SLM Corporation (SLM) Earnings Call Transcript & Summary

Welcome to the Sallie Mae Investor Forum 2025 Conference Call. [Operator Instructions] I would now like to turn the call over to Kate deLacy, Senior Director and Head of Investor Relations. Please go ahead.

Thank you, Cory. Good evening, and welcome to the 2025 Sallie Mae Investor Forum. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our CFO; and Melissa Bernau, Managing Vice President of Strategic Finance. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind that our entire presentation today constitutes forward-looking statements and information and is based on various and multiple assumptions described in our presentation. Nothing in this presentation is intended to be used as guidance. The frameworks, models, projections, future-oriented estimates and assumptions set forth in this presentation have been prepared for illustrative purposes only, are forward-looking in nature and are not intended as a substitute for more detailed modeling. Actual results may differ materially from the projections of estimates modeled herein. Statements that are not historical facts, including statements about our beliefs, opinions or expectations and statements that assume or are dependent upon future events are forward-looking statements. Forward-looking statements and information are subject to risks, uncertainties, assumptions and other factors that may cause actual results in the future to be materially different from those reflected in the forward-looking statements. These factors include those discussed on Page 2 of our written presentation materials and in our filings with the SEC. Listeners should refer to those factors in connection with today's presentation. The company does not assume any obligation to update, revise or supplement any forward-looking information to reflect actual results, changes in assumptions or changes in other factors that occur after the date of this presentation. Thank you. Now I will turn the call over to Jon.

Kate, thank you. Good evening, everyone, and thank you for joining us for Sallie Mae 2025 Investor Forum. We're excited to have you here with us, as we share how our strategy is evolving and the potential implications for the future. Tonight, we will dive into key updates on PLUS volume and highlight our recently announced private credit strategic partnerships business. Our goal is simple that you leave this session energized about what is ahead for Sallie Mae and with an enhanced understanding of our evolved strategy and investment thesis. As a starting point, I'd like to take a moment to reflect on what makes our franchise unique. Our mission is clear: to provide students and their families with the products and services needed to confidently and successfully navigate their higher education journey. This starts in high school when students and their parents are making decisions about where to attend college, what to study and how to finance their journey. It continues through and immediately after their higher education experiences to ensure that students get the most out of their studies and transition smoothly into their adult lives. As highlighted on Slide 3, the franchise we have built to deliver on this mission is powerful and has several notable parts. First, and at its core, is an exceptional customer acquisition and engagement engine paired with a market-leading brand that has become synonymous with higher education. In 2025 alone, we successfully acquired nearly 4 million new members, including approximately 2/3 of all college bound freshmen along with their parents, which is up more than 30% from just 3 years ago. Second, and equally important, we have built a highly effective underwriting and pricing capability. Our proprietary models, refined over decades of experience in student lending, go far beyond traditional FICO-based approaches. By leveraging unique borrower insights and predictive analytics, we have created a smarter, more dynamic credit framework that has consistently elevated portfolio quality. As reflected in our strong NCO performance and high ROEs, these advancements have driven measurable improvements in the underlying credit quality of our portfolio over the past few years, a competitive advantage we expect will continue to strengthen in the years ahead. Third, through our bank and securitization capabilities, we have built a funding model that delivers consistent and attractive net interest margins in the low- to mid-5% range and remains resilient across rate environments. That resilience comes from a disciplined asset liability alignment, a critical strength given that we offer both fixed and variable rate loans that carry a weighted average repayment term of 6 to 7 years. Finally, we have a scalable, reliable and effective servicing engine that supports students throughout their journey from enrollment to graduation and beyond. This fixed cost foundation creates powerful operating leverage as volume scales, driving improved economics and reinforcing a business model designed for sustainable growth and long-term value creation. Building on this strong foundation, over the last 5 years, we have been pursuing a thoughtful, deliberate and evolutionary strategy. Phase 1 of this strategy spanned roughly 2020 to 2023, a period marked by the phased implementation of the CECL framework. During this time, we observed a significant arbitrage opportunity in the market between our equity valuations and the premiums available through loan sales. To optimize capital, meet our CECL requirements and capitalize on this valuation gap, we maintained a flat balance sheet, executed loan sales and deployed the proceeds to aggressively repurchase shares. Approximately 2 years ago, as we approach the end of our CECL phase-in period, we launched the second phase of our strategy designed to reignite balance sheet growth. We believe that meaningful origination expansion coupled with loan sales to moderate growth and a steadfast focus on expense management to deliver both organic earnings growth and generous capital return to our shareholders, as seen on Slide 4. We have executed well on this strategy. Starting on Slide 5, we grew originations and market share in full year of 2024 by 10% and 12%, respectively, over a full year of 2023 through a combination of operational, sales and marketing enhancements. We have steadily transitioned into balance sheet growth, increasing the proportion of revenues from predictable sources. At the same time, we maintained rigorous cost control, unlocking powerful operating leverage. Importantly, we returned considerable capital to shareholders through dividend increases and share repurchases totaling almost $800 million throughout 2023 and 2024. In addition to driving growth and operational efficiency, we have also made meaningful progress in reducing credit risk and earnings volatility, further strengthening the foundation of our business. As you can see on Slide 7, over the past several years, we have implemented several underwriting enhancements that have improved the underlying credit quality of our portfolio. Since these changes were put in place, we have improved our average FICO and approval by 5 points and increased our co-sign rate by more than 4 percentage points. Because of the deferred nature of our loans, it takes some time for these underwriting changes to materialize within repayment vintages. Over the next several years, loans originated under discontinued strategies will represent a steadily diminishing share of vintages and during full P&I repayment, declining from an estimated 8% in 2025 to only 3% by 2028. This shift creates a powerful tailwind that we expect to accelerate over the next several years, holding all else equal. As seen on Slide 8, since the last investor forum, the market has recognized this progress based on both absolute and relative TSR metrics. We believe investors are appreciating the strength and consistency of our execution. Although we are incredibly excited about this progress and performance, several developments have recently emerged that we believe individually and collectively have the potential to further enhance our strategy and vision. With that, let me turn the call over to Pete to talk about these developments.

Thanks, Jon. The first development centers on changes to the PLUS program introduced in HR1 which we expect to significantly increase our originations over the coming years. As we have shared previously, we believe that we are uniquely positioned to serve students and families and support our school partners through this period of transition. Based on the final legislation, we anticipate that the new federal lending limits could translate into an additional $4.5 billion to $5 billion in annual private education loan originations for Sallie Mae once the shift from prior programs is fully complete. We've been engaging in significant readiness planning for this opportunity, evaluating specific programs to best serve these borrowers, designing marketing plans to target a new cohort and using this exercise to evaluate current processes for areas of improvement. As you can see on Slide 11, this includes a focus on marketing strategies, improved capabilities from applications to servicing as well as new alternative funding structures to support growth. Based on this research and a number of assumptions as reflected in this presentation, we have provided our estimate for PLUS volume growth over the next 4 years on Slide 12. The second development is the growing opportunity within our attractive customer franchise. As mentioned earlier, we now acquire approximately 4 million members annually, including 2/3 of all college-bound freshmen and their parents each academic year. Despite this impressive customer base, less than 10% of these relationships resulted in a private student loan from Sallie Mae during the 2025 peak season. While this ratio is likely to increase for PLUS reform many of these customers will not need private student loans while in school, but they may need, however, our other products and services to help them navigate their educational journey. Maintaining and expanding these relationships through school and beyond has the potential to create a large and valuable customer arrangements. This customer acquisition and engagement engine not only improves our customer acquisition costs in an environment where most competitors are seeing rising costs, but also serves as a scalable pipeline that can feed other business avenues. Beyond new customer acquisition, we've seen meaningful opportunity within our existing customer base. Specifically, while less than 10% of these customers ultimately apply for loan, just under 50% of applications are approved by our bank. The remaining customers, many of whom are high-quality borrowers, represent a significant untapped customer segment. This gap underscores the potential to introduce innovative funding solutions and risk-sharing strategies that broaden access, deepen relationships and drive growth. We continue to value the advantages that our bank provides and expect it to remain a cornerstone of our strategy and funding model. However, as a regulated bank, the capital and reserves we are required to maintain along with other regulatory constraints limit the economic viability of certain customers and products. This opportunity cost will only grow as PLUS reform is fully phased in. While there are segments that we will not pursue under any circumstances, the emergence of private credit offers a powerful complement to traditional bank funding. It provides us with greater flexibility to optimize the value of our customer base, capture future PLUS volume, all while preserving underwriting control and strengthening our strategic position. This brings us to our third development, which is the rapid growth in both the scale and sophistication of private credit markets. Over the past decade, the private credit market has experienced remarkable growth. Assets under management have expanded from roughly $300 billion in 2009 to $2.3 trillion today. This sustained momentum underscores the strength and resilience of private credit as an asset class and its increasing role in global finance. What's even more compelling is how this growth has transformed the market scope. Historically, private credit was concentrated in mid-market sponsor lending, an approximately $1.5 trillion opportunity. Today, it has evolved into a $50 trillion-plus total addressable market, diversifying well beyond corporate lending and asset-backed finance and consumer credit, driven by strong demand from institutional investors for yield generating assets. Despite this tremendous growth, private credit penetration in the higher education market remains relatively low, signaling significant room for expansion and innovation through strategic partnerships and new distribution models. This evolution sets the stage for Sallie Mae to capitalize on unique opportunity, establishing a capital-light fee-based revenue business that serves as a third funding strategy, complementing our existing bank balance sheet and loan sales strategies. As a regulated institution, our bank's ability to grow is naturally constrained by capital requirements and risk appetite. By creating alternative funding capacity through private credit partnerships, like the one we just announced with KKR, we can scale originations, diversify revenue and optimize our balance sheet without sacrificing underwriting control or customer relationships. These partnerships can enable us to originate high-quality loans and distribute them off balance sheet, tapping into deep pools of institutional capital while generating capital-light fee-based income from origination, servicing and asset management. We believe this approach will enhance earnings predictability, reduce reliance on gain on sale margins, position Sallie Mae to meet growing demand with a more resilient growth-oriented model, ultimately driving sustainable shareholder value. Importantly, we expect this new business to deliver earnings streams and have capital requirements that, in many respects, are superior to our current funding options. Building on these insights, we are continuing to evolve our strategic framework to create a more dynamic and diversified enterprise. We envision Sallie Mae as a company with 2 complementary parts. The first, our traditional core business. We'll continue to leverage our legacy strengths by maintaining a high-quality growing portfolio of bank-funded private students loans. The second, our alternative growth engine will harness our deep customer relationships, differentiated solutions and marketplace capabilities, along with innovative funding strategies to develop asset-light businesses with attractive economics and scalable growth potential. Our recently announced partnership with KKR represents a significant step in realizing this strategic vision. We expect this inaugural partnership to serve as a foundation for building this alternative lending business. Our journey towards this partnership began in 2023 with early conversations that gained meaningful traction throughout 2024. And in early 2025, we engaged in the formal process culminating in the agreement we announced just a few weeks ago. This partnership is designed with both scale and strategic longevity in mind. We expect it to support significant annual volume while reinforcing our long-term growth objectives. The structure includes a fee framework that is designed to provide consistency of revenue and aligns with our commitment to predictable earnings. Importantly, the strategic partnership approach offers a distinct advantage compared to traditional loan sales and balance sheet funding. We believe the economics under this model provide greater flexibility, capital efficiency and risk diversification. While there will be trade-offs inherent in shifting from the current loan sale model as we will be selling new originations with a fair value closer to book value at the time of sale, we believe these are outweighed by the long-term benefits. In year 1, we expect a modest decline in earnings per share as we transition to this new strategic partnership's model. However, by year 2, we anticipate earnings per share growth should return to the high single digit potentially building to double-digit annual EPS growth in years 3 through 5, reflecting the strength and scalability of this strategy. Overall, we believe the strategic partnership approach positions Sallie Mae to optimize value creation and drive multiple expansion, while maintaining underwriting discipline and customer relationships. Certain elements of our strategy have matured to the point where they should begin to be reflected in new models. Today, we'll focus on those components, why we're excited about them and how they should represent a meaningful down payment on our long-term objectives. As shown on Slide 20 of our investor presentation, we've developed a simplified financial framework with several assumptions based largely on the most recent financial performance of our company that we discussed in detail during our third quarter earnings call. This framework is intended as a conceptual guide. It is not a substitute for the more detailed modeling that may be incomplete nor should it be viewed as multiyear guidance. Its purpose is to illustrate how our evolved strategy could generally translate into financial outcomes and to serve as a useful reference point for you, as you refine your own perspectives. In the series of illustrative vignettes beginning on Slide 21, we aim to provide a general sense of how our evolved thesis could play out under documented assumptions. These simplified scenarios are designed to help analysts and investors brand their thinking, while recognizing that some elements of our strategy will still need to be refined. For those factors, we've assumed stability within the vignettes and have included qualitative considerations detailed within the individual slides that were filed in the presentation earlier this evening. I'll now turn it over to Melissa to go through the [indiscernible].

Thanks, Pete. As we turn to Slide 21 of our investor presentation, you will see our illustrative base case for originations and loan sales over the 5-year period is reflective of both market dynamics and strategic choices designed to optimize balance sheet efficiency and shareholder value. Our analysis begins with a baseline assumption of market growth at approximately 5%. The phase-in of PLUS reform is expected to meaningfully accelerate this trajectory in years 2 and 3 specifically, ultimately stabilizing at the same 5% growth rate year-over-year. To manage this growth in a risk-appropriate manner, we anticipate maintaining consistent private education loan growth on the bank's balance sheet. This approach will require meaningful and sustained access to the loan sale market. In year 1, we have assumed an increase in total loan sales as we launch our strategic partnership business, including a sale of a portion of our 2025 peak season originations. This will result in a heavier weighting towards sales executed through our strategic partnerships platform for the first year. From years 2 through 5, we have assumed a gradual shift from a largely even mix of spot sales and partnership-driven sales to a model where roughly 1/3 of the volume is sold through a traditional spot transaction and 2/3 through strategic partnerships. We view this transition as a superior approach for managing balance sheet growth, delivering greater flexibility, capital efficiency and earnings predictability. As we transition our land sale strategy from traditional spot sale transactions to the strategic partnership model, we also expect a meaningful improvement in the quality and durability of our revenue stream, which we have aimed to demonstrate on Slide 26 of the presentation. This evolution pairs the sale of new originations with growing fee income for both program management and servicing linked to the expansion of loans within our strategic partnerships. Importantly, because these originations will now be distributed off balance sheet, we will not be required to hold a CECL reserve against them enhancing capital efficiency and freeing capacity for growth. We believe this approach is designed to steadily reduce exposure to credit and market-driven volatility by shifting income toward non-balance sheet revenue sources, while simultaneously expanding asset-light earnings outside of the bank. Over time, these asset-light businesses have the potential to transform Sallie Mae, providing a durable revenue stream that complements the bank's stable and predictable net interest income, together creating a resilient foundation that mitigates earnings volatility tied to credit risk positioning us for sustainable growth and superior shareholder returns. To amplify the impact of our new businesses on financial performance, we are investing in capabilities that position us for long-term success. As shown on Slide 27, even in the early years, capital-light revenue growth creates the capacity to fund these investments while maintaining disciplined expense management. Our year 1 focus on talent, products, systems and marketing positions us well to capture the PLUS opportunity and manage risk prudently. This approach should allow us to sustain expense growth responsibly and improve operating leverage over the 5-year horizon. Finally, through the combined strength of our traditional spread-based income and the anticipated new fee income generated by our strategic partnership business, this framework suggests meaningful capital generation potential as shown on Slide 28. Based on this simplified framework, we could generate approximately $2.5 billion to return to shareholders over the 5-year period. We believe that our track record for delivering shareholder value has been proven over the past 5 years as we have bought back over 55% of our company through our share buyback program and increased our dividend in 2024. Looking ahead, our goal remains unchanged: to deliver meaningful returns using the disciplined method that has served us so well. This approach, grounded in proven strategies and capital efficiency, positions us to continue creating long-term value for our investors. I'll now turn it back to John for some final remarks.

Thanks, Melissa. We hope you now have a clear understanding that our evolved strategy anchored in maximizing the PLUS opportunity and building partnership-driven businesses positions us to deliver on an evolved investment thesis, specifically driving consistent earnings growth, reducing credit risk and earnings volatility, maintaining robust capital return and transitioning toward an asset-light growth model, all of this with an eye toward multiple expansion. This strategy represents a significant step toward our long-term vision of building a resilient, growth-focused enterprise that delivers sustainable performance and superior returns with several key possible initiatives on the horizon, including potential partnerships to originate loans beyond the bank's traditional risk appetite, we could see potential upside in building new businesses. Building these complementary businesses alongside our bank is a natural extension of our customer franchise. They will leverage the same acquisition engine, operate on a comparable technology platform and benefit from our distinctive brand positioning. As this strategy reshapes key performance metrics, the look and feel of our company will evolve. We are committed to providing the clarity and detail necessary for effective trend analysis and establishing new baselines. Ultimately, this evolution builds on our strong foundation and positions us to deliver what matters most: sustainable growth, superior returns and an even more resilient Sallie Mae. With that, Pete, Melissa, why don't we go ahead and open up the call for some questions.

[Operator Instructions] Our first question is coming from Moshe Orenbuch with TD Cowen.

Great. And certainly would agree that the new sales approach is superior to the old one. Maybe you could just talk a little bit about the decision to still grow the balance sheet at 8% to 9%? I guess I might have thought that with the ability to earn kind of an ongoing earnings stream from the assets sold that you might not need to grow the balance sheet that high and become even more capital efficient. And kind of as a corollary is to the extent that this does reduce risk, do you need a lower capital level for the loans on your balance sheet as you go forward?

Moshe, it's Jon. Thanks for those questions. I think both are really, really good ones. Let me start and Pete and Melissa should certainly chime in. First of all, I think, it's important to say that we have signed sort of the first version of our first relationship or partnership here. And my sense is we will continue to learn and optimize sort of into those strategies. I think depending on sort of economic and financial performance, volume and capacity updates or appetite, it is certainly possible that the mix or shift of our growth could change over time between partnerships and banks and the bank. With that said, I think it's important to recognize many of us came of age during the financial crisis. While I think we love the private credit model and what it can do for us, we also love diversification of funding sources. And I think in that context, we would always want to maintain a robust bank environment. And by the way, the bank is probably the right owner for a good many of these assets anyway. So my guess is there will always be some balance of the 2, and I think we will look to optimize as we get more experience with these partnerships, certainly over time. But as I think Melissa said, if this management team has proven one thing, I think, it is our discipline around capital allocation and capital return. And I think you should expect us to bring sort of that same discipline to that optimization sort of activity going forward. In terms of capital, Pete, I don't know if you want to take the capital question that Moshe asked?

Yes. I think, again, the capital levels in the bank really are driven by a variety of factors, most sort of pertinent being the stress testing that we have to go through each year. And I don't expect that to materially change. Certainly, there are innovative capital market strategies that have started to be employed in some of the bigger U.S. banks that can help reduce the levels of capital that are required to be held. But I'd say we're probably going to be a follower on that and let others plow that ground before we dive into something like that.

Got it. Maybe just from a housekeeping standpoint. Things like the use of the excess capital and the monetization of the other non-loan opportunities that you described, is there anything in this -- these vignettes for the financial impacts of that?

Not currently. I think we had developed these vignettes based largely on some metrics that we communicated during the third quarter earnings call. I think that the opportunities that we were discussing that are kind of related to the non-loan side of our business, I think that has not been built into the vignettes that are published as part of the materials...

To provide more of a strategic update and what to expect from us over multiyear period. And as we sort of learn more about what those are going to look like and are ready to share something we'll certainly do that.

But that's also true, Melissa, for the use of excess capital for share repurchase. Is that correct or not?

The capital information that we provided was total capital generated. So we have not carved out any sort of breakout there. That's right.

So if it were used for share repurchase, that would be incremental to EPS?

No, the capital that we have -- with the capital that we have generated -- the capital that we have on that page includes all capital generated. And we did not disclose within the vignettes how we had allocated that capital. We did make the decision internally how to allocate it. So that's included. But I'm happy to answer and go into more detail on the modeling offline.

We'll move next to Jeff Adelson with Morgan Stanley.

I guess, just in terms of the EPS scenario outlook here, Pete, you're characterizing that as a modest decline, but it's, I think, about 23% where you've guided below this year, if we were to pretend year 1 is 2026. It seems like you've got a lot of expense increase coming in preparation for the partnership as a part of that. Is there anything maybe you're -- you think you're being more conservative on in your guidance as you sort of get to those numbers? I noticed you're looking for, it seems like, flat charge-offs in the footnotes, a flat allowance ratio among some other factors there? Just anything that are -- maybe just walk us through some of the puts and takes behind that number?

Yes. Again, I think the biggest sort of thing that's driving the EPS is the shift in the loan sales. We did an extra loan sale that wasn't in plan this year as well as designating portion of 2025 originations as held for sale. So that unbalanced tended to pull things into this year that otherwise would have occurred next year. Again, I think the longer-term view on this is it's a really strong growth framework, and it's worth a little bit of transition noise to get from here to there.

Okay. And then just in terms of the loan sales, you're sort of looking at here, you've got the 5.9 in year 1 and then stepping down. Just for housekeeping, is that including the initial seed funds? And then just in terms of how you're expecting the revenue generation to work here? You're basically telling us 2% of the partnership volumes every year's revenue, is that as how you're thinking about the program management fee ignoring the servicing potential as well? And I guess, just if you look at the actual slide for loan sales, if we take that 1/3 number of traditional, it does seem like the traditional loan sales stepped down to like $1.5 billion to $2 billion per year. Is that right?

I'll take it in parts. The first part is the seed portfolio closed in November, so that's included in our -- will be included in our results when we report in January. The flow portfolio, the first flow portfolio sale, which includes a portion selection of 2025 peak originations, first distributions that happened in the third and fourth quarter of this year, will happen in January, and that's a big driver of why the year 1 loan sales is larger than what you would otherwise expect. In terms of the exact math on the fee components because we have one partnership so far and kind of the beginning of a business that we're intending to build, we're not going to get into the details of those arrangements. Certainly, Melissa and Kate are available to sort of give you whatever information they can to kind of guide the modeling off-line, but we're not going to go into great detail on that.

[Operator Instructions] We'll move next to Sanjay Sakhrani with KBW.

Appreciate all the color here. I guess, first question for Jon. Jon, you talked about sort of just the PE sustainability of the capital there and sort of financial crisis. I'm just curious, what happens in the scenario where the forward look -- there's not as much demand for forward flow agreements, how do we think about the puts and takes of the strategy? Did you guys contemplate that as you thought of the different permutations?

Sanjay, I'm not sure I'm fully following your question. Can you maybe say it again?

Yes. I guess like a lot of the strategy on the asset management side sort of is predicated on the sustainability of private capital flows into the market to enter into these forward flow agreements. I'm just curious, like in a scenario where there's not as much capital available, what are the contingency plans to sort of sustain the plan?

Yes. Sanjay, thank you for that color. I probably would have answered the wrong question. A couple of reactions. One, we would not have pivoted to sort of a very different strategic posture if we did not suspect a high probability of sort of the continued success of private credit, I want to be really clear about that. Pete said it in his comments, I'll say it here, we think the structural factors at work mean that this is going to be really as permanent as shift in how global finance gets done as one can envision. And so we view this being sort of very sustainable over time. So that's sort of thought, number one. Yes, thought number two, we are obviously interested, as we go forward, in sort of partnerships that have sort of tenure and permanence to them. We're not interested in short-term strategic arrangements. We are looking for deep partnerships with people who can understand our assets well, who really can make a multiyear informed perspective on their appetite for those risks and those funding obligations and also who have the sort of funding tools at their disposal, the stable funding tools to be able to manage that. Now with all that said, yes, like as a risk manager, we would, as a company, not be doing our work if we were not thinking about contingencies, but that really goes back to my earlier response to Moshe, which is we think the best way for us to have sort of great cloud in the management and negotiation of our partnerships and a great risk mitigation strategy is also to continue to have a really strong bank. And so we like the complementary nature of those 2 things. I think Pete described them as sort of dual legs of the stool, and I certainly agree on that. And so I think you would find us hard pressed to get to a point where we were so solely reliant on private credit that if the unimaginable happened that it would be a kind of a massive disruption to our business, that just wouldn't be prudent risk management.

Got it. Appreciate that. And then just going back to some of the questions that were asked before. I guess like we don't exactly know the structure of this forward flow agreement with KKR. And just to be clear, like that's something that you guys will disclose or aren't disclosed, and can we back into that in fund capacity? And then just as I look at Page -- or Slide 33 in terms of the assumptions that you guys have made, it doesn't show like capital return. I'm just going back to, Melissa, what you were saying. So these estimates that we see on Slide 30 probably don't include that -- elements of that capital return because it's not listed in the assumptions.

Yes. So let me take the capital. On Page 28, what we were trying to show is total capital available to return to shareholders after consideration of growing the balance sheet at the bank. And so I think that similar to what I was saying earlier, and I think it's the EPS assumptions, the assumptions that went into the numbers that you were referencing on the later page, are consistent with how we have historically allocated capital. So said differently, there is an assumption of dividends in that EPS number and there is an assumption of shareholder -- share repurchases in that number as well, and I think they are at similar levels to how we have returned capital historically.

And I think, Sanjay, on your question of sort of the various aspects of the partnership. No, you should not expect us to divulge sort of the key details of that partnership. It is, a, extremely complicated, and there's many different pieces and parts to it; and two, I'm sure you can appreciate, we are interested in continuing to build this business. We are interested in more sort of arrangements with the counterparty we have. We are potentially open to other things in the future. I don't think it serves our competitive interest to have the details and specifics of our commercial arrangements sort of out there in the public domain. I think -- and Melissa and Kate can sort of help you think about this. My guess is there's enough in the detail that we've provided that you can probably back into some rules of thumb about how those revenue streams might change over time, but not the specifics of the individual partnerships now.

We'll take our next question from John Hecht with Jefferies.

Actually, I think Sanjay asked a lot of my questions. I guess, one of them you may or maybe -- may or may not be able to provide details on this because it is going to be related to parts of the agreement. But I'm wondering, can you at least maybe framework for us like interest rate exposure? I mean, does -- when you're contemplating different interest rates scenarios with your private credit counterparty, are you just assuming like a fixed spread to some benchmark or is there other like hedging factors in this that are contemplated in order to preserve some type of return threshold for the counterparty?

Let me try and address that in a way that we'll give you some answers without sort of -- as Jon said, sort of revealing all of the secret sauce in this agreement. What I would say is the pricing does have reference to changes in rates that are built into it. Obviously, we have to manage our exposure to those and our counterparty will have to manage their exposure to those, once we have agreed on that framework. And there will be, over time, the potential for updating spreads and other things in those on a periodic basis, so that we can sort of be reactive to what's going on in the broader rates market.

We'll take our next question from Giuliano Bologna with Compass Point.

I'm curious, maybe kind of going back to a similar question, but you've obviously given us the 2% for the strategic partnership loan sales. When I think about the back-end economics, is there a sense of over what time frame the back-end economics should we recognize? Is it kind of like 1 to 2 years? Or is it should be longer or similar kind of like the 5-year average life of loan?

Well, if you think about our historic process was to originate all the loans in the bank, season those in the bank and then do a spot loan sale of a portfolio in the market. Those loans had already seasoned for some period of time. The youngest of those loans would have been second disbursement plus some seasoning period, so call it 10 months from origination. And then you obviously had -- on the other end, you had loans that have been fully matriculated and in repayment for some period of time. We're now shifting to a model where we are making a selection of new originations each month and designating those as held for sale. And so therefore, you'll have the mix of freshmen versus other points in the education cycle all the way up to seniors that will dictate a deferral period and then ultimately, these loans do have a lengthy repayment option. So the life of the fee stream from these relationships is longer than what you would expect from a traditional loan sale portfolio. And broadly, they are structured similar to an asset manager fee where you have the concept of assets under management times a basis point fee. And that will build over the years as we sell more loans into the structure. And then ultimately, we'll get to kind of a run rate for a given program, but it's our intent, as Jon said, to expand these to broader -- with the same partner as well as potentially other partners as we look at expanding the number of customers that we can serve.

That makes sense. And then maybe as a follow-up it looks like the noninterest expense increases a decent step function change next year, call it, $100 million and that's scaling beyond that. It seems like the revenue generated from the partnership program should be less than that if you assume you have steady-state pull-in regular way loan sales. I'm curious when you think about kind of the breakeven of the new strategy, is there a sense around when these rental expenses related to pursuing the opportunity should be overweighted or at least surpass the incremental revenue from the strategic partners related sales?

Yes. Giuliano, let me take that. I think it's important to recognize that the increase in expense is driven by multiple factors. I think the largest, and Melissa, keep me honest, is really the additional volume and the preparation that's coming from PLUS reform. So there will be new products that we will develop, still very much on our existing platforms. There will be new product teams that we put in place. There are certain technology readiness that we are doing. The biggest portion of that is, quite frankly, enhanced incremental marketing, which we know will not be at the same level of marketing efficiency in year 1 than it is today in our existing core businesses. And so I think it's really that, that is driving the incremental expense, not per se the partnership. And so I think you have to look at the expense change as an investment in the totality of the growth plan, not any one component of the growth plan.

That makes sense. And then you're kind of referring to an asset management base or similar to an asset management base framework for the strategic partnerships. I'm assuming that the probably some performance or credit-related governor on the back-end economics. I assume credit outperforms you make more, credit underperforms you make less. Is that a fair assumption?

There are some return thresholds that are built into the agreement, yes. The majority of the fee is a set amount based on the assets under management, but there are some return thresholds that allow us to earn more fees after those thresholds are hit.

We'll take our next question from Mihir Bhatia with Bank of America.

I had a couple here. So maybe the first one I wanted to ask, just look, I recognize 5 years is a long time and it's a ways out, but I just wanted to get your view on, is the rate of EPS growth in -- as you move into year 2 to 5, if you will, understanding the first year of build out here. But is that CAGR of EPS growth sustainable from -- in your perspective -- from your point of view, just as fee revenue from these partnerships continues to build? Is that how we should be thinking about this? Is that how you're thinking about it? And is the, I guess, end goal here relatedly the idea that, hey, if we can get faster EPS growth, we should get some multiple expansion on our stock? Just trying to understand the motivation of this big change in strategy.

Yes, that's sort of at the heart of it, exactly it, right? Like we've got this big opportunity in front of us that is known with regard to the reform that came in, in HR1. But we started working on this strategy even before that was -- that opportunity was even known. And the goal was to create a profile that would allow us to expand our origination capabilities to leverage the other parts of the franchise that we talked about in the presentation and do that in a way that didn't require us to put up capital, it didn't require us to put up CECL reserves for every dollar of originations that we make. And that's really at the heart of it. And so we do believe that the growth rates that we see there in the out years are indicative of the power of this model for the franchise.

And I think, Mihir, the thing I would add to what Pete said is, and I think I may have said this on a previous earnings call, we love our bank. It gives us really stable, predictable sort of earning streams that come off of it, and we think we do a really good job of managing that. . We do have to invest a lot of capital in that. Through the CECL reserving, growth is expensive in terms of the hit to EPS, and Sallie Mae holds 100% of the risk for those credit decisions, which can create earnings volatility. At the other end of the spectrum, you have, what I'll call, old way loan sales, which are very capital light. They released that loan loss reserve. There is no risk any more -- credit risk associated with those loans to the institution. But the timing is unpredictable. The premium is unpredictable, and that creates sort of an element of variability in our performance year-to-year. What I think we really like about all of this, and I think you have to take the whole recipe, the whole meal together, is it's really attractive from an ongoing sort of economic value creation potential. It is low to no capital. It is sort of eliminating the credit risk problem. So in many respects, it gives you a funding option, and I think this is a little bit of what Moshe was getting at in his first question, it gives you a funding model, which is a really interesting hybrid of those 2 banks. And so when you think about it, if it's lower capital, sustainable, predictable earnings with less credit volatility, I think, if you put all that together, you all are the experts more than I. I would think that, that is deserving of a higher multiple, but you'd be the judge.

Got it. No, I appreciate that color. The other question I wanted to ask was just about -- I think you mentioned in your prepared remarks the potential to originate loans that would be outside your bank's typical risk appetite. I guess just a couple of questions that, that brings up. One, is that contemplated in your illustrative or would that be all upside to us in the illustrated side? And then, I guess, relatedly, at what point do you decide what's going on the balance sheet, what's going into spot sales, what's kind of partnership loan portfolios? Are they all like similar loans today? Or do you decide that at the point of origination, how does that work?

Yes. Let me take that in parts. So I think the first part of your question was with regard to expanded credit box. That's sort of the least bank of the concepts that we talked about receiving. On Slide 31, we gave an illustration of what the potential could be there for expanded originations that would go 100% into the partnership structure because by its definition, it would be something outside the risk appetite of the bank. So I would point you, Mihir, to the first part of your question. With regard to kind of how the loans are selected, et cetera? This first partnership that we've created with KKR was very much intended to sort of replicate, in a different manner, the selection process that we go through for the loans that we put into our spot loan sales. Meaning, they are being originated by the bank, they are credits that the bank is fully comfortable with, they're going through the same underwriting process of the loans that are going to be held and invested in the bank. And what we're doing is selecting a portion of the new originations in any given month that would go into the structure. There are some concentration limits that are governed largely by the rating agency models for the ultimate structuring of the partnership funding, but it's largely a slice of -- a random slice of the originations that we will do in any given period. Now when we get to doing things that are outside the bank's credit box, that will be a totally different proposition and that's something that we will continue to work on as we go through and into next peak season.

Got it. And then just my last question, if I could squeeze 1 more in. Just in terms of the partnerships that have been signed, is KKR the only one that is being signed or are there others that you have not announced yet? Just trying to understand how much of the sales is already baked in.

We've only signed one inaugural partnership that we announced with KKR a couple of weeks ago. And it's our expectation that we will build that relationship over time. potentially, there might be others beyond that. But so far, that's the one we have, and we like it a lot.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Jon Witter for closing remarks.

Thank you, and I appreciate everyone's time and attention this evening. Obviously, we are incredibly excited about the strategic vision that we outlined here today. We will certainly continue to update through our normal communication channel sort of progress on the questions that have been asked and sort of the vectors that we've described. And as always, our IR team is standing by to help folks sort of think through the implications of the strategy and what it might mean in terms of their broader estimates and evaluations. But again, thank you all for your time and effort this evening. We appreciate it and look forward to continuing the dialogue. With that, Kate, I think I'm turning it back to you for some closing business.

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

Thank you. This concludes today's Sallie Mae Investor Forum 2025 Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.