pieces. There's like $116 million just on provision on new commitments and then there is the separate other provision items, and that like jumps around drastically quarter-to-quarter. This one seeing very high. But putting that item to the side, like I said, when I do my calc that provision rate unfunded commitments that $3.3 billion is way down that percentage. So you're saying that do you think it's just because of credit improvement?

Yes, absolutely. The need to reserve declined as a function of that. And we're more than happy to get into the detailed questions, but let's do that offline.

Okay. I wanted to talk about the share repurchases. Obviously, you did the loan sale, got it closed in Q4. By my calculation, you have about $324 million left in your share repurchase authorization accounted for a total for the year about $581 million, so that leaves about $324 million left. Should we assume you complete that entire $324 million in Q4?

Yes, Michael, we do not give specific guidance on the pace of our share repurchases. I think the way that I would think about it is that was a sort of a longer-term share repurchase authorization. I think we will continue to repurchase shares as we see fit, given conditions and valuation levels in the marketplace. And at whatever point we run through that, we will have run through that.

And it comes from the line of Sanjay Sakhrani with KBW.

Steve, congratulations. It's been a pleasure working with you. Maybe first question might be for Jon and Steve, I guess, a two-part question. Number one is, it feels like next year could be a pretty meaningful year for you guys because the competitive dynamics seem to be working in your favor. You've heard at least a couple of big players kind of talk about moderating growth in this space. I'm just curious how you guys are tactically preparing for that? Would you lean into share gains? And then secondly, I think one of the large players has contemplated the sale of their portfolio. I'm just curious if you've heard the same and what you might want to do there, participate if not?

Yes, Sanjay, let me take each of those to the extent that I can. We absolutely want to take advantage of all of the high-quality growth that we can possibly take advantage of in the marketplace. And I'm doing this from memory, but I think we have grown market share every quarter maybe save one since I joined the company, where data has been available. And I think we will continue to look for opportunities to grow market share. At the end of the day, I think there are various levers we can pull for that. We've talked a lot about just the overall strength of our school teams and relationships with the universities we serve. I think we've talked at great length about the enhancements and the improvements that we've made to our marketing and commercial engines. And I think those have only been strengthened through the recent acquisitions of Nitro and Scholly. And no doubt, I think I said this on the last call, we appreciate that there may be competitors out there that have other things on their mind right now, and we're certainly happy to take advantage of that opportunity to the extent we can. We also have lots of other good competitors out there who aren't distracted right now. And they're competing just as hard as they always have, and we view them as being really good solid competitors that we take seriously. So we will approach next year the exact way that we've approached the last couple of years, which is we're going to make sure that we have the staffing and the resources to go after all the great share that we can. We're going to look to serve and take care of as many customers as fit within our buy box. And I think at the end of the day, the sort of market share will play out for itself. In terms of the sale of portfolios, I'm sure I have heard all the same rumors that you have heard. I have not heard anything declarative. We are not really in the business of buying other people's portfolios. We think our real core competency is sort of the marketing and the origination of these high-quality assets. I would never say never, but you can imagine that buying another portfolio hypothetically speaking brings with it all kinds of operational, regulatory, and reputational risk and so we would factor all of that into any decision for what we were going to do. And at the end of the day, I think we believe our best use of resources is forming new customer relationships, not buying existing customer relationships. But again, I don't think we would ever cut anything off absolutely, but it would be a higher bar for us to think about something like that.

And I guess this is a follow-up question, and this might be sort of related a little bit, but you talked about possibly pivoting to growing the balance sheet in 2024. I'm just wondering, tactically, how should we consider the P&L impact? Will the strategy be to minimize implications to EPS or grow EPS? Maybe you could just help us think about a little bit as we look to 2024.

Yes, Sanjay, we have not made a decision on that. And I think there are as many different sort of ways that one might time pace and sequence a return to balance sheet growth as there are imaginations to sort of bring them up. I think the big thing that we are trying to balance right now is we really do believe in the longer term and now actually not so long term, in the real organic EPS growth and capital generation capability of this franchise. And we've talked pretty extensively about the impact that CECL has had on us for the last couple of years. We've talked about sort of the reasons why we did the loan sale and share arbitrage strategy was in part to manage that capital. But ultimately, we view a great way to enhance our valuation, improve our multiple and reward shareholders is to start to drive good old-fashioned organic balance sheet growth and the high-quality earnings that comes from that. With that said, we always want to recognize the power of the arbitrage strategy that I think we've demonstrated over the last three years. And while the rate environments are a little bit nonconducive right now to that, the equity markets absolutely are. And so I think we are continuing to think through what is that right timing, balancing the desire to be opportunistic and to understand the value creation of additional loan sales and share buybacks in the near term with the desire to get to balance sheet growth in the longer term. So we've not made any decisions on that. As I said in my talking points, we certainly expect to have our next sort of installment of those thoughts as a part of the 2024 guidance. But I think I would just conclude with the statement of the obvious when I got here three years ago, January of 2025 and our last CECL payment seems like a very long time away. When we talk to you next for earnings and guidance, that last payment will be less than 12 months away. And so it is absolutely the right and appropriate time in a multiyear planning context for us to start to think about what that looks like. And again, we look forward to sharing more of that information with you in the quarters ahead.

Next comes from the line of Rick Shane with JPMorgan.

And Steve, this is not gratuitous in any way, but we will really miss you and appreciate all the conversations over the years, so thank you. I apologize for interrupting. I wanted to discuss the gain on sale in the queue further. There was a mention of low mid-single digits. The call noted a $0.31 impact this quarter, which suggests around $100 million pretax, but that's net of provision. Can you elaborate on the mix between gain on sale and provision relief associated with that, so we can better understand what the gain on sale would be?

Rick, I think it's pretty straightforward. I think the release is pretty close to the 6% that we carry on our balance sheet as we release, as we sell a representative sample, and the balance of that should be the gain on sale. Again, we like to not be too precise because our buyers are in the process of distributing all the securities involved in that transaction.

Comes from the line of Jeff Adelson with Morgan Stanley.

And Steve, I just wanted to say congratulations. Just on credit, the net charge-offs do seem like they're starting to stabilize again in this 2.5% range. I know your year-to-date is coming in line with your expectations or better, but the earlier part of the year was so much better. I guess as we think about the next 12 months from here, are you expecting kind of a similar shape of seasonality where the first half of the year improves on the back of some of the dynamics you've discussed before? And just in light of the fact that delinquencies are actually improving year-over-year, are you still thinking you can kind of get down towards this low to high 1 over the next several years? And as kind of a part of that, the second part of the question, what are you seeing on student loan repayments starting this month, any of the early read or indications on how that's potentially hitting the book right now?

Yes, Jeff, it's Jon. I'll address those two points, and Steve can jump in if I overlook anything. There are definitely seasonal trends in delinquency and charge-off rates that vary from quarter to quarter. This is primarily due to the earlier spikes in delinquencies and charge-offs that occur in the initial months after customers begin repayment. Most of our customers start repayment mainly in two major waves annually, which contributes to this seasonality. If you were to speak with our operations team, they would indicate that these seasonal effects have slightly altered due to changes in our credit administration practices; however, they remain largely consistent. I believe the overall trend will continue in a steady manner year after year. Regarding the broader issue of returning to normalcy, you'll recall that we anticipated at the start of this year that most of the changes aimed at reducing charge-off rates were expected to take place in the second half of the year. As we discussed last quarter, these include underwriting adjustments. Each year, we tighten our buybacks based on the latest performance data, and we did so this year in response to last year’s different outcomes. Additionally, we have implemented several pre-delinquency initiatives—service programs tailored to customer risk profiles designed to assist them before they fall into delinquency. We have already discussed the new assistance programs we launched in the second half of the year, which may involve interest payment relief, term extensions, and similar measures. We've also mentioned the enhancements we've made to our recovery processes. We're beginning to see the benefits of these changes now, while some effects may still be pending. More adjustments will certainly be introduced in the fourth quarter and refined next year, so we see continued potential to lower our long-term charge-off rates, but we acknowledge that these can fluctuate with the overall economic environment. We believe that a return to the low 1s or high 2s is achievable in the future. While we expect it to take another year or two to fully reach that point, we plan to make significant progress next year, keeping in mind that macroeconomic factors can influence results in unpredictable ways. As for student loan repayments, the federal program has recently restarted with a year-long on-ramp. We've discussed the generous changes to the payment programs available to borrowers. So far, we have not seen any effect from this on our results. As we continue to analyze academic research, recent studies suggest the anticipated impact of this restart will be minimal. We'll keep monitoring the situation closely, but currently, we do not consider it a significant risk to our performance in the near future.

And just if I could follow up on the expense color you discussed earlier. A couple of moving parts there. I know you talked about 40% from FDIC growth this year, not repeating, 20% from other. So it seems like 40% will potentially repeat next year. Is it fair to say that, that kind of looks more like a mid-single-digit growth rate of expenses next year? And then I just want to confirm your view on longer-term expense growth rate. You said in line with historical, is that something more like a low double or high-single-digit growth rate? Or what do you think about that?

Yes. Great question. And again, I want to be really specific. I think it's too early, Jeff, for us to offer any kind of specific guidance here, but we tried to dimension that so folks could get a sense of it. I think what that says is, but for the FDIC expense and but for the other 20%, I think our expense growth this year would have been in the mid-single digits. And I think that's really sort of the result of the direct inflationary expenses that we experienced and I think the whole economy experienced over the last 18 months and some of the sort of more permanent changes that we have elected to make in staffing for a variety of reasons. I think we were pretty clear in saying those inflationary effects have somewhat abated. We're not back to a normal level of inflation yet, but we're certainly in a very different ZIP code than we were at this time last year. So I would say sort of low to mid-single-digit expense growth is what I would consider to be a more historic norm. And again, I think we'll be paying attention to how does the inflationary environment continue to evolve over the next couple of months before we set guidance. But I think we would certainly hope to have a very different growth rate next year than we did this last year.

And it comes from Arren Cyganovich with Citi.

Congratulations, Steve. It's been a fun 18 years working with you. The stronger originations that you had, was that — you mentioned the applications up, is that something demographically that has happened? Or maybe you talk a little bit about whether or not you're taking additional share in the marketplace?

Yes, Arren, we don't have the latest quarter share data yet. So it's so hard for me to comment on that. But I don't think it is a demographic issue. I think it is at least in large part, the continued maturation and sort of a demonstration of the strategy we've been employing. So if you go back a couple of years, I think we've talked at great length about a couple of things. We've made, I think, some really important investments in our marketing and technology stacks. But I think the biggest change that we've made recently is really doubling down on what we think of internally as our content-based strategies. At the end of the day, if we can help customers with questions, answers, services, insights for things that are beyond student loans still related to their student journey, but beyond student loans, we start to form that relationship, and I think that allows us to open up the top of the funnel to a lot more customers. And so I think what we have seen is, as opposed to relying strictly on really the old days, direct mail, sort of the old days, paid search what we are really trying to do here is to borrow a page out of what some of the very best marketers are doing and saying, we want to attract customers to our brand through more organic and content-based channels. That's obviously a wide open strategy, and we get lots of customers who come in. And so it's not surprising that we're seeing really great growth in applications. And then what I'm also pleased about is I think we're continuing to show real discipline in our underwriting by only selecting those customers that we really think hit our buy box and can generate the kind of high ROEs, loss adjusted ROEs that we would be looking for in our business. So it is absolutely, I'm sure, somewhat a function of the broader competitive set, but it is also, I'm sure, in large part due to the changes in strategy we've made. And we feel great about those results.

And maybe we could talk a little bit about the consolidations away from Sallie, maybe still remain pretty low. It sounds like you didn't have too much in terms of prepay. Is there an expectation that you'll start to see a bit of an increase in that now that we have loans on the government side starting to require payment?

I'll take that. So look, consolidations is very much a rate game. And given the structure of interest rates right now, it's very, very difficult to undercut the rates that are outstanding on the federal loan program. And federal loan program, the benefits of that program in terms of income-based repayment and forms of forgiveness just get richer over time. So we think that people will think twice about consolidating their federal loans even at beneficial interest rates. So we are not anticipating a ramp-up in consolidations or an increase in prepayment speeds. And we note they're down very sharply year-to-date, but we will see what the future brings.

Yes, Arren, if I just sort of add on to what Steve said. I think we've sort of thought about there being two segments of people who might refinance. There are people out there who are looking to lower their total cost of debt, pay off their loans quicker and move on to the next chapter of their financial life. The rate environment makes refinancing of loans problematic for that group for a period of time. Three, four, five years from now, we're in a higher for longer phase and then see lower rates, maybe that changes. But I think that's a long-term path back to consolidation volume. The other, as Steve said, are people who are looking to lower payments. They might have high balances and are looking to squeeze a little bit of extra space out of their budget. Totally agree with what Steve said. If you're in that group, the income-based repayment or income-driven repayment programs from the federal government are a far richer benefit than anything that you would see from a refinance option. So we're not in the refinance business. It could be that others have better or different strategies or views on the segments of customers. But I think when we look at those two things together, we don't see a return to normalcy coming anytime in the immediate future.

We have a question from Jordan Hymowitz with Philadelphia Financial.

First question. You haven't seen the final market share numbers yet. But have you noticed the #2 and #3 competitors pulling back in the market as well? I mean, if you could say like how much is those guys pulling back, and how much is the market growing causing your growth? That would be helpful.

Jordan, I don't have those numbers in front of us, and I certainly don't have them for peak season, which is the, I think, the most relevant sort of part of this question because obviously, fall enrollments are sort of really the question here and will drive next spring's investments. If I think, though, sort of a little bit more broadly, during the pandemic, we absolutely saw universities try to hold cost constant. We absolutely saw them minimize the rate of growth in fees. I think we're back to a more normal enrollment and price increase sort of environment for universities. So I would guess that the growth we have seen is a combination of both growth in market and growth in share, but we will have the market share numbers in the fourth quarter. And as we always do, happy to share those publicly once we have them.

Okay. And as you consider reducing or eliminating, pick your word gain on sale next year, do you still think the student lending is a 30% ROE business and especially in an environment where most financial returns are heading towards single digits?

I mean, Jordan, we continue to underwrite and originate at where to hold these loans in the low to mid-20s, 30% is a little bit of a stretch, but the returns on this asset class are extremely high, to those that are in the business right now.

Okay. And I'll just leave it that I've been following your company since '98. And Steve, I've had a tremendous amount of respect for you, but I do think it's time to get the f*** out of there.

Thank you. And this concludes the Q&A answer period. I will turn it back to Jon Witter for his final comments.

Thank you very much, Carmen. Steve. I'll again say thank you for all your years of service. I really do look forward to the next couple of two, three months saying goodbye appropriately, and I'm sure a lot of our investors will want to follow up with you one-on-one. But again, thank you for everything you've done and your friendship and camaraderie over my last three and a half years here at Sallie Mae. Also, thanks to everyone on the call for your interest in Sallie Mae as always. If there are specific follow-up questions, our IR team is here to help and give assistance, and we look forward to your calls. And with that, Melissa, I will turn it back to you for a little bit of closing business.

Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

And with that, ladies and gentlemen, you may now disconnect.