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Off Wall Street Consulting Group, Inc.

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New Rec: SLM Corporation (SLM: $12.53) May 4, 2017 Position: Sell Target: $8.50 Q1 17a Q2 17e Q3 17e 2016a 2017e 2018e Revs $mm* 274 278.9 280.8 960.2 1,126.4 1,300.6 EPS (GAAP) $ 0.204 0.169 0.169 0.529 0.726 0.852 Y/Y Gr 44.4% 40.6% 41.5% (10.2%) 37.3% 17.3% PE n/a n/a n/a 23.7x 17.3x 14.7x Cnsns Rev* n/a 280.3 291 n/a 1,153 1,406 Cnsns EPS n/a 0.163 0.166 n/a 0.725 0.900

* Revenue is Net Interest Income plus Non-Interest Income, excluding Provision for Loan Losses Shares Out: 438.7M Market Cap: $5.5 B FYE: Dec 31 To speak with the analyst on this name, please email research@offwallstreet.com or call 617 868 7880.

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Concept: 1.  The leading online student loan refinancing companies have launched student loan contributions as an employee benefit. Student loan contributions as an employee benefit should adversely affect SLM by increasing prepayments and loan refinancings in SLM’s portfolio. 2. First Republic’s (FRC) December 2016 acquisition of Gradifi, a platform that enables student loan contributions as an employee benefit, should accelerate the trend of companies offering this benefit. 3. Intuit announced a partnership with Earnest (December 2016) to use verified income data from TurboTax to streamline student loan refinancing. Out of TurboTax’s 28 mm users, over 5 mm are said to have student loans. 4. SLM’s disclosure surrounding the prepayment and refinancing of private student loans in its portfolio has been lacking, and, more recently, even disappearing. In an August 2016 comment letter, the SEC questioned SLM about its constant prepayment rate (CPR). Summary: SLM Corp. (SLM) is the largest originator of in-school private student loans (PSLs) in the US, with roughly 54% of the $9.1 B in annual originations. PSLs are marketed as a way for families to fill the financing gap between the cost of college and the financial aid packages, including federal student loans. PSLs are underwritten by private lenders and often require co-signers. PSLs are unsecured debt, but since PSLs typically cannot be discharged in bankruptcy, PSLs should exhibit better default recoveries than other forms of consumer unsecured debt. The private student loan market is still a relatively new asset class after emerging in the mid-1990s and after growing rapidly during the credit expansion and the for-profit school proliferation of the 2000s. PSL originations peaked in 2008 at over $20 B, but, following the financial crisis and the shutdown of the PSL securitization market, PSL originations fell below $6 B in 2011, and three of the country’s largest banks began to exit the PSL origination business. The exodus of the big banks from the PSL market led to an oligopoly with SLM, Wells Fargo (WFC) and Discover (DFS) funding over 90% of new PSL originations. This oligopoly structure has resulted in very attractive margins for SLM’s PSL origination business, with its credit adjusted net interest margin (NIM) on PSLs well in excess of 500 bp, whereas many other lenders have credit adjusted NIMs closer to 300 bp. While SLM is currently overearning on its loans, the student loan refinancing market appears to be at a critical inflection point, and we expect that SLM’s profitability will decline as new competitors refinance the better credit quality loans in SLM’s portfolio. Three significant events have occurred in the last six months or so that indicate that loans in SLM’s portfolio will soon face both increased prepayments and more refinancing by competitors, thereby negatively impacting SLM’s economics as the average life of its loans decreases. SLM typically has 3% upfront origination expenses that it needs to recoup over the weighted average life of its loans, which it has previously stated to be 6 to 7 years.

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When we previously issued a sell recommendation on SLM in July 2015, we highlighted that online student lenders such as SoFi, CommonBond, and Earnest had entered the student loan refinancing market. SoFi, in particular, was early to adopt a brilliant marketing strategy where it pitched student loan refinancing as an employee benefit to large corporations. While such benefit programs have no cost to the employer, SoFi is able to leverage its sales and marketing efforts to target student loan refinancing candidates with verified employment. CommonBond and Earnest both followed suit and began marketing student loan refinancing as a no cost employee benefit. Starting in the Fall of 2016, all three of these companies (SoFi, CommonBond, and Earnest) launched services to administer payments platforms for employers to make student loan contributions on behalf of their employees, similar to how employers can make a 401 K contribution on behalf of their employees. Currently only 4% of companies in the US offer such “student loan contribution benefits,” but according to a study by benefits consultant WillisTowersWatson, that penetration rate is expected to reach 20% by the end of 2018. Given that SLM’s PSL portfolio has an average interest rate above 8%, SLM’s PSLs are likely the highest cost student debt a borrower possesses (federal undergraduate student loan rates have averaged 4.67% the last 5 years) and any student loan contributions made by employers will likely be directed to pay down PSLs first before paying down federal student loans. Additionally, federal student loans have advantageous features not common in PSLs, such as income based repayment (a borrower pays a certain percent of disposable income and the balance is forgiven after 10 years (if the borrower is a public service employee) to 25 years for private sector employees), so most financial advisors recommend paying down PSLs before federal student loan to retain such benefits. The standard $100 per month contribution being made by many employers participating in such student loan contribution programs would have the effect of shortening SLM’s average loan life by ~32% to 4.3 years from 6.4 years (with an 8% Constant Prepayment Rate, or CPR). The second major recent negative event for SLM is First Republic’s (FRC) December 2016 acquisition of Gradifi, one of the leading administrators of student loan contribution benefits. Gradifi is considered one of the pioneers in administrating student loan contribution benefits, having signed up PriceWaterhouseCoopers (PWC) in September 2015 (8,000 plus PWC employees currently on Gradifi platform), and more recently having signed Penguin Random House and Natixis Global Asset Management. First Republic, which has a $77 B balance sheet and a $14.9 B market cap, had only recently entered student loan

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refinancing in 2015 and significantly grew its originations to over $700 mm in 2016. FRC has stated that it intends to offer student loan refinancing to Gradifi’s customers and has identified student lending as an area of focus so that it can identify its “next generation of clients” to whom it can sell mortgages and investment products in the future. We have already found evidence of FRC dedicating resources to Gradifi by shifting FRC employees over to Gradifi in early 2017 and by posting jobs to hire additional salespeople at Gradifi. The third major negative development for SLM recently is the partnership that Intuit’s (INTU) TurboTax division announced with Earnest on December 13, 2016 for student loan refinancing. Given that student loan interest is tax deductible for single filers with $80 K or less in modified adjusted gross income ($160 K for married couples filing jointly), TurboTax can identify clients with student loans and claims that over 5 mm of its 28 mm users have student loans. With its client’s consent, TurboTax will share client’s verified income data with Earnest to see if such clients are eligible to refinance their student loan. TurboTax will receive a referral fee from Earnest if a refinancing loan is issued and Intuit has highlighted this program to its own investors as a strategic priority. The verified income data (often from directly linked W-2s from an employer) housed in the TurboTax platform has the potential to greatly streamline the student loan refinancing process as well as reduce hard underwriting costs (excluding the referral fee paid to TurboTax). Earnest, which has already refinanced over $1 B in student loans since launching its refinancing product in early 2015, is likely to become an even stronger competitor for SLM as result of this TurboTax partnership. As the refinancing market for student loans has developed, SLM management’s disclosure regarding prepayments and the refinancing of loans in its portfolio has been inconsistent, and, at times, even disappearing. As we noted when we last covered SLM in 2015, the impact from prepayments and third party loan refinancing on SLM’s on-balance sheet portfolio was mitigated by SLM’s practice of selling more seasoned loans that are more prone to prepayment and refinancing into off-balance sheet securitizations whose performance would no longer be reported in its SEC filings. PSLs aren’t likely to be refinanced while a student is still in school, so the age, or seasoning, of the on-balance sheet loan portfolio is a key factor in assessing the impact of prepayments and loan refinancing by competitors. SLM’s company line in its investor presentations regarding total prepayments (voluntary prepayments and defaults) previously was that “following the first year after disbursement, total prepayments have generally ranged about 4%.” That quote was a headline that was displayed above charts showing total

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prepayments for various loan vintages, i.e. 2014 Vintage, etc. in numerous SLM presentations from the time of the NAVI spin-off in May 2014 up until Q1 2016. Quite remarkably, SLM’s investor presentations continued including the “total prepayments have generally ranged about 4%” headline above charts that showed 2011 vintage loans going from having a little over 4% total prepayments at 12/31/14, to nearly 6% at 12/31/15. 2010 vintage loan data that were showing total prepayments of 7% as of 3/31/15 were conveniently removed from SLM’s presentations starting in Q415 due to “insufficient data” according to a footnote. SLM finally removed the “4% total prepayment” headline in its February/March 2016 ABS Vegas presentation, and the previously released slides on total prepayments were removed entirely from SLM’s 1Q16 Investor Presentation for equity investors.

According to SLM’s most recent loan data presentation showing total prepayment data at 3/31/17, the 2011 vintage loans’ total prepayments shoot up to over 8% at 6/30/16 and stay above 8% for the next two quarters through 12/31/16 before reaching 9% at 3/31/17. More concerning for SLM investors, however, is that every single one of SLM’s more recent loan vintages (2012 to 2015) have total prepayment rates that are trending noticeably higher than the 2011 vintage. This accelerating prepayment and loan refinancing activity will increasingly start to negatively impact SLM’s earnings since SLM no longer sells loans into off-balance sheet securitizations. Below is a chart showing SLM’s most recent total prepayment data as of 3/31/17, (Source: SLM Smart Option Student Loan Historical Performance Data Period ended 3/31/17, slide 12):

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SLM’s stock has risen over 76% to $12.53 from its $7.10 levels prior to the November 2016 election based on investors’ relief that Hilary Clinton’s proposed free college plan to households with less than $125 K in income wouldn’t be implemented, plus expectations for higher interest rates that might benefit SLM, and the potential opportunity for SLM if federal graduate student PLUS loans and parent PLUS loans are privatized during a Trump administration. PLUS loans are federally issued student loans to either graduate students or parents that allow students to finance up to the total cost of their education (tuition, room, and board), whereas other federal loans have limits that often fall below the total cost of education. Federal PLUS loans currently require very little underwriting other than that the borrower has no bankruptcy proceedings in the last 5 years and does not have any recent 90 plus day delinquencies on debt. PLUS loans are the student loan market’s version of a no-down payment mortgage, and as such, the addressable market of credit worthy PLUS borrowers is much smaller than the current size of the federal PLUS loan market. In an absolute best-case scenario, if graduate student PLUS loans are privatized by Fall 2018 / Spring 2019 academic year, it adds a few pennies to SLM’s EPS in FY18 and 5 to 10 cents in FY19.

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The “street” is almost unanimously bullish on SLM (with 10 Buys and 1 Hold) and consensus FY18 EPS are projected to grow 27% to $0.90 from the $0.71 midpoint of SLM management’s guidance ($0.70 - $0.72) for 2017. Expectations for continued loan growth and for negligible competitor loan refinancing activity appears reflected in SLM’s valuation, as SLM is trading at 17.3x FY17 and 13.9x FY18 consensus EPS. SLM management only recently acknowledged on its Q416 results conference call that refinancing activity picked up in its portfolio, but has not commented on the potential impact of the 3 major recent events that form the basis of our short thesis.

Due to accelerating prepayments and SLM’s loans being refinanced by competitors, we expect SLM’s FY18 EPS to fall short of consensus, at $0.85, and we expect that the investors will shift from the bullish thesis of loan growth to the realization that SLM’s excessive profitability is in secular decline. We initiate coverage of SLM with a sell recommendation and an $8.50 price target, 32.2% below SLM’s current price. Our $8.50 price target represents 10x our FY18 EPS of $0.85, a slight multiple premium to consumer lenders such as Capital One (COF) and Discover (DFS) that trade at 9.6x and 9.0x, respectively. Our below consensus estimates are based on the expected increase in competition from online lenders offering student loan contribution employee benefits, from FRC’s strategic acquisition of Gradifi, and from Intuit’s recent partnership with Earnest to offer student loan refinancing to its 28 mm TurboTax users.

Shares Borrowable Information: Supply Quantity Quantity On Loan Available to Borrow Date 183.094 mm 2.401 mm 182.132 mm 5.2.2017 Source: Markit/Data Explorers

While reasonable efforts have been made to ensure the accuracy and completeness of this data, no warranty of accuracy, completeness, appropriateness or any other kind is given by Off Wall Street, Markit/Data Explorers or their respective licensees or affiliates in relation to this data. Copyright in securities lending data: Markit/Data Explorers. All rights reserved. Background:

SLM Corp’s history dates back to 1973 when the Student Loan Marketing Association (nicknamed “Sallie Mae”) was formed as a Government-Sponsored Enterprise (GSE) to support guaranteed federal student loans. SLM went public in 1983 and benefitted from its GSE status by being able to issue GSE debt that was perceived to be guaranteed by the U.S. government. SLM began its privatization process from a GSE in 1997 and completed its privatization in 2004. During the credit boom in the first part of the 2000s, SLM issued PSLs, in addition to its primary business of issuing federal student loans (Federal Family Education Loan Program, or “FFELP” loans), which were 97% guaranteed by the

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government. At the height of the LBO boom in April, 2007, a consortium of J.C. Flowers, JPM and BAC offered to take SLM private in a $25 B transaction. The LBO of SLM fell apart in September, 2007 with the JC Flowers consortium claiming there was a Material Adverse Change (MAC) in SLM’s business due to new regulations (the College Cost Reduction and Access Act) that adversely impacted the economics of federal student loans. Once issuance of FFELP loans was halted in 2010 and the US Treasury began directly funding all federal student loans, SLM’s business model lost one of its primary income streams. While the FFELP portfolio and servicing business would be in runoff, the PSL business, although dramatically smaller than its pre-crisis levels, was profitable and growing, due to banks exiting the PSL market. In order to highlight the value of its PSL business, SLM spun-off the legacy FFELP business, its servicing business for US Treasury funded federal student loans, and its pre-crisis PSL loan portfolio into a company called Navient (NAVI) on May 1, 2014.

After the financial crisis, three major banks stopped originating PSLs, likely because the small size of the market ($8 B to $9 B in annual originations) wasn’t worth the headache associated with the regulatory scrutiny and negative public opinion about student loans. BAC stopped originating PSLs in 2009, Citi sold off its Student Loan Corp assets to SLM and DFS in 2010 and 2011, and JPM exited the PSL origination market in 2014. The remaining in-school PSL origination market became an oligopoly, with SLM having over 50% share, WFC having 25% share, and DFS having 10% to 15% share. This lack of competition has allowed SLM to earn a credit adjusted NIM over 500 bp, 2.3% ROAA, and a 16% ROE (23% ROE if leveraged at 10% equity/assets), but also has attracted new competition.

Recognizing the lack of competition in the PSL market, CFG entered the

market in 2009, and multiple venture-backed online lenders (SoFi, CommonBond, Earnest, Darien Rowayton Bank) launched products to exploit the attractive returns available in the PSL market. CFG initially entered the in-school PSL market in 2009 and launched its first refinancing loan product in early 2014, highlighting that the refinancing market for student loans is still in its early stages of growth. CFG, which has a 1,200-branch network, has set the explicit goal to grow its PSL market share to 10% from less than 5% currently.

OWS previously issued a sell recommendation on SLM on July 15, 2015 at

$9.74 based on a short thesis centered on the emergence of the online refinancing lenders cherry picking SLM’s loan portfolio and CFG aggressively growing both its in-school originations and refinancing portfolio. Investor sentiment on SLM turned very negative on SLM shortly after OWS’ initiation primarily due to Hillary

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Clinton campaigning to make public universities free for families earning less than $125 K, and because increased volatility in the legacy federal student loan ABS market related to the delayed repayment was causing spreads to widen for SLM’s PSL ABS, and due to news reports in August 2015 that SoFi was raising a massive $1B financing round at $4B valuation. SLM’s market cap at that time was about $3.5B, so SoFi’s $1B capital raise (closed 9/30/15) at a $4 B valuation proved that SoFi was no longer a start-up competitor to be dismissed. OWS closed its Sell Recommendation on SLM at $6.94 in early October 2015 for a 29% gain in less than 3 months.

While likely unbeknownst to most equity market investors, in October 2015

SLM quietly restated the publicly disclosed Constant Prepayment Rates (CPRs) contained in the monthly servicer reports given to the ABS investors in its securitizations. There was no disclosure in any of SLM’s SEC filings or equity investor presentations regarding this restatement. The CPRs for the three securitizations issued since the May 2014 NAVI spin-off are restated significantly lower than originally reported due to loans that prepaid that were then removed from the securitization pool. The “since issued CPRs” for the three securitizations are restated downward by an average of 2.78 percent points, with the 2014-A deal’s CPR restated from 6.34% to 5.44%, the 2015-A deal’s CPR restated from 7.23% to 5.08%, and the 2015-B deal’s CPR restated from 9.28% to 3.99%. Higher prepayment rates are evidence that borrowers are either refinancing their loans with other lenders or making additional payments beyond what is contractually due.

In early 2016, a regulatory agreement limiting SLM’s balance sheet growth

to 20% per year was lifted, paving the way for a shift in securitization strategy for SLM that would allow it to retain more of the loans it originates on its balance sheet. Prior to the 20% growth limit being lifted, three of the first four securitizations that SLM completed since the NAVI spin-off were accounted for as “sales” where the loans were removed from the balance sheet and the equity tranches in the securitizations were sold to third party investors at a premium above par (typically 8% to 10% premiums), allowing SLM to book “gains on sales of loans” into its earnings. Beginning in 2016, SLM would still access the securitization market as a source of low-cost term financing, but would structure the deals as “financings” where the loans remained on balance sheet and SLM would own the equity tranches in the securitizations.

Due to the elimination of gain on sale income, which essentially pulls

forward income, SLM’s EPS declined 10% from $0.59 in 2015 to $0.53 in 2016. While the change in securitization strategy had a near term earnings hit from the loss of gain on sale income, higher balance sheet growth for SLM longer term has the potential to be accretive, assuming, of course, that the loans SLM retains don’t

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prepay or get refinanced too quickly or default. When SLM previously structured its securitizations as sales, it would receive an 8% to 10% premium relative to the loans’ principal amount at the time of sale, which was recognized as the gain on sale. Now, with securitizations structured as financings, SLM earns its profit through its credit adjusted NIM of roughly 550 bp on declining loan principal balances that are amortizing. The speed of such loan amortization, measured by CPRs and weighted average loan lives, are critical to SLM’s profitability, especially under SLM’s new strategy to retain loans and grow its balance sheet.

While OWS’ 2015 short thesis on loan refinancing competition is being

proved correct for both loans kept on-balance sheet and sold off balance sheet into securitizations, the competition for in-school undergraduate PSLs hasn’t materialized as quickly as we expected. Over the last several years, SLM grew its market share of the undergraduate in-school PSL market to 54% from 50% in 2014. Most of SLM’s market share gains came from smaller competitors outside of the #2 to #4 competitors (WFC, DFS, and CFG). The online lenders (SoFi, CommonBond, Earnest) had initially focused on refinancing both graduate and undergraduate loans as well as issuing in-school graduate loans, but haven’t heavily targeted the in-school undergraduate PSL market yet.

SLM’s competition for in-school originations should now increase, however,

as CommonBond announced on April 25, 2017 that it would start originating both undergraduate and graduate student in-school loans. CommonBond previously only made in-school loans to MBA graduate students. Additionally, NAVI has publicly stated in its investor presentations that it views PSL origination as a growth opportunity once its non-compete with SLM ends on 12/31/18. NAVI, which is permitted by its SLM non-compete to purchase PSLs in the secondary market, has already purchased $225 mm in PSL refinancing loans in 2016 and announced a deal on April 18, 2017 to buy $3.2 B in older PSLs from JPM.

One newer online lender, College Ave, was founded in August 2014 to focus primarily on in-school PSLs, although it also offers refinancing loans and parent loans. College Ave was co-founded by Joseph DePaulo, formerly SLM’s EVP of Banking from 2009 to 2014, who was listed as one of SLM’s top 3 executives in SLM investor presentations at the time of the NAVI spinoff. College Ave announced a $30 mm financing round from Comcast Ventures on April 13, 2017, bringing its total equity capital raised to date to $70 mm, indicating that College Ave should have the resources to grow its in-school undergraduate PSL market share. College Ave, headquartered in Delaware, appears to have already put some of its recent financing round to work, having hired, in March 2017, sales people in California with titles such as “Campus Development – West Region.”

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To achieve its recent market share growth, SLM has lowered its underwriting standards. SLM’s investor presentations from the time of the NAVI spin-off up until the 1Q16 state that SLM receives approximately 1.3 mm loan applications per year and that its approval rate is about 35%. In its 2Q16 investor presentation, SLM states that it still receives approximately 1.3 mm loan applications, but its approval rate is now 40%, implying that SLM’s approved loan applications grew by 65 K loans, or 14.3%, in 2016 to 520 K from 455 K. All three of the underwriting credit metrics that SLM discloses for its originations (FICO scores, % cosigned, % making an in-school payment) likewise declined slightly in 2016 from 2015 levels. 2016 originations had an average FICO of 748, 89% were cosigned, and 55% were making an in-school payments, down from 749, 90%, and 56% in 2015, respectively. Given the delayed seasoning characteristics of student loans, where full principal and interest payments aren’t due until after a 6 month grace period following a student’s graduation, the impact of looser credit standards by SLM may not be visible for several years.

In April 2017, NY State approved legislation to offer free tuition at public universities for families making less than $125 k per year. The plan goes into effect for the fall 2017 school year and starts with qualifying income level caps of $100 K in 2017, $110 K in 2018, and $125 k in 2019. 942 K families, or 75.7% of the total families with college age students in NY State, are expected to qualify for the $125 K income cap. NY is SLM’s largest market, representing 10.3% total education loans (both PSLs and FFELP loans) on SLM’s balance sheet at 12/31/16. Discussion:  1.  The leading online student loan refinancing companies have all launched student loan contributions as an employee benefit. Student loan contributions as an employee benefit should adversely affect SLM by increasing prepayments and loan refinancings in SLM’s portfolio. When OWS last had a sell recommendation on SLM in the summer of 2015, we noted that salespeople at SoFi were highlighting on their LinkedIN profiles that SoFi offered “student loan refinancing as an employee benefit.” Such programs, which have no cost to the employer, typically involve either onsite presentations at an employer’s office by refinance lenders or an employer’s HR department informing employees of such refinancing programs. We admired SoFi’s marketing strategy that leverages sales and marketing spending at the same time as identifying large numbers of potential borrowers with verified employment. The other major online student loan (SL) refinancing lenders, such as CommonBond and Earnest, have started similar programs.

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Such SL refinancing employee benefit programs typically involve no cost to the employer, but employers can choose to subsidize part of the interest rate reduction that employees receive on their refinanced loan. Apple announced in the Fall 2014 a subsidized SL refinancing program for both employees with SLs and employees’ children with SLs, where Apple pays part of the interest rate deduction. One of SoFi’s corporate customers, Meredith Corporation, also allows its employees whose children have SLs to participate in its refinancing program. An HR representative from Meredith stated in a Crains Chicago Business article that 200 Meredith employees were approved for SL refinancing loans within the first 60 days of the August 2016 launch. Separate from offering SL refinancing as an employee benefit, the major new development that was ramping up in 2H16 is that companies have also started offering SL contributions as an employee benefit, similar to how companies can make contributions to their employees’ 401 K plans. The adoption of such SL contribution plans started to emerge when Gradifi (acquired by First Republic (FRC) in Dec 2016) signed up Price Waterhouse Coopers (PWC) in September 2015 for a contribution plan that began in the summer of 2016. PWC, which hires 11,000 new graduates in the US per year, is offering to make SL contributions of $100 per month for up to six years for employees. The typical contribution by employers that have signed up to offer such benefits seems to be $1,200 per year, although the range of announced plans we have found is $500 to $6,000 per year, as shown in Table 1 below.

Table 1: Companies offering Student Loan Contributions as an Employee Benefit

Company Annual $ Amount

Lifetime $ Cap

Benefits Administrator

Nvidia 6,000 30,000 EdAssistGradifi 3,000 10,000 GradifiSoFi 2,400 None SoFiFirst Republic 2,400 None GradifiAetna 2,000 10,000 EdAssistFidelity 2,000 10,000 Tuition.ioMartin Health Systems 2,000 6,000Children's Hospital & Medical Center 2,000 10,000 Tuition.ioTuition.io 1,200 None Tuition.ioPWC 1,200 7,200 GradifiLive Nation 1,200 6,000 Tuition.ioCommonBond 1,200 None CommonBondPowerTex 1,200 7,200Penguin Random House 1,200 9,000 GradifiChegg 1,000 None Tuition.ioChowNow 1,000 Tuition.ioNatixis Global Asset Management 1,000 10,000 GradifiKronos 500 None SoFi

Source: Tuition.io press releases, Bankrate, CNN, OWS Researchhttp://www.bankrate.com/finance/jobs-careers/companies-paying-employee-student-loans-1.aspxhttp://money.cnn.com/2017/03/02/pf/college/bill-student-loan-benefits/

Given PSLs usually are variable rate loans and have interest rates much higher than federally issued SLs, employees receiving SL contribution payments

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from their employers are likely to use the contributions to pay down their high interest rate PSL debt. The average yield of PSL loans on SLM’s balance sheet during the 1Q17 is 8.26% (with 82% variable rate/18% fixed rate) versus the 4.67% average fixed rate for federally issued undergraduate loans the last five years. The interest rates for federal direct unsubsidized loans for undergraduates have fallen dramatically over the last five years (2012 – 6.8%, 2013 – 3.86%, 2014 – 4.66%, 2015 – 4.29%, and 2016 – 3.76%), indicating that the PSLs currently on SLM’s balance sheet (2.1 year average age at 12/31/16) have an interest rate roughly 400 bp higher than the federal SL fixed interest rate for the same vintage year. Additionally, given federal SLs have favorable forbearance protection features relative to PSLs (such as income driven repayment which can lead to loan forgiveness after 10 to 25 years), borrowers logically should pay down PSLs prior to paying down lower interest rate federal loans to preserve their loan forgiveness optionality on their federal SLs. The negative impact to the unit economics of SLM’s PSL business from employers adopting SL contribution employee benefits is rather significant. As Table 2 below shows, if the standard $100/month employer contribution is made to SLM’s average original loan balance of $10 K, a typical 10 year payback period loan (after graduation and 6-month grace period) would be completely paid off in 4.5 years. Given that employer contributions will likely be used to pay down principal, the amount of principal amortization would increase by over 187% during each of the loan’s first 4 years, meaningfully reducing SLM’s interest income. SLM’s interest income from the loan would rapidly decline as more principal is paid down sooner, with interest income dropping 8.9%, 23.5%, 42.2%, 66.7%, and 95.1% in years 1 through 5, respectively, relative to the contractual interest income if the loan had stayed outstanding for its full 10-year maturity. The economic impact would be even worse for SLM if a borrower started receiving SL contribution benefits upon beginning employment during the 6-month grace period following graduation.

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Table 2: SLM - Impact of a $100/month Employer Student Loan Contribution

Term 10 Years After graduation & 6 mos grace period

Interest Rate 8.26% SLM portfolio avg yield at 3/31/17

Loan Pricipal 10,000 Avg original balance stated by SLM

Monthly payment 122.72 Borrower monthly payment, separate from employer contribution

YearOriginal Principal

AmortizationInterest Income

Original Principal

AmortizationInterest Income

Original Principal

AmortizationInterest Income

1 6.7% 800.67 19.4% 729.30 189.2% (8.9%)2 7.3% 745.27 21.0% 569.86 189.1% (23.5%)3 7.9% 680.61 22.8% 393.48 187.8% (42.2%)4 8.6% 612.66 24.7% 204.31 187.0% (66.7%)5 9.3% 538.87 12.1% 26.30 29.2% (95.1%)6 10.1% 460.19 0.00 (100.0%)7 11.0% 371.88 0.00 (100.0%)8 12.0% 277.44 0.00 (100.0%)9 13.0% 174.89 0.00 (100.0%)10 14.1% 63.86 0.00 (100.0%)

Total 100.0% 4,726.35 100.0% 1,923.25 (59.3%)

Source: SLM 1Q17 10-Q (p 49), SLM ABS Vegas Presentation (p 9), OWS Research

No Employer Contribution $100/month Employer Contribution

% Change vs. No Employer Contribution

Full Principal & Interest Payments: 10 Yrs

Full Principal & Interest Payments: 4.5 Yrs

Full Principal & Interest Payment Period Reduced by 5.5 Yrs

Perhaps the even greater competitive threat to SLM’s business from this trend of employers offering SL contribution benefits is that SL refinancing lenders are also the largest administrators or processors of these benefits. When SoFi, CommonBond, Earnest, and Gradifi (now with FRC’s balance sheet) make sales presentations to a corporation’s employees, they are offering to both refinance employees loans in addition to administering the employer contributions. From these refinance lenders’ underwriting standpoint, the employee refinancing a loan may also be a lower risk borrower given the average $1,200 per year in employer contributions being made to pay down such loan. The negative impact to SLM’s unit economics if SLMs loans are refinanced in the first or second year after a borrower graduates could be meaningful, given SLM typically incurs origination costs equal to 3% of the loan’s principal. SoFi, which is the largest online student lender and has funded over $18 B in SLs, personal loans, and mortgages since its founding in August 2011, only formally launched its “SoFi at Work” program to also include SL contribution employee benefits in addition to refinancing benefits on September 19, 2016, so the marketing of contribution benefits is still in the early stages. SoFi states in its press release announcing “SoFi at Work” that it has signed up more than 600 companies, including 7 of the top 10 tech firms in the Fortune 500, 58 of the Vault Law Top 100 law firms, and 11 of the top 50 Banking firms. As the purpose of the press release was to announce the launch of the SL contribution benefit product, many of those 600 existing clients likely hadn’t yet adopted contribution benefits.

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As part of the announcement of “SoFi at Work,” SoFi also announced that it had recently signed Meredith and Northrup Grumman to its platform. CommonBond entered the SL contribution administration market through its July 16, 2016 acquisition of Gradible, which had been developing a payments administration platform for contribution benefits. In its press release announcing the acquisition, CommonBond stated that it planned to launch its SL contribution platform by the end of 2016. CommonBond’s offering to employers would include three elements: SL refinancing, SL contribution benefits, as well as SL advisory services (explaining income driven repayment for federal loans or making extra payments to high interest PSLs). CommonBond stated it had nearly 100 corporate clients as of July 2016, including Mercer, Skadden Arps, Dentons, Betterment, and WeWork. Earnest, which has originated over $1 B in SL refinancing loans since entering that market in January 2015, is poised to become an even more significant competitor in the SL refinancing market due to its partnership with Intuit’s TurboTax announced in December 2016. Earnest currently offers both SL refinancing and contribution employee benefits to corporate customers. Earnest appears to have adequate access funding to meet its expected increase in loan volumes, having issued 4 securitizations in 2016 alone for over $700 mm and having lined up $200 mm in lending capital from NY Life and other insurance companies. In addition to the SL refinance lenders serving as administrators for SL contribution benefits, there are several pure-play administrators of contribution benefits, the most notable of which is cleverly named Tuition.io. Tuition.io has already landed some very large corporate clients, such as Fidelity, Staples, HP, and Live Nation. MassMutual Ventures led Tuition.io’s last venture capital round of $5 mm in November 2015. According to the press release announcing the investment, MassMutual’s investment appears to serve strategic goals as well as financial ones, since the “crushing burden of student loan debt…can delay important choices, like saving for the future” and buying MassMutual’s financial and insurance products. We expect that other SL refinance lenders, such as CFG or Darien Rowayton Bank (DRB), or payroll processors such as ADP or Paychex, may express strategic interest in buying Tution.io, given that several other parties are said to have expressed interest in acquiring Gradifi before its sale to First Republic. Other SL contribution administrators include EdAssist (owned by Bright Horizons, BFAM), which already administers employee tuition reimbursement plans for corporations and has signed up Aetna and Nvidia for SL contribution benefits, as well as several earlier stage startups such as Student Loan Genius, FutureFuel.io, Peanut Butter, and PeopleJoy. Millennials with student debt

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apparently like these catchy company names. Student Loan Genius, appears to have the most traction of the earlier stage SL contribution benefit startups, having raised $3 mm in financing in February 2016 from the venture capital arms of two insurance companies, Prudential and Manulife. Shortly after the financing round, Student Loan Genius formed a partnership with Prudential Retirement to offer Student Loan Genius’ SL contribution benefits product to Prudential Retirement’s defined contribution (401 K) and defined benefit clients. The partnership announced its first client win in November 2016 when it signed one of Prudential’s existing clients, a small publicly traded HVAC manufacturer called Mestek (MCCK). 2. First Republic’s (FRC) December 2016 acquisition of Gradifi, a platform that enables student loan contributions as an employee benefit, should accelerate the trend of companies offering such benefit. Leading benefits consultants expect numbers of US employers offering student loan contribution benefits to increase meaningfully. While SoFi, CommonBond, and Earnest have all only recently started marketing SL contribution benefits in 2H16, First Republic’s (FRC) December 12, 2016 acquisition of the Gradifi is by itself a noteworthy event, given FRC’s scale ($77 B balance sheet, $14.9 B market cap), FRC’s portfolio of business banking customers, and because SL refinancing has recently become one of FRC’s strategic priorities to build a pipeline of future customers. Gradifi was founded in 2014 and announced its Student Loan Paydown (SLP) product on September 30, 2015 when it signed PWC as a client. Implementation of PWC’s SL contribution program only began in July 2016, so 2017 will be the first full year that PWC employees will be on Gradifi’s platform. 8,200 PWC employees were said to have signed up for the benefit as of December 2016. Gradifi’s other major corporate customers include Natixis Global Asset Management and Penguin Random House. FRC was initially a Gradifi customer, having announced it was offering SL contribution benefits on November 3, 2016, whereby employees will receive $100/month during their first year of employment, $150/month during the 2nd year, and $200/month in their 3rd year and thereafter until the SL is repaid. The SL contribution benefit is also available to part-time employees that work at least 20 hours per week and to FRC employees that have taken out educational loans on behalf of their children. Recall that ~89% of SLM’s PSL are co-signed, typically by a parent, and that SLM launched a Parent Loan product in 2016. According to FRC’s CAO and Chief People Officer, Mollie Richardson, on FRC’s 4Q16 conference call, 300 FRC employees signed up for the SL

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contribution benefit on the first day it was offered. FRC was so impressed by the “overwhelmingly positive experience” that its own employees had with Gradifi that it decided to acquire Gradifi, with the deal announced 6 weeks after FRC originally announced it was a Gradifi customer. 600 of FRC’s own employees were said to be using the Gradifi service as of FRC’s 1Q17 conference call. Other suitors likewise apparently recognized that SL contributions benefits are on the verge of dramatic growth, as Gradifi’s CEO reported in an interview in Banking New England that two other companies besides FRC approached Gradifi about an acquisition.

FRC ramped up its SL refinancing portfolio meaningfully last year, refinancing $728 mm of loans in 2016 to bring the total on its balance sheet to $834 mm at 12/31/16, up from $174 mm at 12/31/15. FRC views its entry into SL refinancing as a strategic move, allowing it to build relationships with its “next generation of clients” to which it can sell mortgage and wealth management products. FRC has said that in 2016 more than half of FRC’s total growth in lending relationships came through its SL refinancing product. The acquisition of Gradifi bolsters FRC’s role in identifying employed, credit worthy SL refinancing candidates and helps FRC participate in the “once in a generation opportunity to address the student debt challenge” according to FRC’s COO, Jason Bender, on FRC’s 1Q17 conference call on April 13, 2017.

FRC management spoke positively about Gradifi’s progress on FRC’s 1Q17 call, noting “Gradifi continues to add new employers and their employees each week.” FRC is already receiving positive feedback from its business banking clients, with FRC’s CEO, James Herbert, commenting that he is “delighted in terms of our relationships with businesses that might use our service.” While SLM’s prepayments will increase and its unit economics will worsen dramatically as more of SLM’s borrowers receive SL contribution benefits from their employers, as we noted in the first discussion point of this report, the even more negative impact to SLM is when the administrators of SL contribution benefits, such as Gradifi, simultaneously offer to refinance SLs. On the potential for synergy between Gradifi and FRC’s SL refinancing business, FRC’s CEO stated that “the thing I think is possibly underappreciated, it [Gradifi] is clearly a potentially major feeder for our all-in-one student loan refinance business and we have not even tried to do that yet.”

FRC’s growth plans for Gradifi over the near term are significant. Gradifi’s

CEO has stated that under FRC’s ownership, management plans to increase Gradifi’s 27 person workforce by 30% to 40% over the next 18 months and will expand from Gradifi’s Boston HQ by opening offices in many of FRC’s markets, such as NY, SF, Palo Alto, and LA. We have already found evidence that FRC is devoting internal resources to growing Gradifi after only acquiring it four months

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ago. Based on LinkedIn profiles, it appears that FRC has moved three of its own salespeople in Boston over to sales roles at Gradifi in February and March of 2017. An additional FRC salesperson in LA was moved into a sales role at Gradifi in April 2017. FRC also moved two of its finance/operations employees at its SF HQ over to Gradifi in March and April of 2017. Additionally, we have seen Gradifi posting jobs online for salespeople starting in February 2017, so all evidence suggests that FRC is gearing up to grow Gradifi’s SL contribution benefits platform.

FRC’s relationships in the banking industry overall also appear to be

benefitting Gradifi. On February 1, 2017, the American Bankers Association (ABA) endorsed Gradifi, noting that the ABA’s own due diligence found that Gradifi has a “secure and seamless onboarding process” for employers to join its Gradifi’s SL payment platform. An editorial in the ABA Banking Journal on May 1, 2017 encouraged ABA member banks to not only consider offering SL contribution benefits to their own employees but to also encourage their business banking clients to offer such benefits to their employees. The 20% discount on participant fees and the waived implementation and annual fees that Gradify currently offers ABA member banks would also be offered to any business banking clients referred by ABA member banks. Banks, as well as insurance companies and asset managers, are legitimately concerned that if consumers are too burdened with student debt, consumers will not have the resources to eventually purchase mortgage, investment, or insurance products.

As the penetration of SL contribution benefits by US employers is still currently very low, the negative impact on SLM should accelerate in the coming years. The percentage of US employers that have SL contribution programs was estimated to be 4% by a Willis Towers Watson (WTW) survey in November 2015 of 317 employers representing 9.2 mm employees. WTW later estimated in May 2016 that the SL contribution penetration rate would reach 20% of employers by the end of 2018. Likewise, a survey by Fidelity of employer-sponsored health and wellness programs found that only 13% of the 129 companies that participated in the survey offered SL contribution benefits in 2016, but that 21% said they were considering offering such benefits in 2017. Legislation (H.R. 795) was introduced on February 1, 2017 that would make up to $5,250 in annual SL contribution benefits tax-free for employees. Benefit consultants expect that adoption of SL contribution programs by employers will accelerate even more meaningfully if the tax-free treatment of SL contribution benefits is passed.  3. Intuit announced a partnership with Earnest (December 2016) to use verified income data from TurboTax to streamline student loan refinancing. Out of TurboTax’s 28 mm users, over 5 mm are said to have student loans.

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At its September 21, 2016 Investor Day, INTU highlighted a new strategy that would turn its TurboTax product into a “platform” where verified income data (often through electronically linked W-2s) and financial data (interest paid for mortgages and SLs) can be used to offer TurboTax users refinancing loan products. INTU noted that it has 1 mm to 2 mm users per month logon to TurboTax outside of tax season in order to access their tax returns to apply for mortgages, SL refinancing, or apartment rentals.

On December 13, 2016, INTU formally announced a partnership with Earnest where a TurboTax user’s data (with the user’s permission) can be shared with Earnest to see if such users are eligible for SL refinancing. Given that SL interest is tax deductible for single taxpayers with a modified adjusted gross income of $80 K or less ($160 K for married couples filing jointly), TurboTax users already input their SL interest paid as part of the standard tax filing process. Based on the SL interest logged by users into TurboTax, INTU estimates that more than 5 mm of TurboTax’s total 28 mm users currently have student loans. INTU studied the SL refinancing opportunity carefully prior to announcing the Earnest partnership. At an investor conference on November 30, 2016, INTU’s General Manager of the Consumer Tax Group, Dan Wernikoff, elaborated on INTU’s analytical approach to SL refinancing:

In TurboTax, there’s about $2 trillion of verified income with W-2s associated with it. There’s about $60 B of interest expense stored within it. There’s about $5 B of student loan interest stored. And we can actually interpolate the exact rate people are paying. Anonymously, we can find a solution provider that can offer a better rate. We can propose that they potentially refinance with their consent. [Emphasis added by OWS]

The ability to interpolate the current interest rate a borrower is paying on a loan is an incredibly powerful underwriting data point to a lender looking to successfully refinance that borrower’s loan. Knowing the borrower’s current interest rate should not only enable Earnest to increase its success rate for its refinancing offers, but should also allow INTU to better target its marketing to TurboTax users whose current income and SL interest rate levels suggest a refinancing may be possible in the first place. Earnest has been an innovator in using data analytics in its underwriting process and in offering borrowers customizable loan terms across the maturity curve, such as hypothetically offering 6.1 year loan at a 4.1% interest rate as well as a standard 10 year loan at 5.2% interest rate. Earnest has utilized “read only” access to loan applicants’ linked bank accounts, credit cards, and retirement accounts in order to find data points that suggest responsible or irresponsible

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borrower behavior that may not be reflected solely in a credit score. For instance, a borrower with a relatively low income, such as a librarian, but who has never paid late fees or overdraft fees and who regularly contributes to a 401 K or a savings account, may be a better credit risk than a higher income borrower who spends his/her salary quickly and frequently pays overdraft fees. By using such data analytics, Earnest does not require a minimum credit score for borrowers and is able to expand its pool of eligible borrowers. Once Earnest is armed with the time series of verified income data and interpolated SL interest rates from the TurboTax platform, Earnest’s innovative underwriting approach potentially could refinance a large number of SLs for TurboTax users. INTU will receive a referral fee from Earnest for successfully refinanced loans and has described this partnership as part of its strategy to both increase its roughly $50 average revenue per user (ARPU) and to offer TurboTax users beneficial financial products. While the referral fees Earnest will pay to TurboTax have not been disclosed, several of Earnest’s competitors (SoFi and CommonBond) currently have referral programs for their existing borrowers that pay $100 to $200 per referral. As such referral fee levels are material relative to INTU’s ~$50 ARPU, INTU should be highly incentivized to devote marketing resources to the Earnest partnership.

From a TurboTax user’s standpoint, the amount of time and effort that needs to be spent to fill out an SL refinancing application will also be greatly reduced, given much of the required data is already stored in TurboTax. Likewise, Earnest’s hard underwriting costs (other than the referral fee it pays INTU) should be reduced, since TurboTax users are incentivized to enter their income data correctly and on time in order to receive refunds and avoid IRS penalties, thereby potentially reducing the customer service assistance required on loan applications. INTU has said the impact on its earnings from the Earnest partnership will be small in its FY17 (July), but will increase into FY18 as the partnership ramps up and as the two companies optimize their marketing and underwriting. INTU has indicated that the ~5 mm TurboTax users currently have about $135 B in student debt ($27 K per user), which represents about 10% of the total $1.4 Trillion of both federal and private student loan debt currently owed by in-school students, dropouts, and graduates in the US. TurboTax users’ average income of $71.4 K ($2 Trillion income divided by 28 mm users) is higher than the US median household income of roughly $55 K, suggesting that TurboTax users may be more suitable SL refinancing candidates than other SL borrowers with lower income. In Table 3 below, we model the potential impact on SLM from the TurboTax/Earnest SL refinancing partnership. By INTU’s FY19 (July 2019), we estimate that if 12% of TurboTax users with SLs refinance (613 K of 5.1 mm users

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with SLs) and if 7.5% of those users refinancing have PSLs owned by SLM on balance sheet, then 46 K of SLM’s PSL borrowers will refinance. At an estimated average PSL balance of $7 K per refinanced PSL owned by SLM (assumes some principal has been paid down from the $10 K average original balance) and SLM’s borrowers having an average of 1.25 PSLs from SLM, these 46 K in refinanced accounts alone will result in $402 mm in SLM’s loans being refinanced and a $0.03 EPS hit over a twelve-month period. SLM had $103 mm of on-balance sheet loans refinanced in the 1Q17 ($412 mm annualized), so an incremental $402 mm loans refinanced would be an annual increase of 98% and would make it very difficult for SLM to continue to post the balance sheet growth the “street” expects without noticeably lowering its underwriting standards.

Table 3: Impact on SLM from TurboTax Refinancing Partnersip with Earnest

($)

FY16 FY17 FY18 FY19Intuit Fiscal Year end 7/31/16 7/31/17 Y/Y 7/31/18 Y/Y 7/31/19 Y/YTurboTax Online (TTO) Users - BOP 24,300,000 27,900,000 14.8% 28,458,000 2.0% 29,027,160 2.0%New Customers 9,600,000 6,678,000 (30.4%) 6,811,560 2.0% 6,947,791 2.0%Attrition (6,000,000) (6,120,000) 2.0% (6,242,400) 2.0% (6,367,248) 2.0%

TTO Users - EOP 27,900,000 28,458,000 2.0% 29,027,160 2.0% 29,607,703 2.0%

# TTO Users with Student Loans (SLs) 5,000,000 5,007,185 5,107,329

% of TTO Users with Student Loans 17.57% 17.25% 17.25%% TTO Users that Refinance SLs 1.00% 5.00% 12.00%# TTO Users that Refinance SLs 50,000 250,359 612,879

% that have Private SLs (PSLs) 15.00% 15.00% 15.00%

# TTO Users that Refi that have PSLs 7,500 37,554 91,932

% that have SLM PSLs (on bal sht) 25.00% 40.00% 50.00%

# TTO Users Refi that have SLM PSLs 1,875 15,022 45,966

Avg Bal-SLM PSL Refinanced 7,000 7,000 7,000

Average # of PSLs per SLM Borrower 1.25 1.25 1.25

Total $ Amt SLM PSLs Refinanced 16,406,250 131,438,609 402,202,143

Source: INTU Investor Day Presentation Sept 2016, INTU Press Releases 12/13/16 & 4/26/17, OWS research

The TurboTax/Earnest SL refinancing partnership will likely create greater consumer awareness about SL refinancing among all TurboTax users, such as cosigners of SLM’s loans (~90% of all SLM PSLs) that aren’t the primary borrowers on the loans. One of our colleagues, who doesn’t have any SLs

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outstanding, was shown the following messages while filing his taxes through TurboTax: Save up to $21,810* by refinancing your student loans: 1 in 4 are overpaying on their student loans**, are you one of them? **Average savings over life of loan for all clients of our partner Earnest who refinanced between 1/1/15 and 6/10/16 Checking this box allows TurboTax to use your student loan, contact, income, and employment information, and information about our communications, so you can find and obtain student loan refinancing options, communicate with you about the options, and customize your experience. While it is too soon to quantify, a popular personal financial advice site called Credit Karma (CK) began offering free tax filings in 2017 that could also potentially lead to increased levels of SL refinancing. CK is offering its free tax filing with “no hidden fees” and “no upsells” to paid tax-filings, but CK does make money from referral fees paid by lenders. CK’s core business model is to offer consumers free credit reports and to analyze such credit report data to see if the consumer is eligible for lower rates on auto loans, personal loans, SLs, or credit cards. CK then earns referral fee revenue if the consumer purchases a loan or credit card from one of CK’s partnering lenders. CK’s SL refinancing tool on its website currently displays offers from Earnest, SoFi, CommonBond, Lendkey, and Citizens. If CK utilizes the loan referral fee strategy with its free tax filing service in 2017, some qualified SL refinancing candidates may be referred to partnering lenders, thereby further increasing SL refinancing activity. 4. SLM’s disclosure surrounding the prepayment and refinancing of private student loans in its portfolio has been lacking, and, more recently, disappearing. In an August 2016 comment letter, the SEC questioned SLM about its constant prepayment rate (CPR).

The weighted average life (WAL) of SLM’s loans is a key metric for SLM’s profitability given that SLM incurs origination costs equal to 3% of principal that need to be recouped and since the undergraduate in-school origination business is not likely to be as excessively profitable (550 bp + credit adjusted NIM) in the future due to increasing competition from College Ave, CommonBond, and from Navient when the non-compete ends on 12/31/18. The decreasing WAL of SLM’s PSLs has been obscured by SLM selling three securitizations with $1.8 B in PSLs that contained more seasoned loans off balance sheet from 2014 to 2015, leaving the loans on-balance made up mostly of in-school loans that haven’t fully seasoned (2.1 year weighted average age at 3/31/17), or reached the period when full principal and interest payments are due after the borrower graduates. To be fair to SLM, one of the main reasons it undertook the off-balance sheet securitizations

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was to comply with a previous regulatory limit that capped its balance sheet growth to 20% per year. But, as SLM is now retaining all originated loans in order to grow its balance sheet, it will no longer be able to sell off more seasoned loans that are prime refinancing candidates.

Since its spinoff of Navient in May 2014, SLM’s management has often

referred to its PSLs having a WAL of seven years. While SLM’s CEO, Ray Quinlan, has continued to reference a WAL of seven years (11/30/16 investor conference), starting in October 2016 SLM’s CFO, Steve McGarry, has contradicted the historical company line and referred to SLM’s PSL WAL as being “six years” (10/20/16 3Q16 conference call) or “six and a half years” (2/7/17 investor conference). The shortening WAL of SLM’s PSLs is consistent with the material increase in SLM’s Total Prepayments over the last several years, including those sold off-balance sheet into securitizations that are no longer reflected on the income statement. Total prepayments, which are technically called the “Since Issued Constant Prepayment Rate (CPR)” by SLM, were for a long time described by SLM management as being generally in the 4% range, while actual prepayment data from SLM’s eight securitizations since the Navient spinoff have continually increased to the point that April 2017 data now shows a Since Issued Total CPRs average of 7.55% (range 6.85% to 8.42%). The Since Issued Total CPRs disclosed by SLM are defined as Total Prepayments, which include Voluntary Prepayments (extra principal payments and refinancing to third party lenders) as well as defaults.

In addition to SLM’s PSL borrowers refinancing their loans with the much publicized online lenders (SoFi, CommonBond, etc.) and with Citizens, SLM’s increase in CPRs is also due to the less publicized trend of SLM borrowers making extra principal payments on their loans, known as curtailments or partial prepayments. Given that SLM’s average on balance sheet PSL currently yields 8.26%, nearly twice the rate of recently issued federal SLs, it is financially logical that borrowers are trying to pay down their SLM PSLs as quickly as possible to start to build net worth.

Table 4 below shows the general relationship between the CPR and the

WAL for a 10-year PSL once it enters full principal and interest repayment. For a student borrower that graduates, a PSL typically has three repayment stages. The first stage, the in-school period, allows borrowers to either defer interest, to make interest only payments, or to make small fixed payments, such as $25 month. The second stage, known as the grace period, lasts for six months after the borrower graduates and allows the borrower the same three payment options as when in-school, including deferring payment. The last stage is full principal and interest (P&I) repayment, which is the time period when the borrower has graduated,

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hopefully is employed, and potentially is looking to refinance their SLM PSL or make additional principal payments to pay off the loan as quickly as possible.

Adding together the weighted average years of each stage, with 2 years for

the in-school period (weighted average of loans distributed evenly during a 4 year undergraduate degree), 0.5 years for the grace period, and 5 years for the full P&I period (5 year WAL for a 10 year loan at 4% CPR) gives roughly the 7 year WAL that SLM management has historically referenced. As Table 4 below shows, a change in SLM’s loan portfolio from a 4% CPR to a 10% CPR, reduces the WAL of the loans in full P&I by 0.87 years from 5 years to 4.13 years. Borrowers that receive SL contribution benefits from their employer would have their WAL in full P&I shortened even further, with a $100/month contribution having 2.34 year WAL and a $200/month contribution leading to a 1.56 year WAL.

Table 4: SLM - Impact on a 10-year PSL from Higher CPRs & Employer SL Contributions

Loan Term (Years) 10Avg Orig Loan Balance 10,000Interest Rate 8.26%

Constant Prepayment Rate (CPR) 0% 4% 6% 8% 10% 12% 15% Monthly Contribution 100 200

Impact from EmployerStudent Loan Contributions

Weighted Average Life (WAL, in Yrs) 5.72 4.99 4.68 4.39 4.13 3.90 3.58 WAL 2.34 1.56

% Chg in WAL fr WAL for 4% CPR (6%) (12%) (17%) (22%) (28%) (53%) (69%)

Source: OWS Research

As SLM’s WAL and CPR metrics have worsened, SLM management’s

disclosures regarding such metrics have been contradicting, lacking, and, at times, disappearing. The best way to highlight SLM management’s changing disclosure regarding their WALs, CPRs, and credit approval rates is to quote SLM management directly from SLM conference calls, investor conference transcripts, investor presentations, SEC filings and correspondence with the SEC. Below is the timeline of SLM’s disclosures on its WALs and CPRs:

September 2014 Investor Presentation for Asset Backed Securities (ABS) investors (on SLM’s website, https://www.salliemae.com/about/investors/webcasts/): Slide 16 of this presentation shows that SLM’s first securitization post the spin-off, 2014-A, was priced with a 4% prepayment assumption. 1Q15 Investor Presentation for Equity Investors (filed as an 8-K on 1/27/15): The young age of SLM’s PSL portfolio that is not yet seasoned for prepayments and refinancing to third parties is highlighted by several slides in this presentation.

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Slide 12 states that “Only 3% of our portfolio has been in full principal and interest payment for more than 2 years.” Slide 14 states that the “Weighted Average Age of Loan: ~1.6 years.” April 2015 Investor Presentation for Equity Investors (filed as an 8-K on 4/3/15): Slide 14 shows Voluntary CPR by Origination Vintage for 2011, 2012, and 2013 Vintages. A headline on the slide reads “Following the first year after disbursement, total prepayments [voluntary prepayments and defaults] have generally ranged around 4%.” A footnote on the slide reads that data is as of January 31, 2015. [OWS emphasis added] July 2015 Investor Presentation for Equity Investors (filed as an 8-K on 7/16/15): There is a separate slide for Voluntary Prepayments (slide 32) that shows Voluntary Prepayments for the 2010 vintage loans accelerated meaningfully from about 4% as of March 31, 2014 (13 quarters after the loans’ disbursement) to about 6.5% at March 31, 2015 (17 quarters following disbursement). The following slide (slide 33) shows Total Prepayments (Voluntary Prepayments & Defaults) with the following headline “Following the first year after disbursement, total prepayments generally ranged around 4%.” Total prepayments for the 2010 Vintage visually appear to be about 7%, as shown in the slide below:

SLM 3Q15 Investor Presentation for Equity Investors (filed as an 8-K on 8/21/15): There is a slide on Total Prepayments (slide 28) similar to the one in the July 2015 Investor Presentation (slide 33), except that the 2010 Vintage loan data that was showing rapidly increasing prepayments in the July presentation is not updated to include June 30, 2015 data (17 quarters from the disbursement date for

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2010 Vintage is shown in in both presentations, whereas the 2011 Vintage is marked at 13 quarters (March 31, 2015 data) since disbursement in the July 2015 presentation and marked at 14 quarters (June 30, 2015 data) in the 3Q15 presentation). All of the other Vintages, 2011, 2012, 2013, and 2014 are updated with June 30, 2015 data. Below is a screenshot of Total Prepayments from the presentation:

September 2015 Investor Presentation to ABS Investors (on SLM’s website, https://www.salliemae.com/about/investors/webcasts/): Slide 13 shows that SLM’s Prepayment Speed assumptions for both the $704 mm 2015-A securitization and the $714 mm 2015-B securitization were 4%. October 2015 Servicer Reports to ABS Investors (on SLM’s IR website for ABS investors, https://www.salliemae.com/about/investors/asset-backed-securities/): SLM restates its Since Issued CPR data in three of its securitization trusts (2014-A, 2015-A, and 2015-B) in a footnote in its servicer reports to ABS investors. There is no mention of this CPR restatement in any of financial documents typically reviewed by equity investors, such as SLM’s SEC documents, investor presentations for equity investors filed as 8-Ks with the SEC, press releases or earnings conference calls. Prior to the restatement, the Since Issued CPRs (Total Prepayments = Voluntary Prepayments + Defaults) in all three of SLM’s restated securitizations were much higher than the 4% level that SLM management advertises for total prepayments. The footnote in SLM’s October 2015 securitization servicer reports (slide 11) explaining the restatement reads: Since issued Total CPR calculations found in monthly servicer reports issued on or prior to September 15, 2015 included as prepayments… [$5 mm for 2014-A, $10.6

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mm for 2015-A, and $10.7 mm for 2015-B]…of loans that were removed from the pool by the sponsor [SLM] because they became ineligible for the pool between the cut-off date and settlement date. On October 5, 2015, Since Issued CPR calculations were revised to exclude these loans and all prior monthly servicing reports were restated. The size of the reduction of the Since Issued CPR due to the restatement was sizable for each of the three affected securitizations. The Since Issued CPRs for the 2014-A, 2015-A, and 2015-B securitization were restated from 6.34%, 7.23%, and 9.28% at 8/31/15 down to 5.44%, 5.08%, and 3.99%, respectively. Below is a graph of Since Issued CPR data for SLM’s securitizations as of April 2017, including the restated periods prior to September 2015. Notice how the data for the 3 restated securitizations (2014-A, 2015-A, and 2015-B) ends in September 2015 and is changed to much lower levels.

0.00%

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Sep-14

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5Au

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SinceIssued

CPR

(TotalPrepa

ymen

ts)

SLMSecuri;za;ons'SinceIssuedCPR(TotalPrepayments)

2014-A-Original 2015-A-Original 2015-B-Original 2014-A-Restated

2015-A-Restated 2015-B-Restated 2015-C 2016-A

2016-B 2016-C 2017-A

4Q15 Investor Presentation for Equity Investors (filed as an 8-K on 10/30/15): SLM removed 2010 Vintage loan data, which had total prepayments at 7% as of 3/31/15, entirely from its slide on Voluntary CPRs (slide 27). A footnote claims the removal of the 2010 Vintage loans from the graph is due to “insufficient data.”

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Voluntary CPR data for the 2011 to 2014 Vintages does not appear to be updated with September 30, 2015 data, since 2011 Vintage data is 14 quarters from disbursement in both the 3Q15 presentation (using 6/30/15 data) and the 4Q15 presentation (claims to be using 9/30/15 data). The next slide (slide 28) on Total Prepayments (Voluntary Prepayments & Defaults) shows 2011 Vintage loans at 6%, 2012 Vintage loans at over 5%, and 2013 Vintage loans at over 4% despite the headline on the slide still reading “Following the first year after disbursement, total prepayments have generally ranged around 4%.” SLM 4Q15 Conference Call on January 21, 2016: SLM CEO, Ray Quinlan, states that SLM’s business is “built upon assets that have on average a seven-year life [OWS emphasis added].” Mr. Quinlan goes on to state “the number [of SLM’s loans being refinanced] has been, and is, de minimus, from what we can see. When we think about market share, we think about originations, primarily, but we are protective of the assets that we have, we expect them to go for seven years.” As three of the first four securitizations SLM issued after the Navient spinoff that contained SLM’s more seasoned loans were sold off-balance sheet, the trend of higher total prepayments we have been highlighting was not yet showing up fully in SLM’s earnings since SLM no longer owned the equity of such securitizations. SLM 1Q16 Investor Presentation (filed as an 8-K on 1/29/16): SLM has a slide titled “Analytical Approach to Credit” (Slide 10) that states it receives “~1.3 mm annual applications” and has a “~35% approval rate,” implying that about 455 K loan applications per year are approved. This is the same approval rate disclosed in all of SLM’s presentations since the Navient spinoff. There are no slides whatsoever discussing the Total Prepayment rate, unlike in previous presentations to equity investors, such as the 4Q15 Investor Presentation. Apparently prepayments are no longer a talking point that SLM management wants to highlight when presenting to equity investors. SLM ABS Vegas Presentation to ABS Investors on February 28 to March 2, 2016 (on SLM’s website, https://www.salliemae.com/about/investors/webcasts/): The typical slide showing Voluntary Prepayments is completely removed from the presentation. This is particularly unusual since ABS investors are normally more concerned with prepayment speeds than are equity investors. There is now only a slide showing Total Prepayments (slide 18) with data as of 12/31/15. The 2010 Vintage loan data that was removed from the 4Q15 Equity Investor Presentation is likewise not contained in this presentation. Total Prepayments look to be down slightly from 6% at 9/30/15 for the 2011 Vintage loans, but increased sequentially for both the 2012 Vintage loans (approaching 6%) and the 2013 Vintage loans (approaching 5%). SLM also removed completely the headline that was typically in past presentations that read “Following the first year after disbursement, total

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prepayments have generally ranged around 4%.” There is a slide (slide 22) showing that the third securitization that it completed in 2015, the $701 mm 2015-C securitization, was modeled by SLM with a 4% pricing prepayment speed, similar to the first two securitizations that SLM did in 2015. SLM 2Q16 Investor Presentation for Equity Investors (filed as 8-K on 4/27/16): SLM has the same slide titled “Analytical Approach to Credit” (Slide 10) that was in its 1Q16 Investor presentation, but now states SLM receives “~1.3 mm annual applications” and has a “~40% approval rate” up from the 35% approval rate disclosed in the 1Q16 presentation and every investor presentation since the 2014 spin-off. This 40% loan approval rate suggests that SLM is approving 520 K loan applications per year, up from the 455 K implied by the previously disclosed 35% approval rate. As we outlined in the Background section of this report, SLM’s borrower FICO scores and co-signer rates declined marginally in 2016 to 748 and 89% from 749 and 90% in 2015, which is consistent with SLM increasing its loan application approval rate. SLM Smart Option SL Historical Performance Data Period ended 3/31/16 (on SLM’s website on 5/11/16, https://www.salliemae.com/about/investors/webcasts/): This presentation contains historical performance data related to SLM PSL’s loan defaults and prepayments, including the prepayment data slides that SLM had removed from its 1Q16 Investor Presentation for Equity Investors. As of April 2017, SLM has not included any prepayment data in any general Investor Presentations for Equity Investors since the 4Q15. As can be seen in the slide on total prepayments below (slide 12), 2011 vintage loans have total prepayments running at 6% and 2012 and 2013 loan vintages are trending at noticeably higher CPRs than the 2011 loan vintage. The 2010 Vintage loan data that had 7% CPRs as of 3/31/15 is still not shown. The headline the on this slide that previously said total prepayments were generally around 4% now has been changed to read “following the first year after disbursement, total prepayments have generally ranged round 5%-6%.”

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SLM 3Q16 Investor Presentation for Equity Investors (filed as 8-K on 8/2/16): SLM presents a slide titled “Sallie Mae Bank ABS Structures” (slide 20) that discloses that while its third securitization in 2015, the 2015-C deal priced on 10/19/15, was priced with a 4% prepayment speed assumption, its first securitization deal in 2016, the 2016-A priced on 5/18/16, was priced with a 6% prepayment speed assumption. SEC Comment Letter to SLM dated 8/26/16: The SEC sent SLM a comment letter regarding SLM’s Non-GAAP efficiency ratio, SLM’s changing interest rate sensitivity disclosure, and SLM’s assumptions regarding its prepayment speeds. Specifically, as it relates to prepayment speeds, the SEC clearly asked SLM: “Tell us the level at which you estimate the prepayment assumptions for your loans.” SLM’s Response on 9/9/16 to the 8/26/16 SEC Comment letter: SLM does not answer the SEC’s question regarding the prepayment assumptions for SLM’s loans with any actual, hard data on SLM’s CPR or the assumptions underlying the CPR. Instead of providing hard data, SLM tells the SEC that the “Company considers the CPR a significant accounting assumption and on a quarterly basis the Company’s critical accounting assumption working group reviews all critical and significant accounting assumptions, including the CPR estimates. All significant assumptions reviewed by the working group are updated, as needed, at least annually.” SLM 3Q16 Conference Call on 10/20/16: SLM’s CFO, Steve McGarry, refers to SLM’s PSLs during the unscripted Q&A segment of the call as “an asset that has an average life out of the chute of six years.” This potential Freudian slip by Mr. McGarry, mentioning that PSLs now have a six-year average life, contradicts the claims of a seven-year average life touted by SLM’s CEO at a “street” investor conference the following month.

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SLM Smart Option SL Historical Performance Data Period ended 9/30/16 (on SLM’s website on 11/8/16, https://www.salliemae.com/about/investors/webcasts/): SLM contains a slide on Voluntary Prepayments (slide 11) with the headline “Voluntary prepay speeds trending up as more loans enter P&I [Principal & Interest] repayment.” The slide on Total Prepayments (slide 12), shown below, indicates that the 2011 vintage has had total prepayments running above 8% for the last two quarters and that the 2012, 2013, and 2014 loan vintages all have CPRs materially higher than the 2011 loan vintage. SLM has removed headline from this slide that previously stated “following the first year after disbursement, total prepayments have generally ranged round 5%-6%” and has replaced it with the headline “following the initial few years after disbursement, total prepayments begin to rise more quickly as loans begin to default.” Notice that the CPR for the 2011 loan vintage for the 17th quarter following disbursement is clearly noticeably above 6% in the chart below from the 3Q16 data presentation whereas the 17th quarter for the 2011 loan vintage data for the 17th quarter is at 6% in the chart from SLM 1Q16 loan data presentation that we presented on page 30 of this report.

SLM’s 2nd Response to the 8/26/16 SEC Comment letter dated 11/22/16: After 2.5 months had gone by since SLM filed its first response to the SEC’s comment letter, SLM starts the letter by saying “Thank you for your consideration regarding our comment letter response, which we filed with the Securities and Exchange Commission on September 9, 2016,” indicating that there were behind the scenes conversations between SLM and the SEC. While there was a non-material, $141 K upward adjustment to loan interest income related to estimates of education loan defaults, the major information disclosed was related to the SEC’s previous questions regarding SLM’s CPR. SLM stated that its CPR estimates are based

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partly on the “prepayment curve’s tendency to follow a ramp pattern (i.e., the prepayment rate typically increases during the in-school and early repayment periods, then stabilizes.)” SLM released that its CPR estimates for FY16 are 5.00%, compared with a CPR of 5.12% for FY15. Recall from the chart on page 27 above that as of November 2016 when this response was made, the six securitizations issued by SLM post Navient spinoff had an average Since Issued CPR of 6.32% (range of 5.6% to 7.16%). In other words, every single securitization had a CPR higher than SLM’s 5% estimate. Three of these six securitizations also had their CPR restated lower by SLM since ineligible (prepaid) loans were removed from the deals. The only reason that SLM could employ to justify using a 5% CPR estimate is that the majority of the on-balance sheet PSL portfolio was unseasoned (1.7 year average loan age 12/31/15) and not yet primed for prepayments or refinancing because the majority of the borrowers were still in school. SLM at a “street” Investor Conference on 11/30/16: SLM’s CEO, Ray Quinlan, while discussing SLM’s PSLs boasted about “the long life of those vintages, seven years” and goes on to say “and when we look at the projections for our balance sheet and our income statement, out five, six, seven years, those non-sales, which have a life on them of seven years once they’re in principal and interest and before that while they’re in college greatly amplifies our EPS and their trajectory associated with that.” SLM at a “street” Investor Conference on 12/6/16: In response to a question about refinancing competition, SLM’s CFO responded that SLM doesn’t “see the consolidators targeting our portfolio, but what does happen is some of our loans get swept up in the net as they’re targeting federal consolidation loans. It is a very small percentage of our book. It’s something that we monitor carefully, but at this point in time it’s not really having an impact on our profitability.” Remember Mr. McGarry’s statements here relative to what he says next month on SLM’s 4Q16 conference call. SLM 4Q16 Conference Call on 1/19/17: SLM’s CFO, Steve McGarry, discussed loans refinanced by third parties by saying “Ending loans in full P&I [Principal & Interest] totaled $5.1 B, and this includes the $1.6 B of loans that entered full P&I in the quarter. And associated with this increase in loans going into full P&I, some analysts have noted, as did we, that – we saw a pop of loans being consolidated to third parties. This is something that we obviously watch very closely here at the Company and we are certainly not alarmed in the pattern [OWS emphasis added].” SLM 1Q17 Conference Call on 4/20/17: While SLM said on its 4Q16 conference call on 1/19/17 that it was “not alarmed in the pattern” of its loans being refinanced by third parties, three months later SLM’s CFO, Steve McGarry,

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said on the 1Q17 conference call that SLM is “carefully assessing the types of loans that we’re seeing consolidated away based on pricing, school type, et cetera, to see if there are some preemptive actions that we can take on that front.” Mr. McGarry cautioned investors that in order “to prevent those loans from going away [being refinanced by third parties], we would have to take some pretty radical steps in pricing.” We likewise caution investors that if SLM is going to start cannibalizing its loan interest income by offering existing borrowers lower interest rates, SLM better hope it doesn’t encourage even more borrowers to refinance by putting the idea in their heads. SLM Smart Option SL Historical Performance Data Period ended 3/31/17 (on SLM’s website on 4/25/17, https://www.salliemae.com/about/investors/webcasts/): SLM quarterly loan performance presentation contains a slide labeled Total Prepayments (slide 12) shown below. Notice how the 2011 vintage total prepayments have surpassed 9% and the later vintages (2012 – 2015) continue to have total prepayments trending much higher than the 2011 vintage. Recall from Table 4 on page 24 that we showed that a 10% CPR shaves 0.87 years off the weighted average life (WAL) of a 10 year loan versus a 4% CPR, while a 12% CPR cuts the WAL by 1.1 years relative to a 4% CPR. Similar to how SLM removed all slides on prepayments in its general presentations geared to equity investors, we expect SLM management’s commentary on conference calls regarding its WAL will likewise disappear.

Recent Results: SLM reported 1Q17 revenue (net interest income and non-interest income) of $274 mm that beat consensus of $265.7. The revenue beat was mostly due to

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SLM’s assets re-pricing more quickly than its liabilities following the December 2016 Fed rate hike, causing SLM’s net interest margin (NIM) to come in at 5.96% vs. 5.77% in the prior year. SLM management cautioned that while it doesn’t expect the full year 2017 NIM to stay at the 1Q17 level, it does anticipate that it could come in a few basis points better than the 5.68% reported in 2016. SLM’s reported adjusted EPS of $0.21 beat consensus of $0.15 by $0.06, but after backing out non-recurring items related to allowance for loan loss adjustments ($0.02) and a lower tax rate ($0.01), the clean beat was about $0.03. SLM’s 1Q17 PSL originations (and loan acquisitions) of $1.848 B were up 2.3% Y/Y, which is below the 4.6% full year growth rate implied by SLM management’s 2017 origination guidance of $4.9 B. SLM management attributed the lower growth in PSL originations to its reduction in lending to for-profit schools, which saw originations down Y/Y as SLM deemphasizes these schools. For-profit schools represented 9% ($419 mm) of SLM’s total originations in 2016 and 10% ($430 mm) in 2015. As SLM’s originations are seasonally strong in the 1Q (38% to 39% of full year originations in FY15 and FY16), in order for SLM to meet its 4.6% origination FY17 growth target there would need to be 6% origination growth in the remaining three quarters in FY17. Consistent with how SLM slightly lowered its average FICO and co-signer rates in 2016, we expect that SLM may lower its underwriting standards for the remainder of 2017 in order to meet its origination target. Credit quality during the quarter, which is a reflection on underwriting standards several years ago, came in better than expected even when backing out several one-time items. SLM’s allowance for loan losses (ALL) is designed to cover all charge offs during the next year plus life-of-loan losses on Troubled Debt Restructuring (TDRs). When looking at credit metrics on SLM’s PSL portfolio and excluding FFELP loans (97% credit guarantee by US Government) and a tiny personal loan portfolio ($56 mm), SLM’s $15.6 B PSL portfolio ended the 1Q17 with ALL at 3.61% of PSLs in full principal and interest payment ($5.1 B), versus 3.59% in the 4Q16 and 3.64% in the 1Q16.

SLM’s provision for loan losses (PLL) for the PSL portfolio declined substantially in the 1Q17 to $26.8 mm (0.52% full P&I PSLs) from $42.8 mm (0.84% full P&I) in 4Q16 and $33.8 mm (1.01% full P&I) in 1Q16 due to two revisions SLM made to its modeling assumptions for its TDR loans that together lowered its PLL by $12 mm in 1Q17. The first modeling assumption change, which lowered SLM’s PLL by $8 mm, should be non-recurring, as SLM pushed back the timing of defaults in its TDR loans and lowered the amount it estimated for incremental defaults resulting from shortening the charge-off period for loans to 120 days from 210 days at the time of the Navient spinoff. The second item that lowered SLM’s PLL by $4 mm was related to the March 2017 Fed rate

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increase and the resulting increase in 1-month Libor that has led to higher expected interest income from loans in SLM’s TDR portfolio that continue to pay interest and don’t default. Net Charge Offs (NCOs) plus loan sales as a percentage of full P&I PSLs came in at 0.47% in 1Q17 up slightly from 0.45% in the 4Q16, but down substantially from 0.60% on the 1Q16.

Total expenses in 1Q17 were up 10.4% Y/Y, below the 18.9% growth in revenue (net interest income and non-interest income), demonstrating that SLM has some operating leverage as it grows its balance sheet. SLM’s non-GAAP operating efficiency ratio came in at 36.8% for 1Q17 vs. 40.2% for 1Q16. SLM management has guided a full year 2017 non-GAAP efficiency ratio of 38% to 39%. The “street” bulls on SLM are excited by this operating leverage, but SLM’s servicing costs, which are a function of the age of its PSL portfolio, have not yet fully seasoned, given that only 33% of SLM’s PSLs are in full P&I repayment as of 3/31/17. As loans enter full P&I, SLM’s servicing costs typically increase, as the company has to send out monthly statements and its call centers have to field more calls from borrowers. SLM management commented on the 4Q16 conference call that if it hypothetically cost $1 to service an account before it enters full P&I, it costs $8 to service an account, on average, once its in full P&I repayment, and it costs “many, many multiples of that $8” to service a loan that is delinquent.

A change in the GAAP tax treatment of stock compensation expense reduced the amount of taxes SLM paid in 1Q17 by $6 mm, resulting in a 35% tax rate versus the 37.1% tax rate in 1Q16 and the full year 2016 tax rate of 39.6%. Financial Assumptions:

SLM’s Private Education Loan Y/Y origination growth projected to be 6.1% in 2Q17, 3Q17, and 4Q17, resulting in total FY17 originations of $4.9 B, which is 4.63% Y/Y growth for FY17, in line with SLM management guidance. FY18 Private Education Loan origination growth is 5%, resulting in total FY18 originations of $5.146 B.

Private Education Loans - Loan consolidations to third parties is a line item

disclosed in SLM’s 10-K (2016 10-K, p 56) in a table titled Education Loan Activity. It represents third party loan refinancings that are separate from contractual repayments and voluntary prepayments by borrowers for the on-balance sheet portfolio. Loan consolidations to third parties are modeled to be $150 mm, $175 mm, and $200 mm in 2Q17, 3Q17, and 4Q17, for a FY17 total of $628.7 mm. For FY18, loan consolidations to third parties are modeled to be $225 mm, $275 mm, $285 mm, and $300 mm in 1Q18, 2Q18, 3Q18, and 4Q18, for a full year FY18 total of $1.085 B.

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Private Education Loans - Repayments & Other is a line item disclosed in

SLM’s 10-K (2016 10-K, p 56) in a table titled Education Loan Activity. Repayments & other is modeled to be $475 mm, $500 mm, and $525 mm in 2Q17, 3Q17, and 4Q17, for a FY17 total of $1.910 B. For FY18, repayments & other are modeled to $575 mm, $590 mm, $610 mm, and $625 mm in 1Q18, 2Q18, 3Q18, and 4Q18, for a full year FY18 total of $2.4 B.

The FFELP loan portfolio continues to amortize and there are no acquisitions of

FFELP loans. The period end FFELP loan balances for 2Q17, 3Q17, 4Q17, 1Q18, 2Q18, 3Q18 and 4Q18 are $968 mm, $946 mm, $925 mm, $905 mm, $884 mm, $ 864 mm, and $843 mm.

The personal loan portfolio is modeled to be $100 mm at the end of 2Q17 and

then increase by $50 mm per quarter through the end of 2018. The yields on the Private Education Loan portfolio for 2Q17, 3Q17, and the

4Q17 are estimated to be 8.10%, 8.05%, and 8.08%, while the yield is modeled to be 8.30% throughout 2018. The yield on the FFELP loan portfolio, taxable securities, and personal loans are modeled to stay constant from 2Q17 to the 4Q18 at 3.69%, 2.50%, and 9.05%, respectively. The yield on cash and other short-term investments is modeled at 0.80%, 0.85%, 0.90% in the 2Q17, 3Q17, and 4Q17, respectively, and is estimated to stay at 0.90% throughout 2018.

The interest rates paid on Brokered Deposits go up 5 bp per quarter from 1.55%

in the 2Q17 to 1.65% in the 4Q17 and then stay at 1.65% throughout 2018. The interest rates paid on Retail & Other deposits also increase by 5 bp per quarter from 1.31% in the 2Q17 to 1.41% in the 4Q117 and then stay at 1.41% throughout 2018. The interest rate paid on Other interest-bearing liabilities, which is predominantly SLM’s on-balance sheet securitization financing, increases by 5 bp per quarter from 2.71% in the 2Q17 to 2.81% in 4Q17 and then stays at 2.81% throughout 2018. SLM issued $200 mm of 5.125% Senior Notes due 2022 on April 5, 2017, which are included in SLM’s interest expense and net interest income starting in the 2Q17. The proceeds from these Senior Notes were partly used to redeem SLM’s 6.97% Preferred stock, as described below.

SLM’s Net Interest Margin (NIM) is modeled at 5.90%, 5.80%, and 5.44% in

2Q17, 3Q17, and 4Q17. The 4Q NIM is seasonally lower due to SLM’s need to build cash balances in the 4Q ahead of its seasonally strong loan disbursements in January for spring semesters. SLM’s NIM for 2018 is estimated to be 5.86%, 5.94%, 5.72%, and 5.63% for the 1Q18, 2Q18, 3Q18, and 4Q18.

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Provision for Loan Losses (PLL) are $42.9 mm, $42 mm, and $41 mm for 2Q17, 3Q17, 4Q17, and $151.2 mm for full year FY17. For FY18, Provision for Loan Losses are $46 mm, $45 mm, $43 mm, and $43 mm in the 1Q18, 2Q18, 3Q18, and 4Q18, for full year FY18 of $177 mm. In addition to taking PLL for SLM’s private education loans and FFELP loan portfolio, our PLL estimates for SLM also include a PLL for the growing personal loan portfolio equal to 2% of personal loan originations.

There are no gains on sales of loans modeled since SLM’s strategy since early

2016 has been to retain all loans on balance sheet, although it still uses securitizations as a form of term financing but it retains the equity tranches in such deals.

Other Income, which is primarily Upromise, is modeled to be $14.5 mm, $14

mm, and $14 mm for 2Q17, 3Q17, and 4Q17, for a full year FY17 of $53.8 mm. For FY18, Other Income is modeled to be $12 mm, $15 mm, $14.8 mm, and $14.8 mm for 1Q18, 2Q18, 3Q18, and 4Q18, for full year FY18 of $56.6mm.

Total operating expense is modeled to be $107.4 mm, $112.1 mm, and $113.3

mm for 2Q17, 3Q17, and 4Q17, for a full year FY17 total of $435.5 mm. For FY18, total operating expenses are modeled to be $118.6 mm, $120 mm, $125.1 mm, and $124.2 mm for 1Q18, 2Q18, 3Q18, and 4Q18, for a full year FY18 total of $487.9mm.

Acquired intangible asset amortization expense is modeled to run at $0.115 mm

per quarter from the 2Q17 to the 4Q18 The tax rate is assumed to be 39% in the 2Q17 to the 4Q17, in line with SLM

management guidance. SLM’s tax rate in 2018 is modeled to be 37% in 1Q18 and 39% from 2Q18 to 4Q18.

SLM redeemed its 6.97% Preferred stock on 4/24/17 so there is $0.7 mm of

dividends from such securities included in the 2Q17. There is still $400 mm of preferred stock outstanding with dividends based on 3 month Libor plus 170 bp. Preferred stock dividends are modeled at $3.6 mm in the 2Q17 and $3 mm per quarter from the 3Q17 to the 4Q18.

The diluted share count is modeled to increase by 1 mm shares per quarter from

439.7 mm shares in the 2Q17 to 445.7 mm shares in the 4Q18.

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Risks: If the US corporate tax rate were lowered to the 15% to 20% range being discussed, SLM would benefit since it currently has a 39% tax rate. Several factors could reduce the overall benefit SLM receives from tax reform if other elements of the tax code are changed. First, if personal income tax rates are reduced, SLM’s borrowers may use their incremental tax savings to accelerate prepayment of their PSLs that have interest rates significantly higher than federal SLs. Second, legislation (H.R. 795) has been introduced in early 2017 that would make up to $5,250 in annual employer paid SL contributions tax-free to the employee. Such tax-related legislation may logically be included in overall tax reform. Adoption by employers of SL contribution benefits is expected to accelerate if legislation makes the benefits tax-free to employees. If Graduate student PLUS or Parent PLUS loans are privatized, it could be an opportunity to for SLM to grow its balance sheet and earnings. The rationale for privatizing PLUS loans is that, given there is very little underwriting for such loans by the US government, there would be sizable credit losses due to both outright defaults and from borrowers entering income driven repayment plans where principal is forgiven after 10 years (if the borrower worked in a public service job) to 25 years (if the borrower has paid 20% of his/her discretionary income during the repayment period). Any privatization of either of the two PLUS programs would result in substantial number of less credit worthy borrowers (students) not receiving financing from the private sector, and thus is likely to face opposition from advocates for expanded education access. SLM management has stated that student loan reform appears to be behind tax and healthcare reform on the Trump administration’s list of priorities.

In an absolute best-case scenario, if Graduate PLUS loans are privatized in time for the Fall 2018 / Spring 2019 academic year, it might add a few pennies to SLM’s EPS in FY18 and 5 to 10 cents in 2019. We expect that loans to credit worthy graduate school borrowers would be at lower margins than SLM currently makes on undergraduate PSLs, given the increasing competition from online lenders (SoFi and CommonBond) as well as from Navient, which has indicated it plans to originate PSLs once its non-compete with SLM ends on 12/31/18. Additionally, SLM has noted that it would likely need to raise equity capital in order to take advantage of any meaningful amount of Graduate PLUS originations.

Private student loan demand is tied to the availability of other financing alternatives, such as more advantageously priced federal student loans. If federal student loan limits were to decline or grow slower than college tuition costs, there could be increased demand for PSLs. Similarly if college tuition costs were to

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grow faster than federal loan limits, scholarships, grants, and work-study limits, the residual funding needs could result in increased demand for PSLs.

If banking regulation is revised to allow SLM to operate with less equity capital, SLM could return capital to shareholders. SLM currently has 12.3% Tier 1 Capital to Risk Weighted Assets vs. the 8.0% required to be “Well Capitalized.” SLM would likely return capital through a dividend, unless SLM wanted to buy its stock back at its current 2.9x tangible book valuation (tangible book value to common is $4.26 at 3/31/17). Currently, SLM only buys back a small amount of stock to offset employee stock dilution. If Graduate student PLUS loans are privatized, SLM would likely have to retain capital for such loan growth.

Wells Fargo, which is the #2 competitor in PSLs with a 25% market share, has suffered negative publicity over creating accounts for customers without their permission. If such negative publicity continues for WFC, this could lead to market share gains for SLM. While WFC reported PSL originations were down 4% Y/Y in 1Q17, SLM’s origination growth of 2.3% Y/Y in 1Q17 was below its full year 4.6% target due to a reduction in lending to for-profit schools. College Ave, a SL lender founded by a former SLM executive in 2014, recently hired a sales person in California to focus on in-school PSLs at west coast universities, indicating that other competitors besides SLM may be going after WFC’s sales as well.

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Financial Projections:

Qtrly Income Statement 1Q17a 2Q17e 3Q17e 4Q17e 1Q18e 2Q18e($ mils)Total Interest Income 329.5 330.9 339.8 364.9 397.8 393.7Total Interest Expense 61.4 67.0 72.9 85.7 89.8 89.5Net Interest Income (NII) 268.1 263.9 266.8 279.2 308.1 304.2Provision for Loan Losses (PLL) 25.3 42.9 42.0 41.0 46.0 45.0Net Interest Income after PLL 242.8 221.0 224.8 238.2 262.1 259.2Gains on sales of loans, net 0.0 0.0 0.0 0.0 0.0 0.0Gains (losses) on derivs & hedges (5.4) 0.0 0.0 0.0 0.0 0.0Other non-interest income 11.3 14.5 14.0 14.0 12.0 15.0Total non-interest income 6.0 14.5 14.0 14.0 12.0 15.0Compensation & benefits 55.5 58.0 58.0 58.0 60.0 61.0FDIC Assessment Fees 7.2 7.4 7.6 7.8 8.1 8.0Other operating expenses 40.0 42.0 46.5 47.5 50.5 51.0Total operating expenses 102.7 107.4 112.1 113.3 118.6 120.0Acq intangible asset amortization 0.1 0.1 0.1 0.1 0.1 0.1Restructuring & reorg expense 0.0 0.0 0.0 0.0 0.0 0.0Pre-tax income 146.0 127.9 126.6 138.8 155.4 154.1Income taxes 51.0 49.9 49.4 54.1 57.5 60.1Net income attributable to SLM 94.9 78.0 77.2 84.7 97.9 94.0Preferred stock dividends 5.6 3.6 3.0 3.0 3.0 3.0Net income attrib. to SLM common 89.4 74.4 74.3 81.7 94.9 91.0Diluted EPS 0.20 0.17 0.17 0.18 0.21 0.21F.D. Shares 438.7 439.7 440.7 441.7 442.7 443.7

Y/Y % Change 1Q17a 2Q17e 3Q17e 4Q17e 1Q18e 2Q18e

Total Interest Income 32.1% 29.6% 24.7% 21.6% 20.7% 19.0%Total Interest Expense 55.1% 57.9% 48.1% 57.0% 46.2% 33.5%Net Interest Income 27.7% 24.0% 19.5% 13.8% 14.9% 15.3%Provision for Loan Losses (PLL) (22.4%) 2.6% 0.5% (5.1%) 81.8% 4.9%Total non-interest income (71.1%) (8.4%) (39.0%) 49.7% 101.1% 3.4%Total operating expenses 10.5% 13.3% 12.4% 15.6% 15.5% 11.7%Net income attrib. to SLM common 47.0% 43.2% 43.8% 26.2% 6.2% 22.3%Diluted EPS 44.4% 40.6% 41.5% 24.4% 5.2% 21.2%

As a % of Revenue* 1Q17a 2Q17e 3Q17e 4Q17e 1Q18e 2Q18e

Revenue (NII + Non-interest income)* 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Net Interest Income 97.8% 94.8% 95.0% 95.2% 96.3% 95.3%Non-interest Income 2.2% 5.2% 5.0% 4.8% 3.7% 4.7%Provision for Loan Losses (PLL) 9.2% 15.4% 15.0% 14.0% 14.4% 14.1%Total Operating Expenses 37.5% 38.6% 39.9% 38.6% 37.1% 37.6%Pre-tax income 53.3% 46.0% 45.1% 47.3% 48.5% 48.3%Tax Rate 35.0% 39.0% 39.0% 39.0% 37.0% 39.0%Net income attributable to SLM 34.6% 28.0% 27.5% 28.9% 30.6% 29.4%Preferred stock dividends 2.0% 1.3% 1.1% 1.0% 0.9% 0.9%Net income attrib. to SLM common 32.6% 26.7% 26.5% 27.9% 29.6% 28.5%

* Revenue is net interest income plus non-intereset income, excluding provision for loan losses.

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Annual Income Statement FY14a FY15a FY16a FY17e FY18e($ mils)Total Interest Income 674.3 831.1 1,077.2 1,365.0 1,619.5Total Interest Expense 95.8 128.6 185.9 287.1 375.6Net Interest Income (NII) 578.5 702.5 891.3 1,078.0 1,244.0Provision for Loan Losses (PLL) 85.5 90.1 159.4 151.2 177.0Net Interest Income after PLL 493.0 612.4 731.9 926.8 1,067.0Gains on sales of loans, net 121.4 135.4 0.2 0.0 0.0Gains (losses) on derivs & hedges (4.0) 5.3 (1.0) (5.4) 0.0Other non-interest income 39.9 41.9 69.5 53.8 56.6Total non-interest income 157.3 182.6 68.8 48.5 56.6Compensation & benefits 129.7 159.0 183.5 229.5 245.0FDIC Assessment Fees 0.0 0.0 10.8 30.0 32.4Other operating expenses 143.2 190.1 191.2 176.0 210.5Total operating expenses 273.0 349.1 385.4 435.5 487.9Acq intangible asset amortization 5.2 1.5 0.9 0.5 0.5Restructuring & reorg expense 38.3 5.4 0.0 0.0 0.0Pre-tax income 333.8 439.1 414.4 539.3 635.2Income taxes 140.0 164.8 164.1 204.4 244.6Net loss attributable to min. interests (0.4) 0.0 0.0 0.0 0.0Net income attributable to SLM 194.2 274.3 250.3 334.9 390.6Preferred stock dividends 12.9 19.6 21.2 15.1 12.0Net income attrib. to SLM common 181.3 254.7 229.1 319.7 378.6Diluted EPS 0.42 0.59 0.53 0.73 0.85F.D. Shares 432.3 432.2 432.9 440.2 444.3

Y/Y % Change* FY14a FY15a FY16a FY17e FY18e

Total Interest Income NA 23.3% 29.6% 26.7% 18.6%Total Interest Expense NA 34.2% 44.5% 54.4% 30.8%Net Interest Income NA 21.4% 26.9% 20.9% 15.4%Provision for Loan Losses (PLL) NA 5.3% 77.0% (5.2%) 17.1%Total non-interest income NA 16.1% (62.3%) (29.6%) 16.8%Total operating expenses NA 27.9% 10.4% 13.0% 12.0%Net income attrib. to SLM common NA 40.5% (10.0%) 39.5% 18.4%Diluted EPS NA 40.5% (10.2%) 37.3% 17.3%

* N/A due to spin-off of NAVI

As a % of Revenue* FY14a FY15a FY16a FY17e FY18e

Revenue (NII + Non-interest income)* 100.0% 100.0% 100.0% 100.0% 100.0%Net Interest Income 78.6% 79.4% 92.8% 95.7% 95.6%Non-interest Income 21.4% 20.6% 7.2% 4.3% 4.4%Provision for Loan Losses (PLL) 11.6% 10.2% 16.6% 13.4% 13.6%Total Operating Expenses 19.5% 21.5% 19.9% 15.6% 16.2%Pre-tax income 45.4% 49.6% 43.2% 47.9% 48.8%Tax Rate 41.9% 37.5% 39.6% 37.9% 38.5%Net income attributable to SLM 26.4% 31.0% 26.1% 29.7% 30.0%Preferred stock dividends 1.8% 2.2% 2.2% 1.3% 0.9%Net income attrib. to SLM common 24.6% 28.8% 23.9% 28.4% 29.1%

* Revenue is NII plus non-intereset income, excluding PLL.

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Financial Metrics:

($ mils) At 3/31/17

Total Assets 19,236.5Available for sale investments 216.9Loans held for investment, net of ALL 16,562.2Accrued interest receivable 838.5

Deposits 13,361.9

Book Value 2,433.4Series A Preferred Stock* 165.0Series B Preferred Stock 400.0Book Value available to Common 1,868.4Acquired intangible assets, net 0.7Tangible Book Value avail to Common 1,867.6 Tangible Book Value - Common - Per share 4.26

Price/Tangible Book Value 2.9x

Share Price 12.53FD Shares 438.7

Equity Market Capitalization 5,496.9

OWS 2017 EPS 0.726OWS 2018 EPS 0.852

2017 P/E - OWS Est. 17.3x2018 P/E - OWS Est. 14.7x

Consensus 2017 EPS 0.725Consensus 2018 EPS 0.900

2017 P/E - Consensus 17.3x2018 P/E - Consensus 13.9x

*SLM's Series A Preferred was redeemed on 4/24/17with proceeds from 5.125% Senior Notes due 2022