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SLM (NASDAQ:SLM)
Q3 2019 Earnings Call
Oct 24, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2019 Q3 Sallie Mae earnings conference call. [Operator instructions] Thank you.

I would now like to turn the call over to Mr. Cronin, VP of investor relations.

Brian Cronin -- Vice President of Investor Relations

Great. Thanks, Lisa. Good morning, and welcome to Sallie Mae's third-quarter 2019 earnings call. With me today is Ray Quinlan, our CEO; and Steve McGarry, our CFO.

After the prepared remarks, we'll open up the call for questions. Before we keep -- before we begin, keep in mind our discussions will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors.

Listeners should refer to the discussion of those factors in the company's Form 10-Q and other filings with the SEC. During this conference call, we will refer to non-GAAP measures we call our core earnings and adjusted core earnings. Descriptions of these measures, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended September 30th, 2019. This is posted along with the earnings press release on the investors page at salliemae.com.

Thank you. I'll now turn the call over to Ray.

Ray Quinlan -- Chief Executive Officer

OK. Thanks, Brian, and thank you all for your attention this morning. It's a pleasure to talk to you about the results of our quarter and about our franchise more generally. And I want to take a couple of minutes upfront to level set on some things associated with the franchise, especially the backdrop of how successful investment in college is for most Americans.

And college and a lifelong learning have continued to expand in our country and they create opportunity. People have greater mobility, they have greater chances for economic and even personal success, including health. Those with a bachelor's degree earn 65% more than those with a high school diploma, and that delta has increased significantly over the last 25 years. We do an independent research on overall borrowing for -- our overall attendance and borrowing college students in our annually published How America Pays for College, and families continue to value college and higher education more generally, with 90% seeing it as a good investment in the student's future, 84% believe that their student in their family will earn more money and 77% are willing to give up other items in their financial plan in order to devote this money to the investment in the next generation.

And despite all these benefits, it's still -- we should remember that only about one-third of the next generation of Americans are on a track to have a bachelor's degree. And so we're seeing, in our franchise, alternative mechanisms that people are using to increase the human capital. And at this point, 20% of our originations are different from the traditional undergraduate student loan in either parent, graduate, international, for-profit or distance learning. Sallie Mae continues to be a supporter of American families as we help build human capital for the next generation.

And at the moment, we're serving over 2 million students and cosigners. We are the No.1 choice for families over all other private student lenders combined. And so this is a case that -- this is due in part to our full court press franchise, including our relationship managers who are nationwide in constant contact with over 2,400 higher education institutions. We're on 98% of the preferred vendor list.

We have an A+ rating from the Better Business Bureau. And we're proud to announce that just recently, we acquired a J.D. Power's Certificate of Performance for our customer service operations. This is driven by vast improvements in our customer service operation over the last four years, where customers contacting us to clarify something or to fix a problem with their account has dropped by 60% over the last four years from 2015 to 2019.

And at the same time, we are adjusting our interface with customers to conduct their selves in a way that is in line with their preference. And so this year, we'll do over 500,000 chats and chat bots with an approval rating -- customer satisfaction rating over 90% for the customers who use that facility. And so it is the case that all of what I'm talking about is not the end, but is the means to an end as the same college commencement, and we follow our customers as they go past college and move on to the next successive chapters in their lives. In addition to that, we believe that Sallie Mae has a role in helping students more generally understand the financial backdrop for their activities.

And we post both tools for analytics, as well as scholarship availability on our website. Happy to say that last year, the Sallie Mae Scholarship Search, which is rendered as a free service to anyone looking at our website, was able to help 20,000 students and with $61 million of scholarship funds that were distributed to them via on the -- for scholarship providers, but through the access on our Internet site. So as we go forward, we are in an environment where the federal program dominates the outstanding amounts for student lending, and there has been quite a bit of debate back and forth in regard to that, and we are participants in that debate. And we believe that the federal government and other government bodies have a role to play in helping economically challenged households to obtain the needed resources to advance their lives as they see fit.

But the federal program is certainly a candidate for improvement. And I'll just note in passing that the description of it is frequently sort of lumped together, some sort of average of some undergraduate profiles, but 65% of the students there have balances under $25,000. It is the case that 40% of the graduates in the last year had no debt at all. And so we start to see that some of these distortions that are in the public press of people having over $100,000 in debt don't represent the average customer and average student within that portfolio and only 5% of the federal program had balances over $100,000.

9% of the federal program, 9% of the students in the federal program will have a balance over $80,000 and they make up fully 43% of the debt. So you might think that 10% of the students have 50% of the debt outstanding and 90% of the students have the other 50%. So it's a very skewed distribution. I think as people start to enhance the program, we should look at those individual segments as opposed to on average, which dominates most of the conversation.

On the other end of the spectrum, if 9% have over $80,000, more than half of all the loan defaults had balances under $10,000. And so we have very fat tails on these, one fat tail is people, one fat tail is dollars. And so I think this program could be greatly enhanced with some parameter changes, and we are participating in conversations to advance that agenda. Returning to us, our practices work.

Our customers are successful. 91% of them complete the course of study in which they've enrolled, 91% of those become employed; 88% agree that the work gives them a feeling of personal accomplishment; 86% agree that the college education opened opportunities they wouldn't have had without it; and 98% successfully managed their loans with our write-off rate running under 2% per annum. The underwriting limit and loan limits are important to managing both our portfolio for financial results, as well as for the student success. And so as we look at things, we go forward with this quarter continuing our franchise build.

We've had a very successful third quarter, and we'll go on to report about it in a moment. But I will say that backdrops to many conversations we have with people are, "Gee, what about the political debate that is extent in the United States as people buy to become candidates for presidency," and it is the case that whoever gets elected, we will still be there. We will prosper. We will be satisfying the needs of middle-class Americans as they seek to improve the lives of the next generation of Americans.

In regard to this particular quarter, we had a good quarter. Core net income is $122 million, $0.29 a share, 26% increase over the prior year. We originated $2.245 million of -- that $2,245,000,000 education loans in the quarter, up 6% from a year ago. And year to date, we're at $4.9 billion originated, up 7.1% from the prior year.

Our efficiency ratio has dropped to 36.6% in the quarter, normalized quarter for last year, which had some financial ins and outs would have been about 39%. So a dropping from 39% to about 36.5%. In credit, the 30-day delinquencies are 2.8%, up from 2.7% in the quarter before, the second quarter, and up from 2.3% a year ago. Our charge-offs came in at 127, 127 basis points, compared to 88 basis points to the prior year.

And year-to-date charge-offs were 115 basis points compared to 101 basis points or 101 basis points in the prior year. Charge-offs and delinquencies are essentially -- well, they actually are right on our plan. We expect delinquencies to stay at the 2.8% level for the remainder of the year, and that the full- year charge-offs will be about 1.2%, which is on the expectation we set for the charge-offs over 12 months ago. The delinquency buckets and what we see is a pipeline and is stratifying the portfolio by segments and risk cohorts.

We expect that the performance that we have will continue through the remainder of 2019 and persist through 2020. And so the increases that we see are continuing, but mitigating maturation of the portfolio that we have been discussing with investors and other interested parties for the last three years. Our net interest margin was 5.55% in the quarter compared to 58 -- 5.88% in the prior quarter, 60% in the prior year. As you know, we have been increasing our liquidity ratio, and we ended that with 12.4% of total assets versus 7.2% in the prior year.

And as we've discussed in prior calls, we expect the NIM to continue to drift on down, but is a pass-through largely with no EPS impact as we increase the liquidity on the balance sheet to be more in line with some industry norms. In the 10-Q, there is a discussion of modifying some of our service in collection practices. As bank has grown, we continue to review the practices that we experience, we look to see what other people are doing, we take feedback from our -- both our regulators, as well as from our customers. And we have an evolutionary approach to the collections treatment in particular.

And so as we've looked at this, there is a trade-off in collections between forbearance where no payment is made and loan modifications or interest-only payments where a smaller amount is paid, but you're in more contact with the customer during those periods when less than contractual payments are being made. And so we are changing a few things here. We are testing our way through 2020. And in general, I'd say from a philosophical standpoint, what you'll see is we're moving from periods of no payment to periods of low payment.

And so as we look at that, we will see whether or not that effect on the customers is the -- results in the advantage what we believe it will have, and we will keep everybody posted on that as we go through 2020. And so we continue to have very good performance, and this is just an enhancement of an ongoing nature to our portfolios. And so our experience shows us that most of the customers who use forbearance or loan modifications perform very well. And it's right to say that our lending happens in a venue that is extremely unusual for consumer finance types and especially banks because most lending is based on a continuity of the current picture when the loan is granted.

So if a couple buys a house, we look and see who is working, we look at the cash flow associated with that. We, as lenders, will say we hope that continues and everything works out fine, and we'll make the mortgage bank -- or we'll make the mortgage loan. In regard to our customers, there are at the other end of the spectrum. When we lend to them, they are entering a period of high volatility in their lives.

They will graduate, they will move, they will get a job, they may get married, they may buy a house. And over those seven years, which is the normal length of loan, for our customers, we have the highest volatility in their lives. That's being the case, so their lives are relatively successful in regard to economics. And so the challenge for us is to move along with our customers as their cash flows increase and decrease.

And that's what we're trying to do as we continue to evolve our collection practices. As we look at this, we think it will affect about 4% of our customers who wind up being in some stages of delinquency, and we will work our way through that. It's a little bit hard to figure out whether or not these -- the impact of these will all be neutral or not. We had some estimates that said, gee, if this continues, as the way it had been going, and we don't change our collection practices or we don't change the efficacy of those, there might be an increase over the life loan of 4 to 14% in losses.

We don't think that we will, of course, experience that, but that is what the numbers would fall out of, of the current extrapolations. And so we will do everything we can to make sure that it doesn't occur. We'll do everything we can to mitigate that. And so as we go forward, we will have constant reports each quarter on how these changes are going, which ones we adopt, which ones we don't for purposes of forecasting for 2020, 2021.

The impact on the portfolio will be negligible for those. Returning to the quarterly results, the average yield on the private student loans were at 9.3%, 9 basis points down from the prior quarter, up 14 basis points from the year before. Cost of funds was at 2.75%, down from 2.84% in the prior quarter, up from 2.59% a year ago. These changes, of course, are all driven by LIBOR and the forward curve.

In regard to guidance, we are increasing our fully diluted core earnings per share guidance. We are holding constant on our originations and our operating efficiency, so the guidance will be EPS of $1.23 to $1.24, originations of 5.7 billion and operating efficiency rate of 35 to 36%. As we lead this portion of the call, the backdrop that we have is -- as long-term players with us know is we're going through several chapters. And so the split and launch was '14 and '15.

We had extraordinary growth as our receivables filled up on our balance sheet in '16, '17 and '18. In 2019, we transitioned to a more normal company. Growth rate mitigated somewhat. As you saw, we authorized $200 million in stock purchases, initiated dividend.

And so as we enter '20 and '21, we will continue to do that. We expect the industry revenue pool to grow by about 5%. We expect that we will continue to grow slightly faster than that. We expect that we will have leverage in regard to that.

But we will start to follow that growth rate with that growth rate compounded by the leverage that we have in our operating base. So we'll be at 5%, 6% in revenue, and we will track that going forward, we expect that to continue on a regular basis. So with those remarks, I want to thank you, one, for your patience and interest, and, two, open up the call for Q&A, which Steve and I will attempt to answer.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Michael Kaye with Wells Fargo.

Michael Kaye -- Wells Fargo Securities -- Analyst

I mean, now that peak season is over, just hoping if you could provide some further commentary on what your experience has been in a broader pricing environment? Specifically, how did the expected ROEs compare this peak season versus the past seasons?

Steve McGarry -- Chief Financial Officer

Sure, Michael. So we did lower our prices during the peak season, part of that was in response to a lower cost of funding. And the ROE on this origination cohort is going to be very similar to cohorts past and be in the very high teens.

Michael Kaye -- Wells Fargo Securities -- Analyst

OK. Great. And just touching on credit, the additional color was helpful, but just on this topic on credit, these refinancing players, do you view them as taking off some of your better credit quality customers? And is that starting to have some impact on your credit metrics?

Steve McGarry -- Chief Financial Officer

So look, the consolidation has been going on for many years. It grows along with the portfolio. It has been very stable for the last three quarters. They do tend to consolidate the higher FICO score borrowers.

But the fact of the matter is these are people that are getting jobs in investment banking, public accounting, etc, and are going to prepay sooner or later anyway. We view in that present value on those loans due to the higher prepaid fees with or without consolidation as lower than the overall portfolio.

Michael Kaye -- Wells Fargo Securities -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Mark DeVries with Barclays.

Mark DeVries -- Barclays -- Analyst

Yeah, thanks. It sounds like credit on both delinquencies and charge-offs continue to come in line with what are your expectations though we have seen some volatility in the provision item from quarter to quarter. Could you just give us some color on kind of what's driving that and maybe some expectations as how to think about the provision next quarter?

Steve McGarry -- Chief Financial Officer

Sure, Mark. So the volatility in the provision has been driven -- the outside volatility has been driven principally by this TDR impact that we've talked about on the last couple of quarterly calls. So as interest rates decline, the cash flows on the TDR portfolio decline, which is less of an offset to the ultimate charge-offs in that portfolio. So I think there was $15 million of provision in the current quarter due to lower interest rates.

We expect another $10 million of provision due to lower interest rates in the fourth quarter. And we do expect as a percentage of loans in repayment for the provision to increase to the like 1.65% area from the 1.48% level that came in at this quarter, but that is fully baked into our current outlook for the remainder of the year.

Ray Quinlan -- Chief Executive Officer

And Steve, you might comment that the change in regimen to CECL will change this.

Steve McGarry -- Chief Financial Officer

Yes. Once we adopt CECL, this impact on the TDR portfolio goes away completely. Good point, Ray.

Mark DeVries -- Barclays -- Analyst

Got it. That's helpful. And then just one more question on the consolidation activity. Have you seen any signs with the recent rally in rates of more aggressive behavior there from competitors? And any thoughts on that potentially picking up that activity as we go into the fourth quarter?

Steve McGarry -- Chief Financial Officer

So as rates decline, we haven't really seen an uptick in the activity that we were expecting from the beginning of the year. The cost of funds in the securitization market has pretty much, I think, gone as low as it can for the consolidators. So we don't think that the continued decline rates is going to increase volume. We would expect as we have seen in past years that in the fourth quarter as more loans going through repayment, we might see an uptick in that consolidation volume.

But we don't think that the lower interest rates has had an additional marginal impact.

Mark DeVries -- Barclays -- Analyst

Thank you.

Operator

Your next question comes from the line of Vincent Caintic with Stephens.

Vincent Caintic -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, guys. Just a question about the charge-offs and delinquencies in the new collections practices. I am wondering so have those new collection practices affected your DQs and net charge-offs this quarter just saw with the uptick in DQs, if there is kind of an explanation for that and what you're learning from that?

Ray Quinlan -- Chief Executive Officer

Sure. The collection changes and the sort of work out changes that I mentioned had no effect on this quarter and won't have any effect on the right-offs as we go through the next five quarters. And so as we look at these, we're evaluating. We have a series of test set up for both customer service group, as well as for collection group.

But to answer your question, for the coincident performance of the portfolio, there is no impact of these changes, which we will introduce as we say gradually over the next five quarters. We'll keep you posted on that, but there is no impact in our current portfolio or our current write-offs.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. Got you. And so the impact of DQs and charge-offs takes -- it should come on gradually over time rather than just seeing a big impact in one particular quarter?

Ray Quinlan -- Chief Executive Officer

Yes. And gradually over time, it's actually really effective starting in 2021, right. As we sort of go through 2020, we will conduct our tests. We're obviously not going to do anything, which is going to be deleterious to the portfolio.

And so we'll keep people posted, but we thought it was a good idea to announce to people that we are doing a series of tests that we will take a look at those in the interest of transparency, less than what we would say is the -- yes, the motivation is not to change the financial outlook of the company, but to just keep our interested investors informed about practices that we are undertaking.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. That's helpful. And then separately, just when you think about NIM and your asset yields, what -- in your guidance for the full year, and I guess, maybe implying to fourth quarter, what do you have in terms of rate cuts? And how -- any update that we should think about in terms of your sensitivity going forward?

Steve McGarry -- Chief Financial Officer

So we have reduced our sensitivity to declining interest rates dramatically over the course of the last several quarters. We are pretty well matched. So as rates decline, we don't expect any impact on our net interest margin. The net interest margin impact that you've seen is purely due to the increased liquidity that we put on the books over the last several quarters.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. Thank you.

Operator

[Operator instructions] Your next question comes from the line of John Hecht with Jefferies.

John Hecht -- Jefferies -- Analyst

Thanks very much guys for taking my questions. First of all, just touching again on the services changes. Ray, I think, you said that the 4 to 14% change in the lifetime loss is tied to that. But I assume that's just for the cohort of borrowers that are -- that have an impact from the change in servicing? Or how do I think about that 4 to 14%?

Ray Quinlan -- Chief Executive Officer

Sure. First thing is you should think about it as the life of loan. So we're talking out five, six, seven years. Second is the practices that we engage in will be represented in all the vintages and driven by the individual customer behavior and not by the cohorts.

So if people are in moderate delinquency and having trouble with their cash flow, we are endeavor to do two things. One is to be responsive to that in such a way that we work, as I said, through these major changes in our customers' lives in a way that's more accommodating to the fluctuations in their cash flow, but importantly, at the same time, we're looking to maximize our contact with these customers. So, as you know, in our student loan portfolio, we give people an option when the loan is granted to make either interest-only payments while they are in college or to opt for a $25 a month payment, and we find that the practices associated with that are very good from a standpoint of our, one, staying in contact with customers; and two, as represented by their performance, in credit, in particular, as we go forward. And in fact, we offer a discount to people who choose those two regimens.

So we'll see the same thing going forward here. As I said, we're going to do this is a test in. And so when I mentioned 4 to 14% as an extrapolation based upon current practices, which I think is representative of the fact that we think it's relatively minor. We're taking a midpoint on that as a number, 9% or so over the course of the seven years, and we will keep people posted as we get better information through 2020 as to whether or not those numbers, A, will move at all; and B, where they will move, if in fact they do.

But what we're right now seeing here is that we want to have a practice of more contact with our customers, follow them as they go through their lives and their cash flow needs and opportunities fluctuate and to keep both our investors and interested parties aware of what we're doing, how are we doing at. So this is just an announcement of the beginning of something. We'll keep you posted on the results as we go through the next five quarters.

John Hecht -- Jefferies -- Analyst

OK. And then with respect to your -- I mean, just thinking about kind of margin trends in 2020, I know there was a modification to NIM guidance last quarter tied to excess liquidity. If we think about next year and think about the forward curve, how much of the forward curve should influence NIM? And how much of that excess liquidity requirement should influence NIM or is that fully baked in at this point?

Steve McGarry -- Chief Financial Officer

So we are still very much a variable rate loan portfolio. I think we're running around 60% variable, 40% fix. So declining rates, if we're approaching the funding of our fixed-rate portfolio in a balanced manner, shouldn't really have much of an impact on our NIM going forward. We did begin to build our liquidity position in the second quarter and the build will continue through the fourth quarter.

So as that liquidity position is on the books for the full year of 2020, it is going to have a larger impact than it did in 2019. We have not guided for 2020 yet, that will take place a couple of months from now. But you can draw from that the conclusion that our NIM for 2020 is going to be lower than the 5.80% that we're going to post for the balance of 2019.

John Hecht -- Jefferies -- Analyst

OK. And with respect to the seasoning portfolio and the kind of migration of delinquencies and so forth, at what point you does -- assuming all things equal, does the balance of loans and repayments and new originations balance out, so we should see that drift, again, all else equal start to stabilize?

Steve McGarry -- Chief Financial Officer

So we've got about $9 billion in full P&I, and we're originating close to $6 billion every year. So it's a little bit of a treadmill, one step forward, two steps back. So it will take a while for our portfolio to reach equilibrium, I'm going to say three years from now. But what we're seeing in our portfolio is very steady performance, very steady pure rates in the collection department.

And we're very comfortable with how we see the portfolio performing at this point in time.

John Hecht -- Jefferies -- Analyst

Thank you very much guys, appreciate your feedback.

Operator

Your next question comes from the line of Rick Shane with JP Morgan.

Rick Shane -- J.P. Morgan -- Analyst

I have bunch of questions this morning, I apologize. As you head into 2020 and provide guidance, are you going to provide guidance in the context of your adjusted core EPS or are you going to provide a GAAP EPS guidance?

Steve McGarry -- Chief Financial Officer

Rick, we're going to provide guidance in terms of adjusted core. Given all the volatility that we're going to see in the CECL number, I think it would be presumptuous of us to assume that we could give a reasonable GAAP guidance number.

Rick Shane -- J.P. Morgan -- Analyst

OK, great. And then second, it basically sounds like in terms of the collections practice, you guys are in champion challenger test mode. I'm curious what percent of the portfolio, just so we understand the risks of the new servicing strategy, will be in the challenger bucket?

Ray Quinlan -- Chief Executive Officer

The entire sample bucket, we believe, will be about 4% of the portfolio. And then we will divvy up the test depending upon individual segments. So for purposes of 2020, as I said, the impact is negligible. So I think we can disregard that and say that, what's in challenger versus tests, it's more important to understand how the tests get resolved than the individual pieces, which will be a small part of the portfolio.

Rick Shane -- J.P. Morgan -- Analyst

OK. And is the idea here is that if you can prove this out that ultimately it might allow you to change your CECL reserve assumptions as well?

Ray Quinlan -- Chief Executive Officer

Yes. Whatever impact we have as we would model it and then do life of loan forecasting, we'll be -- not only will it impact CECL, it will be CECL. And so as I said, if we just do a straightforward extrapolation of this number in there between that 4 to 14%, 9 to 10% over the life of loan and that is a naïve extrapolation while we are sitting here, but the best we have. And so as we go through 2020, we'll certainly give that more body of evidence that we think is relevant going past 2020.

And as I said, we just want to be transparent with folks that we're undergoing these tests. And as I said earlier, we don't expect any impact really for 2020 or 2021.

Rick Shane -- J.P. Morgan -- Analyst

OK. And then last question. As you wrap up your buyback and head into 2020, obviously, there -- that was significant news to the market earlier in the year as you sort of contemplate capital returns in 2020. I am curious where you see the gating issue related to the CECL implementation? Do you see it from a regulator perspective or do you see it from a rating agency perspective?

Ray Quinlan -- Chief Executive Officer

From the standpoint of capital you're asking, it is clearly an SEC requirement that filters through the accounting profession of KPMG, the way we see it. So it starts off with SEC reporting. That effects our balance sheet. Our balance sheet then has particular levels for capital.

The capital then goes to the regulators. And so in that stream, everybody is sort of on equal footing and there will be a nice switch that will occur on January 1st. And so it won't be somebody leading or following, we'll all be on the new regimen together.

Rick Shane -- J.P. Morgan -- Analyst

Understood. But realistically, what we're talking about is balance sheet geography. And your ability to absorb losses is really unchanged in my mind regardless of whether it's an equity or a reserve, yet the decision -- the signal to the market is to suspend the buyback through 2020. You guys are rational economic actors.

You understand that it is a noneconomic, it's an optical event. So I am curious with that knowledge, why -- what's driving the conservatism in terms of buyback, given where you guys are in your life cycle?

Ray Quinlan -- Chief Executive Officer

Sure. Let me first agree with you that it is an address change from lower on the right-hand side of the balance sheet to higher on the right-hand side of the balance sheet, and has no effect on the loss-absorbing capability of the franchise, that's absolutely true. However, because it is an increase in tracked reserves in the loan loss area, not in the capital account, we're attempting to be as prudent as possible in regard to that in such a way that we say, all right, let's wait till it gets implemented. And so as we look at it, we haven't given any guidance for 2020 in regard to either capital levels or buybacks or anything else.

And so it is the case that we'll -- this is a big implementation. I agree with you it doesn't change the underlying cash flow economics at all. But we want to get that implemented and make sure what we're trying to do, as you said, as rational economic players here, is to ensure that any changes by any regimen, whether it's the accounting profession, the SEC or the regulators have no impact on our ability to manage our franchise in a way that we think is prudent. And so that's the first objective.

After that, we will look at available cash and available capital and see how regulatory responses go to capital limits and other things as we approach the distribution of capital. As I mentioned in the closing part of the opening remarks, we are clearly in the normal company regimen now. And so to the extent that we think we would have a rational and appropriately conservative approach to capital and there was excess capital in our forecast, we would be happy to buy back stock. But we think it's sort of premature now to either talk about that in a serious way or to give specific guidance in regard to it.

Rick Shane -- J.P. Morgan -- Analyst

Very helpful. Right. Thank you so much.

Operator

The next question comes from the line of Henry Coffey with Wedbush.

Henry Coffey -- Wedbush Securities -- Analyst

Yes, good morning everyone. Thank you for taking my questions. Just a couple of things. I've been listening the discussion around the change in collection practices.

The simple outcome is, if the plan works as expected, your view is that lifetime losses will be lower. Is that an oversimplification of it or --

Ray Quinlan -- Chief Executive Officer

Lower is -- would be wonderful. I think, what we're hoping for is lifetime losses will be neutral. And then you can hear that we're trying to be conservative about this. We have new practices going in.

We have, as we said, a challenger and test, and we have seven years of life to it. We think there's just a lot of new in all of that. And so what we wanted to do is be able to migrate to what we think is a more effective collection regimen without having any negative impact. I'd love to tell you year from now it's having a positive impact, but as of the moment, I don't have the wherewithal to do that based upon empirical information.

Henry Coffey -- Wedbush Securities -- Analyst

And then looking at the 10-Q, the change in CECL guidance, is that indicative of the kind of volatility we'll be seeing from quarter to quarter or does that reflect an update in your analysis?

Steve McGarry -- Chief Financial Officer

So look, we did estimate this potential range of 4 to 14% on life of loan losses as a result of these servicing changes. And that basically requires us to build back into the CECL reserve. So what you saw is us use the midpoint of the 4 to 14% and 9%, we topped up the CECL reserve between June and September. So the CECL reserve is typically going to grow in the third quarter anyway because we are originating our peak season loans.

So in that increase, I think, it's $180 million or so, there are several factors; there's an increase in the CECL reserve for forbearance; there is an increase in the CECL reserve for volume; and there is a decrease in the CECL reserve because we did adjust life of loan CPR rates. So I think this does highlight that there is going to be considerable volatility in the CECL reserve from quarter to quarter, given that we are talking about a very large portfolio and a life of loan estimate and small changes are going to have a pretty big impact on our GAAP numbers. And that is why we think that it makes a lot of sense to go to this adjusted core earnings number, which I think gives people a much better idea of how the company is actually performing on a cash like basis.

Henry Coffey -- Wedbush Securities -- Analyst

And then in terms of the tax rate, what is the effective tax rate you're using to calculate the impact on equity?

Steve McGarry -- Chief Financial Officer

25%.

Henry Coffey -- Wedbush Securities -- Analyst

And then just another business-related question. You have been exploring, establishing your own refinance program and then securitizing those loans. Can you give us an update on the progress there?

Steve McGarry -- Chief Financial Officer

Henry, we've had a really difficult time developing a model that with the appropriate precision targets likely candidates to consolidate without cannibalizing our own portfolio. So our efforts to date have come up empty, but we continue to look for ways to protect our portfolio.

Henry Coffey -- Wedbush Securities -- Analyst

And then just last question, any comment on your graduate school lending?

Ray Quinlan -- Chief Executive Officer

The gradual school lending is a segment. As we've talked about earlier that we have five segments or so of what we think of sort of nontraditional lending among graduate, among them. And we're continuing to make progress in the graduate space at a rate that is faster than our core business.

Henry Coffey -- Wedbush Securities -- Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. Most of my questions have been asked and answered. Could you talk just a little bit more about the competition in school? I think you had referenced that there were some pricing changes that you made.

But as you kind of look around, I mean, are there -- were there a substantial amount of new players, was it just increased intensity from existing players? Because we haven't seen that many kind of new players enter.

Ray Quinlan -- Chief Executive Officer

No. And some of the new players have been notably unsuccessful, but there's only comment on that. And so as we looked at the field, one, is let's remember we grew faster than the market, and so our competitive position has been improving over time. And so in regard to the pricing, what has been normal in this industry is a price that gets set on or about Memorial Day, and the schools, in particular, like to have a set price.

So when they're talking to students in the financial aid office, they have an idea of what the appropriate trade-offs are for families that are looking to finance higher education. So traditionally there has been no movement in price in this particular sector, let's say, in contrast to mortgages or something where you might change price every week or even every day. So that has been normal here. However, somehow J Powell didn't get the memo and he reduced the interest rates in the country on July 26, which was inconveniently for the competitors right in the middle of our busy season.

And of course, once that was in the forward curve, that was sort of built into everybody's projection of their cost of funds, people reacted to that, we reacted to it as well. As Steve commented earlier, the margin during the peak season has not changed, and so what happened potentially is the entire industry followed the cost of funds down and that was reflected in the individual pricing, as well as in the aggregate pricing, which I'm happy to say across the industry remains rational.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. And just a follow-up, and I know you've answered a lot of questions about the servicing changes. But the -- I guess, the initial impetus for you to kind of go down that route, was it the fact that you found these practices to be better in some way and lower cost? Because you said that you didn't necessarily expect them to have lower losses or -- I mean, will they have lower losses than you would have had? I guess, what was the original impetus for that, the start of that process?

Ray Quinlan -- Chief Executive Officer

I think it was a combination of three items: One is it's good to review our collection practices on an ongoing basis, which we do; two is the idea of forbearance, which essentially is a period during which a customer doesn't make payments on the loan. It's something which, as I said, we had especially designed for this industry, given the high vicissitude that exists in the customers' lives in their first seven years after graduation. And so that has become traditional, but it has always been a practice that people worry about because you don't get a payment and you're not in particular contact with the customer. And so what we say -- and we've had pretty good results in that.

But it's something that always makes us a little bit uneasy. We prefer to have more contact with our customers. We prefer to have a minimum payment. We prefer to be in touch with them every day.

And we also would like to serve as a counselor to them as they go through these changes in their lives. And so I think what we had was, it's always good to have new practices; two is forbearance. As we use it, we monitor it carefully, but it's a situation that always causes us to worry because we don't have a payment from a customer for a longer period of time; and thirdly, as we looked horizontally across the industry, we've noted that some people are doing pretty well and it's always something to learn from our competitors.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks so much.

Operator

There are no further questions at this time.

Ray Quinlan -- Chief Executive Officer

OK. Well, thank you all for your attention. And I'd say it's pleasure talking to such a august group. And I do want to just not lose forest for trees.

We had an excellent quarter. We grew faster than the market. And our winning the J.D. Power's certification is a stand-alone in the industry.

And for those of you who have been with us for a long period of time, it's a nice bookend. When we launched from Navient, let's remember the bank had a seasoned assist order on it, had a consent decree for, of all things, overcharging American servicemen who is our service people. It was just in a dismal spot. We come in five and a half years later.

We now win the J.D. Power certification. It's the best in the industry. Our complaints had dropped by over 60% on a pro rata basis.

As we go forward, we are well equipped for the future. Our best days are in front of us. And in regard to politics, we will be the premier player in this gap financing industry, no matter what happens. And I will say, I appreciate the fact that the politicians are doing their best to demonize the industry in such a way that it keeps the entrants for a serious to a minimum.

So we appreciate their helping us out by lowering competition. With that, I just want to thank you all for your attention, and look forward to talking to you in the future.

Brian Cronin -- Vice President of Investor Relations

Thank you for your time and your 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.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Brian Cronin -- Vice President of Investor Relations

Ray Quinlan -- Chief Executive Officer

Michael Kaye -- Wells Fargo Securities -- Analyst

Steve McGarry -- Chief Financial Officer

Mark DeVries -- Barclays -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

John Hecht -- Jefferies -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

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