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Welcome to the Sallie Mae Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Kate deLacy, Vice President, Investor Relations. Please go ahead.

Thank you, Madison. Good evening, and welcome to Sallie Mae's Second Quarter 2026 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our Co-President and CFO; and Melissa Bronaugh, Managing Vice President of Strategic Finance. After the prepared remarks, we will open the call for questions.

Before we begin, keep in mind, our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here 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. For Sallie Mae, these factors include, among others, results of operations, financial conditions and/or cash flows, as well as any potential impacts of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements to reflect events or circumstances that occur after today, Thursday, July 23, 2026.

Thank you, and I'll now turn the call over to Jon.

Thank you, Kate, and Madison. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Second Quarter 2026 results. Before we dive into the quarter's results, it's worth taking a moment to reflect on the strong position we enjoy today as a company. It's been just over a year since the federal PLUS reform reshaped the higher education financing landscape and created the potential for a $4.5 billion to $5 billion increase in annual originations for Sallie Mae over the next several years.

Since then, we have been diligently preparing for this exciting opportunity to serve more students and families, strengthening our product offering, investing in our capabilities and positioning the company for our first peak season under the revised federal programs. At the same time, we have remained focused on supporting our school partners and maintaining our industry-leading status as a preferred lender for more than 2,100 schools.

I'm pleased to announce that we have successfully delivered all of the additional products, features and functions we planned for this peak season, including enhancements to our medical, dental, law and MBA products and the launch of our new parent loan. While peak season is just beginning and it's too early for definitive conclusions, the application and volume trends for these new products, as shared on Page 5 of our earnings presentation, are at the higher end of our expectations or better. These trends, if sustained, reinforce our confidence in both our 2026 originations, estimates and the longer-term opportunity presented by changes to the PLUS programs.

We are pleased with our performance and the positive trends we are seeing in credit. The changes we have made in the past to our underwriting standards and loss mitigation practices are bearing fruit. Previously distressed borrowers are successfully navigating their loan modification journey and enjoying better-than-expected success upon completion. Credit trends within our portfolio are generally consistent with or better than expectations. We believe these factors position the company for continued success in 2026 and beyond.

Within that context, let's jump into the details of the quarter. GAAP diluted EPS in the second quarter was $0.29 per share. Loan originations were $716 million, up nearly 4.5% from the prior year quarter. In addition to overall growth, origination credit quality improved modestly year-over-year, with the average FICO score increasing from 754 to 755, while cosigner rates remained strong at 84%.

Turning to credit. As discussed at a recent conference, we have observed activity affecting a small segment of borrowers who we believe have both the willingness and capacity to repay, yet are progressing directly through delinquency to default. Based on our analysis, we believe many of these borrowers are engaging with debt resolution providers whose services are being marketed as consolidation or refinancing solutions. We do not believe that many of these practices are in the customers' best interest, and we are committed to doing what it takes to ensure that customer interests are protected and that our recovery and settlement strategies are fully aligned with the underlying value of our loans.

In response to this, we have taken deliberate steps to increase control over our post-default recoveries. While these actions create an in-year headroom to potential recoveries previously estimated at approximately $25 million in 2026, we view the impact as largely a timing dynamic and expect our internal efforts to equal or exceed this recovery level over time.

In this context, we remain optimistic about our credit performance. Net charge-offs for the quarter were $113 million, up from $94 million in the prior year quarter, approximately $16 million of the year-over-year increase we believe to be attributable to these misaligned third-party debt resolution practices and the related shifts in our recovery strategies. Importantly, we do not view this as a broad-based weakening in credit. While our most recent repayment wave increased by 4%, the net charge-offs for the portfolio, excluding this small impacted segment, grew at a much slower rate.

Supporting this performance is the sustained success of our loan modification programs. Borrowers in all active modification cohorts continue to have payment success rate in excess of 80% over 6- and 12-month periods. Looking specifically at borrowers who have begun to exit the programs, over 75% are consistently making payments after 3 and 6 months. We are encouraged by these results, which are performing modestly better than our expectations.

Overall, we remain confident in the underlying health of the portfolio. Credit quality remains strong, borrower performance trends are stable, and the current loss pressure is concentrated, understood and manageable.

Pete will now take you through some additional details. Pete?

Thank you, Jon. Good evening, everyone. For the second quarter of 2026, we generated $333 million of net interest income and $45 million of other income. Compared with the prior year quarter, net interest income decreased by $44 million, while other income increased by $16 million, driven by growth in recurring program management fees from our strategic partnership and growth in servicing fee revenue. Net interest margin was 4.75% for the quarter. As previously communicated, we expected NIM to moderate modestly during the quarter, primarily reflecting the higher liquidity levels following the loan sale completed in late March.

Looking towards the second half of this year, we expect margin expansion to resume as excess liquidity is deployed into new loan originations during our peak season. As a result, we believe the second quarter will likely represent the low point for margin this year. Importantly, the underlying earnings power of the portfolio remains strong, supported by disciplined funding, attractive asset yields and continued growth in fee-based revenue streams.

Private education loans delinquent 30 days or more were 3.7% of loans in repayment, an increase from 3.5% in the year ago quarter and a decrease from 4% at the end of the first quarter of 2026. Our reserve rate was 5.89% at the end of the quarter, down 6 basis points from the prior year period, reflecting the effectiveness of our disciplined underwriting and ongoing efforts to optimize loss mitigation strategies. Our provision for credit losses was $126 million in the second quarter, down from $149 million in the year ago quarter.

Noninterest expenses were $195 million, up $28 million from the year ago quarter. The majority of this increase was driven by onetime investments and product enhancements, as well as strategic initiatives to support anticipated growth from the federal lending reforms. Importantly, revenue growth from servicing and recurring program management fees more than offset a significant portion of these investments, resulting in an efficiency ratio of 48.6%, an increase of just 7 percentage points year-over-year. This reflects our ability to invest meaningfully in future growth while continuing to operate from a position of financial strength.

As you may remember, earlier this year, we took decisive action in response to the market dislocation in our stock, which allowed us to return a significant amount of capital to shareholders through a $200 million accelerated share repurchase program. We completed the ASR during the second quarter, repurchasing a total of 9.3 million shares. The final 900,000 shares were recorded on June 30 upon completion of the program.

Year-to-date, we have repurchased approximately 13 million shares or 6.5% of the shares outstanding at the end of 2025 at an average price of $21.95 per share. Since 2020, we have reduced shares outstanding by approximately 59% at an average price of $17.19 per share, underscoring our disciplined approach to long-term value creation. We have $242 million remaining under our share repurchase authorization, which we expect to substantially deploy throughout the remainder of this year.

Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 18.6% of total assets. At the end of the second quarter, total risk-based capital was 13.1% and common equity Tier 1 capital was 11.8%. We continue to believe in our strategy and the solid foundation it provides to drive sustainable growth and return capital to shareholders.

I'll now turn the call back to Jon.

Thanks, Pete. As we discussed today, our preparation for the evolving market landscape is beginning to translate into encouraging early indicators, and we are pleased with the momentum building across the business as we enter peak season. We believe the recovery actions we have taken have the potential to create better outcomes for both borrowers and Sallie Mae. Combined with the continued positive performance of our loan modification programs, these factors further strengthen our confidence in the durability of our portfolio. The investments we have made, together with strong credit quality and growing customer demand, position us well for the remainder of 2026.

With that in mind, let's turn to our updated guidance. At this time, we are narrowing our net charge-off guidance range by maintaining the high end at $385 million and raising the low end to $365 million. We are making this change in response to our adjusted recovery practices, as detailed on Slide 8 in the earnings presentation and discussed earlier in my remarks.

While we continue to expect approximately a $25 million potential impact to recoveries in 2026, a portion of this NCO impact has already been partially offset by slightly better-than-expected performance in the broader portfolio. This reinforces our confidence in the underlying credit performance in the business. We are affirming all other guidance metrics.

With that, Pete, why don't we go ahead and open up the call for questions.

[Operator Instructions] Our first question is coming from Mark DeVries with Deutsche Bank.

Pete, I think you mentioned you expect 2Q to maybe be the low point in the NIM for the year. But any color you can give us on kind of the trajectory for that in the back half?

Yes. Thanks, Mark. Yes, I think as we deploy the liquidity during the peak season, we'll start to normalize probably closer to our long-term target range of kind of 5%. I don't think we'll get too far up in that normal range. But I think plus or minus, we should track there for the full year.

Okay. Got it. And then any updates you can provide on ongoing conversations with the new loan sale partner? And also, any optimism you may have that buyer could help expand your credit box and the TAM?

Yes, sure. We started this year with the goal of expanding the partnerships. And we ran a mini process similar to what we did last year with a lot of the same participants. We selected a partner to go into bilateral negotiations with.

That's progressing really well. We're in the stage where documents are being created and traded back and forth with each other. And we're negotiating the finer points of the economics. I feel really good about kind of how that process is going there, sort of openness to our asset class and their interest in both the traditional undergrad product that we have traditionally sold, but also at the margins, creating some opportunity for credit box expansion.

I expect that, that will continue at pace and likely close in the third quarter or early fourth quarter at the latest in time for us to potentially put some of our peak origination volume into the new partnership.

And our next question is coming from Moshe Orenbuch with TD Cowen.

Great. I'm hoping that maybe, Pete, you could give us a little bit of additional detail as to how the current partnership is going? And how should we think about the revenue components, both periodic and kind of ongoing from that? And if there are any differences that you've kind of incorporated into the discussions with the new partner? Or would it be similar?

Sure, sure. The existing partnership with KKR is going really well, according to plan. The volumes that we had anticipated for the year are coming right in line with expectations. The structure of the second partnership is largely in line with the economics that we have in the first partnership with some minor tweaks to different components of the structure. But we feel really good about how the KKR partnership has gone so far.

I think importantly, both KKR as well as the second partner have expressed strong interest in building capabilities for taking Grad product. And so that will be kind of the next phase after we get through peak originations this year and have a little more information about what the makeup of our Grad originations are. And I think also, once we've completed the second partnership, we'll be in a position to share more details around components of the fees and ranges of those fees once we get beyond having just one bilateral arrangement.

Great. Okay. I wanted to also just talk a little bit about credit performance. Obviously, a pretty hot topic. And it is encouraging that you kept the high end of your charge-off guide range where it was, but anything that kind of approaches credit kind of gets people a little more antsy.

And Jon, you had made a comment saying that you felt good about the current performance that you had already kind of offset or some of the recovery from those kind of deferred recoveries. And I was hoping you could kind of just expand on that? What aspects of the performance are you seeing that are better? And how does -- if you can kind of roll that out for us over the next several quarters, how does that manifest itself in your numbers?

Yes. Moshe, let me sort of provide the perspectives I can. I may not be able to give all the detail you're looking for. First of all, we really appreciate credit as a sensitive topic, given broader macroeconomic, technological sort of concerns and the like. I think that is why we have worked really hard starting at a conference a couple of, I guess, just a month ago that Pete attended and going through the day to really try to provide a lot of detail about what's going on with this particular segment in question and sort of how we are treating it and why. And I think we're also trying to provide a nice amount of data on the performance of sort of the other components of our credit story.

Let me first start with what was the hot topic for the last couple of years, which is loan modifications. And I think if you rewind the tape, Moshe, you obviously know us well. When we changed the loan modification program, the question was always how were these customers going to perform when they come out the other side. We are now up to 6 plus -- 6 months plus outperformance with some of these customers. Obviously, less with others as they roll out of the mods.

And I think the data we've provided is, I hope, helpful, useful and encouraging. We are seeing better than 75% success rate after 3 and 6 months. That is higher than our expectations. I think we've given you some of that data in the overall investor presentation. And we feel great about that and have not seen any trends in those payment rates over time that would make us anything less than optimistic about their effectiveness.

And again, that hasn't happened by accident. Those programs are, we think, very well designed. They are tightly controlled in terms of entry. The conditions and the requirements for what a customer has to do to get into them are quite diligent, and we obviously track that regularly to make sure we're getting the performance we like. So I think that is sort of key component number one and obviously something that's going to be important to our credit story for the remainder of this year as those customers come out of their modifications and setting sort of new baseline levels of expectation going forward.

In terms of the core performance of the portfolio, I think the simple math I would point you to is, I think we've been very clear that the sort of recovery gap has been estimated to be about $25 million on this segment in question. I think it is notable we have only raised sort of the lower end of our guidance by $20 million. And I think that is reflective of the fact that we are seeing general strength in the portfolio across the rest of our segments and the rest of the components that obviously more than offset the sort of full $25 million impact there.

So I don't think I feel comfortable trying to give specific guidance by quarter. You're well familiar with the normal seasonal patterns that we have in the business. And those patterns, I think, continue to sort of mature and set. But I think we really have gone to great lengths to try to delineate what we see as really a timing of recovery issue versus a credit issue and remain committed that based on everything we see today, we are optimistic about what we're seeing in the general credit performance.

And our next question is coming from Sanjay Sakhrani with KBW.

Pete, just a quick question on sort of the NIM rebound. Noticing sort of the loan yields, those have come down pretty meaningfully. Do you expect a step up in those loan yields as we move through the back part of the year in terms of loan mix just to get back towards the 5%?

Yes. I think some of that's a little bit of a distortion by the fact that second quarter is kind of our lowest origination quarter and the mix of loans that are coming in. We fully expect that as we get into the heart of our peak season that traditional yield patterns will sort of start to reemerge.

Got it. And then just another question on sort of the -- your expected gain on sale. I think when we looked at -- we calculated this quarter, it seemed to be higher than the typical 2% or so that you've been getting. Is that -- maybe you could just help us think about what's incorporated in your expectations for this year? And if there was anything different in the mix of the loans that you sold this quarter?

Yes. I think -- yes, I certainly can address that. I think one thing to remember is when we're selling the newly originated loans, we're selling -- the price that we're getting upfront is both the initial disbursement as well as the gain on the second disbursement because that's just the way the accounting model works for selling an undisbursed loan that has 2 component parts.

So that kind of front loads a little bit the gain with the newly originated loans. And so that might be the factor that's sort of putting you off a little bit. I think in totality, though, that kind of 2%-ish is a good target for the gain on sale for the flow-related loans. It will move around a little bit based on the pricing grids and other things. But I think in terms of trying to set a benchmark, that's probably a good place to start.

And our next question is coming from Terry Ma with Barclays.

Maybe just starting off the EPS guide. Can you kind of talk about what's kind of contemplated in the back half EPS guide? Seems to be about 15% higher than Street expectations right now. So like any color on the moving pieces would be helpful.

Yes. Thanks, Terry. Again, I think there's some moving parts here. Obviously, we talked about the change in our net charge-off guidance. So like we're operating in the higher end of our original plan there. And we -- although we've covered a portion of the anticipated impact from this segment of borrowers and changing our recovery strategy, we still got to get through that over the second half of this year.

But that, based on other activities that we have in the second half of the year, we still feel there's a viable path for us to get up into the range that we had previously raised to last quarter. So we feel good about both our net charge-off updated range as well as the previously released range of earnings per share for the full year.

Got it. Okay. And then if I think about credit for the second half, obviously, delinquencies this quarter improved sequentially. But as we look out to the back half, should we kind of expect the same seasonality that we saw last year with elevated delinquencies in the back half? You guys did have a sizable cohort exit extended grace this quarter.

Yes. Terry, I think the general seasonal patterns are probably right. There's a few things that will affect delinquency trends that are worth just considering. Obviously, the size of the repayment wave, we know early to repayment borrowers tend to experience financial distress at a higher level. So if you have a larger wave this year than last year but a comparably sized portfolio, there can be some numerator denominator effect of that.

There will also be, Terry, over time, a modest impact driven by the fact that we are selling new originations now for the first time. And some of those new originations are defined as in repayment based on their sort of deferral status. And we know that loans that are in school tend to experience financial distress at a much lower rate.

So I think you've got a couple of those factors that are working that can move some of the seasonal patterns a little bit on the margin. But I think sort of the seasonal patterns, plus or minus, keeping in mind those types of considerations, yes, it was probably the right ZIP code for you to be thinking about.

And our next question is coming from Don Fandetti with Wells Fargo.

I was wondering if you could just talk a little bit more about the debt resolution situation. Just trying to better understand why the pause on all recovery sales. Couldn't you just sort of say we're not really open to debt resolutions? Just kind of walk through that a little bit. And is there anything that could change it would enable you to turn those back on? Or is this more of a permanent change?

Sure, sure. So our broader recovery strategies are really based on an assumption that by the time the borrower gets into that part of our collection cycle, they've already gone through evaluation of their ability to pay. And the settlement levels in our traditional strategy was really based on an assumption that those borrowers didn't have an ability to pay.

These resolution companies that we talked about are really targeting customers that do have an ability to pay and are relying on kind of the back door in our recoveries process to pick up the loans at a discount in a way that disadvantages the borrowers. So we made a decision which I talked at length at the prior conference about to sort of halt all of our debt sales and pull, for a time period, all recoveries in-house. Once we get a handle on how this is going to play out, we certainly have an ability to change our strategies and turn that back on.

But in the short run, this is a way for us to get control of post charge-off recovery strategies. And it's a timing issue in large part because when we started our champion challenger a few years ago, what we've learned over time is our internal recovery strategies yield on balance, a higher return. And so it's really a question of in-year recoveries versus collecting over time.

Got it. And then could you also talk about plans for seasoned loan sales this year and just kind of balance sheet growth expectations?

Yes, sure. When we started the year, we anticipated loan sales to sort of manage a flattish balance sheet this year. And when we accelerated the loan sale in the first quarter that I talked about and that allowed us to do the ASR program, we indicated that we likely would do modestly more loan sales this year and sized that at sort of $1 billion-ish more than what we otherwise would. Which would imply, all things equal, maybe a little bit of a down balance sheet. I think that's all contingent on what the level of originations we have during peak this year. But that's how you should think about it. We're probably $1 billion more loan sales than we otherwise would have done in our original guidance.

And our next question is coming from Jeff Adelson with Morgan Stanley.

I just wanted to circle back on the loan yield question real quickly. I think we looked at some of the typical seasonal trends you've seen historically. It didn't seem like the second quarter tended to be down that much. I know there's more noise with the sales you've been doing.

I guess I was just wondering, were there more higher-yielding loans being sold in the last 2 quarters? And I guess as we think about the yield recovery from here you mentioned, Pete, how do we balance that against, I think, one of the questions we've gotten from investors is with the partnership -- or not the partnership, the Grad opportunity and the parent opportunity, those might be a little bit lower yielding. So just help us understand those puts and takes there a little bit better?

Yes. Let me start with the question about yields on the loan sales. I think our practice on loan sales has been pretty consistent over time. We attempt to select sort of random sample of our existing book. Largely, that is driven by the concentration limits that the rating agencies put around the ultimate securitization takeout. So that really hasn't changed, and that's been pretty consistent over time. The partnership loan selection process follows a similar kind of concentration approach and grid for pricing. So no adverse selection one way or the other between our bank book for investment and the partnership programs.

In terms of the path from here to the end of the year, keep in mind that carrying the extra liquidity is the real thing, more so than yields on the loans. And so we're carrying around a lot of extra liquidity that's invested in at cash rates that we wouldn't have otherwise done. And in our original plan, we would have done a loan sale in the second quarter much closer to when we need the liquidity for our peak season.

So as that investment balance gets pulled down and reinvested into higher-yielding loans, we'll blend back to an overall NIM level that's more in line for the full year with our long-term guidance. Now we'll be a little bit above 5% or a little bit below 5%. That will be dependent on how the rest of the year materializes. But I think, again, it's a temporary thing in year, driven largely by timing of when we generated that liquidity.

Okay. And Pete, you talked over the quarter about the opportunity to get the efficiency ratio down to the low 30% once you exit this growth phase. How should we think about the near-term, medium-term path here, what that looks like? And how long it might take you to get back down to a mid-30%? And just maybe talk about how the second strategic partnership helps you get there in that journey?

Yes, sure. We -- when we set out our guidance for this year on noninterest expenses, we kind of gave an additional a bit of information that sort of a little bit of a forward look on '27 that we thought the rate of growth going into next year would be roughly half the rate of growth that we've had from last year to this year.

And we're not ready to update that at this point. I'd say we'd like to do better than that. And if we do better than that, then we'll get to that kind of low to mid-30s rate in a much more rapid fashion.

With regard to the partnerships, as we build this fee-based revenue, that obviously adds to the mix in terms of the top line denominator of the efficiency ratio. So we've had a growth in fee-based revenue in excess of 50% year-over-year off a small base, admittedly. But based on the scaling that's happening with these loan sales, we'll continue to build -- even with just the first partnership, we'll build significantly going into -- from this year to next on both basis of the program management fees, the base fees there as well as we'll start to get to the point where we kick into the additional performance fees. The servicing fees will continue to build as we get scale in these partnerships. And the second partnership will just add additional scale to that.

I also mentioned that we intend to expand the partnerships going into next year before next year's peak to cover grad volume that will start to originate this year. And that will be important for us to have those facilities as we have the real increase in opportunity from the PLUS reform. So like that's all building towards a really positive trajectory for capitalized fee-based revenue, as well as we will get past this year 1 investment that we've needed to make to get ready for PLUS, and we'll start to normalize and get more efficient in our marketing efforts and other efforts around the core business.

Okay. Great. If I could just squeeze in a third. I apologize. Just what about the balance sheet growth impact of the third? I mean just any update on how you're thinking about the balance sheet growth once that comes through?

I think, again, for this year, we're probably flat to a little down depending on what the overall level of originations are during the peak season. I think we would probably have some modest growth aspirations for the balance sheet in 2027, and then we'll probably start to trend back to kind of a mid -- low to mid-single-digit kind of rate of growth of the bank's balance sheet as we move forward.

Yes. And I would just add, I think we provided a little bit of commentary on this in the fourth quarter earnings announcement in January. I don't think our thinking has changed at all since that time.

And our next question is coming from John Hecht with Jefferies.

This is Yuna on John Hecht's line. I had one more question on the NIM. So with as previously mentioned on the Grad program likely bearing lower yield, shorter duration, mix with the forward flow -- additional forward flow that may or may not change how you think about the balance sheet growth, what would -- what kind of factors or moving pieces would get you to reevaluate the medium-term NIM target? And is that kind of how you're thinking about it for 2027?

Yes. First, let me just address a couple of the points you made on the Grad opportunity. I don't know that it's necessarily significantly lower yields on the assets. And certainly, I don't think it's necessarily a shorter duration. I think there's -- there will be a mix issue of -- MBA loans will be very short, but medical and dental and other programs like that will be much longer than, and much higher balances than our traditional undergrad products.

So I think it's hard for us to answer that perfectly until we get through our first peak season of originations and understand what the mix of this opportunity is going to look like. So as a result of that, it's really hard for me to give any other guidance on forward look, other than I think by the end of this year, for the full year, we'll be close to that 5%, if not a little bit over. And over the longer term, we have not updated our point of view that deviates from our past long-term guidance of kind of low to mid-5% range for NIM.

Got it. And maybe on the -- after the 2026 class graduating in May/June. Is there any data that you can share about their employment trends, what you see or what your expectation might be for the repayment for the second half of that new cohort?

I think it's too early. I mean, those grads are still in their grace period. So like we won't really start to see any meaningful data on that until we get into the fall and they get into repayment. I think broadly, the headlines are indicating that employers are hiring, which is a little different than the headlines last summer. But I think it's really just too early to make a call on anything like that.

And we will take our last question from Caroline Latta with Bank of America.

So maybe just heading into peak season, can you give us an update on the competitive landscape in the graduate market in terms of like any changes in pricing or the credit box? And then also, I think you guys talked about how the new products are trending pretty well, but are there any specific products or markets where you're sort of meaningfully exceeding the expectations you guys had internally?

Yes, Caroline. Sitting here in middle of July, peak is really just a couple of days old. And so I think it's hard to sort of infer too much at this point. I think most of what we could talk about are sort of things that we've seen leading up to peak. And as I've described this in the past, I think typically, we have seen pretty rational pricing. I think that continues.

I think we have seen some modest pressure on sort of marketing expense and some modest increases in marketing activity, nothing that I think we would view as being particularly out of the norm for things that we did not anticipate as a potential eventuality and plan for in sort of our outlook and sort of strategy. So I think it's sort of progressing as we thought it would at this point, again, with maybe a little bit of sort of upward marketing pressure.

But I think it's fair to say we will know much more over the course of the next month or 2. And peak season is not long. It's 8, 10 weeks. And certainly, by the time we get to the third quarter, we'll have a good sense of that.

And I think likewise, in terms of volumes, it's hard to know. Obviously, the most important measure is disbursements. It's just we haven't started disbursing yet. That's not the point we are in, in the academic calendar. I think the data we provided in the investor presentation on application rates is probably the sort of best early indicator that we have of general activity levels.

And as I said in my comments, I think we are encouraged by those activity levels. They are by product listed out and sort of at or slightly above our expectations for this point. But again, all of that with the caveat, it's early, but we like what we are seeing so far.

Thank you. 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.

Great. Thank you, Madison. I appreciate your help today and appreciate everyone's time and attention this afternoon. Obviously, if you have questions, please feel free to reach out to our IR team. They stand by ready and willing to help. We look forward to talking to you again in the third quarter and updating you on what we hope will be a really successful peak season. And until then, again, thank you for your interest in Sallie Mae. Have a good evening. Oh, I'm sorry, Kate, we're turning it back to you for some closing business.

Thanks, Jon. Thank you for all your time and questions today. A replay of this call of 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 Second Quarter 2026 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.

All right. Good morning, everybody. Kicking off day 2 of our financials conference. We have with us, Sallie Mae. With me today, I'm joined by Pete Graham, CFO of Sallie. Pete, welcome back to our conference.

Yes. It's great to be here. Thanks for having me. .

So maybe let's get right into it. You released some slides a little while ago this morning. You highlighted some recent loss pressure that's being driven by a specific high ability to pay segment where outcomes appear to be influenced by misaligned debt resolution practices. Can you maybe walk us through what you're seeing here and why it's behaving differently from the broader portfolio?

Sure, sure. As we started to see the November payment wave come through, we noticed a trend of what we would otherwise think to be customers who had a high ability to pay by various credit metrics, whether it's FICO or other credit lines outstanding, things like that, were not engaging with us, and were rolling straight to default. So it's a small -- a very small portion of our portfolio, but was driving an outsized kind of impact in terms of our charge-offs. As we dug into that, we realize that there's some sort of players in the debt management space that are kind of taking advantage of recovery settlement levels that we normally have that we set for people who don't have an ability to pay.

And they're basically marketing a product that purports to be a student loan refinance. They're basically writing a new loan to this customer at full loan value plus origination fees, and then they're coming on the back end of our recovery processes and getting that loan at $0.50 on the dollar, call it. And so we feel that's misaligned for a number of reasons, but mainly because we believe the customers are not really understanding fully the product that they're being offered. They're not understanding the long-lasting impact that, that charge-off is going to have on their credit ratings.

And so we're going to take some action to kind of close that down in the near term. We're going to -- or we already have terminated our flow contracts that we have in the recovery sales -- charge-off recovery sales space. And we're going to adjust our settlement floors and our internal processes for a period of time. So we can get a -- kind of get a good handle on that landscape.

Can you talk about when you maybe first noticed this? And how long you think it's been going on? .

Yes. Again, I think there's always some level of settlements that happen in the recovery process, but this sort of elevated level really materialized in this November payment wave that comes into repayment here in the first quarter. And that's where we really noticed the outsized impact on charge-offs. We were expecting again. And if you look at the charts in the deck on a -- once you normalize for this cohort of customers, like credits actually, although the dollars are higher because of the size of the payment wave, the actual performance is only modestly elevated. So like we feel good about broader credit. And when we saw trends in the portfolio that we're going against that, we dug in a little bit and uncovered this.

And you sort of highlighted some of the actions you're taking in response. Can we just dive a little deeper there. What channels you're turning off? How you think that will impact the credit in the near term or over time? I'm assuming -- I noticed in the slide, you mentioned that this would be NPV-positive, but I think there's probably a timing dynamic there.

Sure. Yes. So we kind of sized it sort of if we don't restart our normal recovery practices before the end of this year, that's kind of like a $25 million impact to recoveries in year. Now we've proven through our sort of champion challenger model that we put in place a couple of years ago that our internal recovery efforts actually drive higher NPV on recoveries. It just happens over a longer period of time. So kind of the trade-off always is, do you get the immediate recognition from the charge-off sale? Or do you work that -- those accounts over time and kind of build up a layer of payment recoveries coming in. Again, if we don't restart any of those sales this year, that's kind of the full $25 million impact.

But still how this unfolds over the coming weeks, months will determine whether we are comfortable restarting this year or it kind of tails into next year. So it's -- again, it's a modest impact. It's not a credit impact because, again, it's the recovery part of it. So it's not kind of like core credit in the book once you isolate for these early straight rollers that we're seeing that otherwise look like they have ability to pay. So we feel like it's well contained, and we're taking action to kind of ring-fence it and get it under control.

And is there any sort of expense impact to be thinking of as you sort of bring some of that in-house or... .

Yes. I mean the internal recoveries that we direct are largely using some form of contingent collections. And while that will have an impact on expense, it's variable and like, for instance, a few years ago, when we brought half of our process in-house, we didn't -- we updated our charge-offs guidance for the year, but we didn't have a noticeable impact on expenses. I don't think anybody is going to notice the expense impacts this year. And it will be all within kind of puts and takes that always happen in any given year in a guidance range.

Okay. So I guess maybe more to come on the actions you're taking, the results of those actions.

Yes. Again, I think we'll know more by the time we get to earnings, and we'll update on what's happened since. And we'll probably have a little sharper view on exactly timing and duration of change in process.

Okay. Great. And you also shared some new and encouraging data on modifications as well. Can you just walk us through what you're seeing and what gives you confidence that these borrowers will continue to perform as they step out of their lower payment period?

Yes, sure. We've been really pleased with the performance in the modification programs. We've been giving sort of payment success rates over time in the different cohorts at different sort of slices of how long have they been successfully making payments. And I think we updated that data in the 8-K, we filed this morning. I think if you look at it over time, what it shows is, although there is some variability by enrollment cohort, there's a really high success rate of the people in -- when they're actually in the modification period of making payments over 80% in all the cohorts.

And because we started these new programs in the fourth quarter of 2023, there generally 2-year programs. What we've seen this year is sort of the graduation of the first cohorts that entered. And we've been really pleased with the early performance. We put some data in the charts around success rates after 3 months being back in -- or stepping back into their contractual payments. And those success rates are approaching 8%, which is higher than what we had anticipated when we designed the program. So again, all really positive signs about success of the mods programs, and we'll continue to update that exit success rates as we build more data points moving forward, but feel really good about early signs.

Okay. Great. And as you step back, I think, from some of these near-term dynamics we're talking about today, how are you thinking about the durability of your loss profile? And what gives you confidence in maintaining outcomes around your current range?

Yes. I think certainly, the success of the loan mod programs is a big piece of that. I think that's an important tool that helps us manage the peak stress period in our portfolio, which is that new to repayment. The other thing that we have also updated information in the 8-K is the fact that we made some significant underwriting changes a few years ago. And those underwriting changes are now flowing through into new repayment -- people rolling through into repayment status.

And the portion of borrowers that are subject to the old underwriting standards continues to sort of dramatically shrink. So in the current year, that's going to be 5% roughly of borrowers entering repayment are under the old criteria, and that shrinks pretty dramatically as you move into the next couple of years. So that again, is a little bit of a credit tailwind of having made some cuts to underwriting to sort of optimize against what we saw as poor loss performance of certain cohorts.

Maybe shifting away from credit. There's a lot happening for Sallie Mae lately, not the least of which includes increased opportunity in private lending as Grad Plus retrenches. So I think it's still early days, but how do you view your competitive position in the market? What differentiates your new graduate products? I think you also included some nice stats around early uptake of those 2 new products you highlighted. Maybe just talk about that.

Yes. We've been really focused on analyzing customer demand as we've thought about leaning into grad. We really took a position that we wanted to get insights into what features we're really going to resonate with the different programs of study, tried to be really thoughtful and gather data around what kind of deferral periods we needed to offer just to sort of tailor that because what a medical school student needs given residency periods and the like is very different than what a law school student needs, et cetera.

So we've been very thoughtful about product design. I think that's resonating somewhat in our early launch of these programs. And again, it's early days, but we're really happy with the uptake on that. And we think that is a promising sign towards our readiness for really being in the heart of peak season this year.

And how do you expect the competitive dynamics in the grad market to really evolve relative to what you've seen in undergrad. I mean you've had the long-standing relationships with schools. Are they giving you any feedback on this dynamic?

Yes. I think the broader expectation around competitive landscape is kind of the same as we've talked about. We haven't seen any evidence of major new entrants or the like. I think the established players in the undergrad space are the same folks that are competing in the grad space. And they're not kind of uniformly leaning in. Some are sort of being very measured about what they're doing. Others are being a little more aggressive on like marketing spend and things like that.

So we expect it to be a pretty competitive market still, we expect for there to be a stable sort of set of participants in the way that there has been in the undergrad. I think the feedback we're getting from the colleges is, they really appreciate the sort of level of effort we've put into really tailoring our programs to meet defined needs of different student cohorts. And so we feel like that's probably a differentiator for us as we go into a competitive peak season.

You mentioned you're probably seeing the same competition as you see in the undergrad. I guess one question we get a lot is, there are some players in the grad market or the refi market, consolidation market that have a different -- a little bit of a different footprint. Are you expecting any competition there? Or is there a difference in the marketing strategy and how that...

Yes. I think there are certain players that have a different view on efficiency of marketing spend, and they will tend to drive costs higher in the overall environment, but we're set up to sort of compete in that sort of commercial backdrop. We can sort of target where we want to spend our dollars and focus on things that we think are going to generate a higher throughput and higher efficiency. And we've been really focused on that in terms of our digital outreach, in terms of sort of recognizing that grad students are a different -- completely different customer than undergrad, and really trying to tailor our outreach on grad for that consumer.

And just relatedly, as you've leaned into that grad opportunity, where have you made the most meaningful upfront investments? And how should we think about those investments over time?

Sure, sure. Kind of as we've talked about, the expense build for this year was really about being ready for peak. So things like developing the new products that we've been launching successfully in the recent weeks, building out the sort of underwriting models and things like that, that go behind that, the tech improvements that enable those product features because, again, you've got to make that come to life in all of your systems and processes and make sure it's well controlled. So that's been a big area of focus.

The other, obviously, is the marketing spend that we need to make to -- the investment we need to make to go after a new-to-firm customer. And it's been a very competitive environment. Just in the broader sort of digital marketing space costs across the board have increased. So that's been the sort of main areas this year that have been an area of focus. And again, it's kind of like a build before the actual volume comes. And we believe very strongly that as we scale into next year and beyond that will start to drive efficiency, particularly in the marketing processes and get to, hopefully, as good or better sort of efficiency rates as what we've had in the undergrad marketing. .

Can you just help us understand like what makes you think you can get that same level of historic efficiency as you sort of think about the efficiency ratio popping up and then getting back down to the...

Well, I think there's a piece of it which is tied to kind of like serialization. Again, we demonstrate in the undergrad space that it costs more to get them in the door the first time, but then serialization over time sort of normalizes that out. I think there's also an element of learning about an entirely new customer segment, tailoring strategies to go after that customer and you learn something by doing that and you sort of rinse and repeat and always refine your processes. So you are always looking at efficiency and trying to drive better throughput from your activities over time.

Okay. Great. And the other major development at Sallie Mae is the new strategic partnership business. You've been talking about a second partnership. How are you thinking about timing there? And how might that structure differ from the original transaction you did last year?

Yes. So we kicked off that business last year with the first partnership with KKR. The KKR partnership is going great, working as intended and coming up on the 1-year anniversary because again, based on an academic year. So as we start the new academic year, we'll be starting the new sort of next year of commitment. We ran a sort of competitive process internally with a lot of the same participants that participated in our process last year, and went into bilateral negotiations with one of those parties in the last few weeks.

Still anticipate working through that process before the end of the year. And initial conversations are going well. I think I would think about this as probably a similar sort of construct in terms of structure and economics as the KKR deal, not exactly the same, but similar. And we believe we'll -- based on the engagement so far that we'll get that done in short order. And I think the important thing is the -- both KKR and the second partner are both also very interested in building on the undergrad contracts that we have, and building capacity for grad flow originations as we're scaling into that going into next year.

So this one might have a little bit more of a grad focus as you?

This one will be primarily undergrad as the prior. Again, we -- because we're creating these new products and in market largely for the first time in this peak season, we need to get some data about the actual originations before we can build the various components of a partnership program. But I think the important thing is that the investors are interested in expanding to cover grad. So whether that's an add-on to the existing contracts or another sort of contract with the same partners, I'm sure we'll get that done. We just need some more data about what the thing is that's going to be in the flow contract before we can build the contract.

And apologies if I missed this, but when you think about the structure, is it -- is there typically going to be an upfront sale? Or is that unique to the original?

I think for any of these partnerships, there likely will be -- we refer to it as kind of like a seed portfolio because if you think about new flow originations, it's going to be a couple of years before you start to get cash flow into the structure. And so having some element of seasoned portfolio sale into the structure will be preferred, I think, by the investor and result in a sort of a better overall construct. So we're anticipating that to be part of the [indiscernible] partnership and quite frankly, any new partnerships we'd create in the future. .

Got it. And speaking of other partnerships in the future, how should we think about the long-term role of partnerships in your model and how that platform evolves over the next couple of years? And any sort of thought process around cadence of new partners? .

Yes. I wouldn't think about it so much as a cadence. It's more -- we need to build capacity for the level of underwriting that -- or originations that we expect to occur. And as you know, we are expecting a pretty dramatic ramp in particularly grad originations moving into next year. So like that will be the next thing we're really focused on is getting the contract structured around what that grad opportunity is.

I think over time, our view is we'll probably have a handful of partners as we get to scale, we'll have private credit firms like the KKR arrangement and this second one that we're working on now, we'll probably have some contracts directly with some insurance companies. We'll probably have some contracts directly with some of the big institutional money managers.

And because we're sort of building these programs over time, you'll get to a point where you naturally have staggered maturities of the various flow contracts and different sort of pricing reset time periods and the like. And our view is that will build kind of a more durable and resilient sort of funding profile that has less sort of episodic things built into it.

And I think one maybe more longer-term aspect you've highlighted in prior calls is despite the fact that you've maybe restricted how much you're willing to take on balance sheet, you've hinted that maybe some potential to underwrite a little deeper for those partners down the line? Like is that -- once you get...

Yes. I think that's always an option for us as we go into negotiations with a partner as to what their credit appetite is and whether that's setting the sort of concentration limits for our existing underwriting box that they want to take into a structure or whether it's they're comfortable with something that's beyond our current underwriting box that we're comfortable putting into our bank. I think that's always something that's open for discussion.

And all of the partners, to a various degree, over the course of the last couple of years as we've been talking with potential investors, they all -- all the firms are different and they have different sort of risk appetites and different profiles that they're looking for. We feel pretty confident that over time, we'll build the capability also to expand credit box, particularly in the undergrad space beyond what we've currently been putting into these flow contracts and what we currently put into our bank.

And I guess from a profitability standpoint, how should we think about partnerships in the kind of low to 20% return framework you've put out there? And how does that maybe compare to what you're doing for the on-balance sheet business?

Yes. So I think it's important when talking about these kind of comparators to note that like we intend to always have a well-functioning, well-controlled and very profitable bank book. I think that that's kind of something that is going to be important to maintain over time because markets change and appetites change, and we want to be able to have that balance. Our focus on the bank side has been on optimizing our operations and making sure that we're driving really strong returns into the bank held for investment book, that carries over too, into the partnership structure because, again, currently, we're selling a slice of those originations into these new structures so that the partners benefit from the improvements we're making in the core business.

The return profile of on book obviously, is very different than the return profile of what you're going to get through a partnership flow type structure. But the capital efficiency of the partnerships really is an enhancer to the overall ROE of the company. Because if you think about sort of monthly flow originations, we're recycling that capital month after month after month and putting that into the -- as we put those assets into the partnership structure. So it's a pretty exponential increase to ROE, although it blends into the overall return profile of the company.

Okay. Great. And maybe if we could just take it back to credit for a bit here as we come into the last 10 minutes of our conversation. As you think about the credit outlook we discussed earlier, how are you assessing the potential impact of AI on unemployment outcomes for recent grads? I know you've highlighted an improvement in the trend for the unemployment rate on recently graduated folks. So maybe just what you're seeing today?

Yes, I think there's been like -- there's been lots of opinions over the last 12 months and even going back longer than that on the potential impact of AI in the economy, et cetera. I think last summer, there was a big focus on the grads from last year were never going to get jobs. So I think that's been disproven by the data and the actual experience over the course of a year. I think the most recent sort of announcements by companies around grad hiring really is sort of dispelling that myth. And I think companies are realizing that if they want to have a workforce that's fluent in how to use these AI models, the best way to do that is to hire new college grads because they've kind of grown up as AI natives.

So I think the whole narrative around AI sort of crushing jobs in an immediate fashion is really a little bit overblown. I don't think the data supports that. And I think it's going to be like any other technological innovation where, yes, there is some job disruption, but there's more job creation as a result of it and as a result of the productivity that comes from it.

And maybe with rising costs and token costs, companies will realize that.

Yes. I mean that's another element that nobody ever really talked about, but it sounds like companies are starting to get a focus on that as they've seen their OpEx impact of just letting AI loose amongst everybody in their companies. So yes. .

And I think for our last topic, just capital, you have the new capital reproposal in focus. I think Sallie Mae has been a little overlooked in that regard. They still apply to you to go through. So how are you thinking about the potential impact to your capital profile and risk-weighted assets?

Yes. I think, look, there's a roughly 10% change in how student loans are rated and that's the bulk of the assets in our balance sheet. So again, the final rules aren't out, and we don't have implementation time lines, but that's kind of simple math in terms of kind of scaling the impact on us. Yes, go ahead.

Does that change how you think about capital return? I mean if we assume this is a final rule, would you...

If anything, we've proven that we're very focused on returning value to shareholders. I think our outlook on that really hasn't changed dramatically. We are very good stewards of capital. I think you've seen that over the time period that Jon has been the CEO. Since 2020, we've returned or bought back roughly 58% of the total flow to the company. I think as we move into this next phase with the partnerships, with the growth that's really coming from this sort of increased origination opportunity with Grad PLUS, you'll see us continue to have that discipline.

It's a growth story, both on the core held-for-investment book but also a growth story over time as we build these partnership fee streams that will be supportive of generation of a high return on capital, and we'll continue to focus on that. .

And does the partnership business, given the capital-light nature of that model, does that alter your framework at all down the line for how you think about mix of buybacks, dividends or any sort of preference?

Yes. Again, I think we're attuned to what our investors' preference is. And I think we've heard loud and clear that all things equal, they'd prefer capital return to come via share buybacks, just given the tax efficiency of that. And so that we'll maintain, obviously, a base level of dividends over time, but I don't think the nature of where the earnings are coming from really necessarily changes our point of view on capital allocation and return to shareholders.

It just -- again, this is a really important point to make, like the growth whether it's coming from bank balance sheet growth and NIM earnings or whether it's coming from the fee-based earnings coming out of the partnerships, it's still earnings growth, and it is a big pool of capital that we have to return to shareholders. .

Okay. Perfect. And one question we've gotten a little bit more recently has been just around consolidation activity. I think there's been a little bit of an uptick recently. As you sort of think about your flat to down balance sheet this year with modest growth next year, how much of an increase in that are you factoring in? And maybe what are you seeing?

Yes. Again, we've anticipated for a period of time that consolidations would tick back up. I would say our actual experience, although it's elevated, has been, they're running below what our expectations were. So like, again, I think that's kind of -- we're getting back to more of a normal state. I think the period of time immediately prior to the sort of rise in interest rates was probably an abnormal period because the rates were held low for so long. And that product is really a rate arbitrage game. And so as long as rates are relatively stable and don't move violently in one direction or another, I think the level of consolidation activity will largely be stable and very manageable in the context of the overall book.

And maybe just last one for me as we sort of wrap up here. You put some positive news in the slides. You hadn't update on.

I think most of the news in the slides is positive, frankly.

Yes. you're killing it on the new grad product. .

Yes. I mean we've got a lot going on in the company right now. We've got a once in a generation opportunity in terms of volume increase of originations. If you think about from '25 to when this scales in kind of the '28 time frame, a 70% increase in originations. That's a lot of growth, like not many industries or companies have an opportunity to go after something like that. So we're laser-focused on going after that in a good way. I think the early signs in terms of the new products we've launched are making us feel good about our readiness to really go and compete and win in that environment. So we feel good about that.

The progress we've made around sort of our funding capability for that origination growth, again, we haven't built the specific grad programs, but we've had enough discussions with investors that we're confident that we will be able to scale into next year as that starts to build. And so that's kind of a winning solution.

Okay. Great. Any closing messages from you on the outlook or... .

No, again, I appreciate the opportunity to be here and talk about our company. Again, I think we've got a really positive story to tell. I think notwithstanding some of the broader environmental concerns around AI and the other things, we feel great about our commercial position. We feel great about the growth opportunities. We feel great about credit performance in our book and look forward to being back on stage in future conferences with you and telling about our success.

Great. Well, we look forward to an update on your progress next quarter. Talking you a month or so. Thanks for coming.

Thanks for having me.

Welcome to the Sallie Mae First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Melissa Bronough, Managing Vice President, Strategic Finance. Please go ahead.

Thank you, Erica, Sallie Mae's First Quarter 2026 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; and Pete Graham, our CFO. After the prepared remarks, we will open the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here 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.

For Sallie Mae, these factors include, among others, results of operations, financial conditions and/or cash flows as well as any potential impact of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations are forward-looking statements to reflect events or circumstances that occur after today, Thursday, April 23, 2026.

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

Thank you, Melissa and Erica. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's First Quarter 2026 results.

Our performance in the quarter was strong as we continue to reap the benefits of the strategy we have been pursuing for the last several years. Diluted EPS in the first quarter was $1.54 per share as compared to $1.40 in the year ago quarter. Loan originations were $2.9 billion, up 5% from the prior year quarter. These results were driven by strength in our loan disbursement funnel. Importantly, this performance precedes the expected multiyear growth in both undergrad and graduate lending tied to federal reforms, which we believe could increase our originations by up to 70% over the next several years.

We have been actively preparing for this opportunity, driving improvements across our full delivery system from product features to enhance client acquisition strategies and improved servicing and fulfillment capabilities. We have already rolled out several of these enhancements, including our new medical and dental school offering with more to come. Our goal is to serve as many students, families and university partners as possible as the higher education sector navigates this time of change.

Net charge-offs and delinquencies were consistent with or slightly better than our expectations. Net charge-offs were $89 million, driven by continued underwriting discipline and the ongoing optimization of our loss mitigation collections and recovery strategies. In Q1 of 2025, the granting of disaster-related forbearance tied to the California wildfires and the North Carolina floods temporarily suppressed both net charge-offs and delinquencies, creating tougher year-over-year comparisons.

Shifting gears. You will remember customers started exiting our new loan modification program at the end of 2025. We I'm happy to report that their performance has been slightly better than what we assumed in our loss outlook, although we will need to see several more months of data to develop full confidence in these trends. These results support our belief that we have built a business and are executing a strategy that is capable of performing in almost any environment.

We've sharpened our customer acquisition strategies to extend our market-leading position. We've enhanced our underwriting practices and strengthened our credit and collection capabilities to better support borrowers during times of financial distress. We have built an efficient cost structure with diversified efficient funding sources that continues to support strong net interest margins. We have developed a strong capital allocation framework by adding strategic partnerships to our existing portfolio loan sale capabilities, giving us greater ability to grow recurring earnings and return capital.

Our belief in our strategy, coupled with the desire to act nimbly and decisively when market opportunities arise, led us to accelerate our already robust capital return program. We executed a $2 billion seasoned loan portfolio sale during the quarter, coupled with a planned 10b5-1 share repurchase plan and also launched a $200 million ASR all to take advantage of what we believe to be the disconnect between the premium from our whole loan sales and our equity valuation.

Pete will now take you through some additional details. Pete?

Thank you, Jon. Good evening, everyone. During the first quarter, we executed $3.3 billion in loan sales, generating $146 million in gains at attractive economics. This included $1.3 billion of planned new origination sales through our strategic partnerships business as well as a $2 billion seasoned loan portfolio sale executed at gains in the mid- to high single-digit range. As we have done in the past, when our equity valuation became disconnected from the market value of our loans, we deliberately leaned into our capital flexibility to advance shareholder value.

Following the loan sale, we entered into a $200 million accelerated share repurchase program. And year-to-date, we have repurchased approximately 12 million shares, 6% of the outstanding shares at the end of 2025. We at an average price of $21.50 per share. Since 2020, we have reduced shares outstanding by approximately 58% at an average price of $17.15 per share. underscoring our disciplined approach to long-term value accretion. We expect to fully utilize our $500 million share repurchase authorization during the calendar year 2026.

Strong ongoing investor demand in the structured finance markets continue to support capacity for both seasoned portfolio sales and our strategic partnerships business. We have already completed meaningful groundwork for our next strategic partnership, which we expect to launch before the end of this year.

Turning to earnings. Net interest income for the first quarter was $375 million, consistent with the prior year period. Net interest margin of 5.29% increased both sequentially and year-over-year. reflecting the benefit of lower funding costs and continued discipline and balance sheet management. As we progress through this year, we expect NIM to moderate modestly reflecting the higher liquidity we're carrying following the loan sale we executed in March.

We recorded an $11 million negative provision in the first quarter, driven primarily by $131 million release of reserves associated with loan sales and loans held for sale, partially offset by growth in loan commitments and updates to our economic assumptions. Our reserve rate was 6.05% at the end of the quarter, modestly higher than the prior quarter and reflective of seasonal origination patterns rather than changes in underlying credit performance.

Credit quality across new originations remained strong with cosigner rates increasing to 95% and average FICO and approval rising modestly to 754. It's interesting to note that just 5 years ago, our cosigner rate was 86% and our average FICO approval was 750. The change reflects a deliberate multiyear and persistent focus on enhancing credit quality. Across the portfolio, delinquency trends were stable. Loans delinquent 30 days or more were 3.98% of loans and repayment at the end of the quarter, modestly lower than at the end of 2025., with later-stage delinquency buckets remaining steady at 1%. Net charge-offs for the quarter were $89 million, modestly ahead of our expectations.

First quarter noninterest expenses were $171 million compared to $155 million in the year ago quarter. This increase primarily reflects targeted investments to support growth particularly across our graduate lending programs, while maintaining a strong efficiency ratio of 30.6% for the quarter. And finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 21.2% of total assets. Total risk-based capital was 13.7%, and common equity Tier 1 capital was 12.4%. We continue to believe we are well positioned to grow our business and return capital to shareholders.

I'll now turn the call back to Jon.

Thanks, Pete. We are pleased with our first quarter performance and the momentum it provides for the year ahead. Let me conclude with a few thoughts about the higher education environment and an update on our guidance. We believe students and families continue to see strong value and higher education. Our upcoming How America Plans for College Report will show that nearly 90% of those surveyed view higher education as an investment, over 80% believe it's worth the cost and nearly 3/4 would rather borrow than forgo college and improving recent college enrollment trends and faster completion rates that are up almost 20% from this time last year.

Colleges universities and other higher education institutions are continuing to innovate to ensure that their students have the skills to compete in the future economy. We see schools integrating AI-related coursework into new and traditional programs. Students are also responding by better aligning their majors and skill sets with those likely needed in an AI-enabled future.

The employment picture for recent college grads remains resilient even during times of economic uncertainty. While unemployment among recent graduates temporarily rose last summer, the gap versus historical norms closed in March. Reflecting this confidence, a recent National Association of College and Employer Survey indicated employers expect to increase new graduate hiring this academic year by 5.6%. With this backdrop, we feel well positioned as we look ahead to the balance of the year and beyond.

Let me now turn to our 2026 guidance. We expect our diluted earnings per common share for 2026 to be between $3.10 and $3.20. This revised outlook assumes the full utilization of our $500 million share repurchase authorization of incremental loan sales beyond our initial plan. At the same time, we are reaffirming all other elements of our 2026 outlook, including originations growth, net charge-offs and net interest expense metrics.

With that, let's open the call for questions. Thank you.

[Operator Instructions] We'll start our questions today with Terry Ma from Barclays.

You mentioned we should expect another partnership by year-end. Any kind of early color on how we should kind of think about it? And then as we kind of take a step back with an additional partner, and I think you just mentioned an incremental $1 billion of loan sales, are you kind of just transitioning more to a capital-light model? And should we kind of like expect the balance sheet to shrink a little bit more this year?

Yes. Thanks for the question, Terry. On the first part of that, when we launched the inaugural partnership with KKR last year, we indicated that it was our intention to build this into a business. So that's been part of our plan all along. And we've started discussions with some of the folks that are involved in our process last year and weren't the final sort of partner that we went with. And so those are early days, but well underway, and we're confident that we'll get something done by the end of this year.

I think in the context of growing the partnerships, I'll remind that initial KKR partnership was really sized and scoped to deal with our traditional undergrad student loan product. And so we always knew that we were going to need to expand and grow that to be at scale for the grad opportunity, and we're working on getting ahead of that so that we have something in place in advance of when the major increase in volume grad comes online.

Got it. And then maybe just on credit. It sounds like the borrowers exiting mod are performing a little bit better than expected. Any mods thus far this year, whether or not that's in line with your expectations? And then as we kind of look forward, like should we expect the percentage of borrowers in mod to kind of start to come down this like any way to think about that?

Yes. I think in the context of the exits, as we said, we're pleased with the early performance in line with the outlook that we had when we set net charge-off guidance for the year. The absolute value of entries to mod will fluctuate as the payment waves come through and depending on the sort of overall size of the ways, nothing really out of the ordinary in that regard for this. and overall level of mods, we believe will begin to stabilize as we move through this year and into next.

And our next question will come from Moshe Orenbuch from TD Cowen.

Great. Jon, could you talk a little bit about how you see the kind of developing competitive environment in the Grad PLUS market saw some announcements this week from one of your major competitors, but haven't seen that many across the board, but maybe you put a little finer point on that, if you would.

Yes. Moshe, happy to. And obviously, I think everyone understands the opportunity that the plus reform provides, I think, different competitors certainly look at the market opportunity, the segments of the market opportunity differently. I think there are some who have expressed more interest for certain segments than for others. But I think we certainly do expect there to be a heightened level of competition as a new kind of market normal shapes out here over the next couple of years. And we see a little bit of early evidence of that just in things like some of the digital marketing spend, we can see some activity from some players and begin to understand a little bit of the testing and the programs that they are looking to develop.

I think more importantly, though, we have tremendous confidence in our incoming position and we have incredible confidence in the work that we are doing to prepare for this opportunity. I think the credit models, the relationships with schools, organic marketing channels that we have really pioneered here over the last 5 years, serve as a really important foundation. All of those will need to be enhanced and grown and expanded, in particular, to get after the grad opportunity. While there's a lot of similarities, there are differences.

And I think you heard in my prepared remarks, we are leaving no stone unturned in preparing to compete rigorously. So whether it's a lot more competitive, modestly more competitive or not more competitive at all. I think we feel really great about what we're doing, how we're going to show up and most importantly, our ability to serve students, families and our important university partners because we know every loan we do is enabling someone's higher education dream.

Got it. Maybe as a follow-up, just kind of on the loan sale process, kudos to you and the team for or recognizing to do a loan sale and take advantage of that arbitrage. How do you think about the outlook and kind of balancing the various types of loan sale opportunities as you go forward and kind of probably adding in the potential for an incremental partner that you had talked about.

Yes. Thanks, Moshe. That's a good question. Just a reminder, the structure, again, focused on traditional underground product, and that was sized at a $2 billion a year commitment, think of that roughly academic year. So as we think about this next partnership, we're looking to build upon that to create capacity for low sale of grad originations and start to build capacity for the real growth in the grad space that will come '27 and '28.

As we get that started, I would expect that the way that we will do that will be similar to how we did the first transaction, which is enter into a flow agreement but also start the process with some sort of a seasoned portfolio sale. So that's kind of within our expectation for the latter part of this year. And again, I think in terms of overall balance sheet size, our initial -- our original guidance and initial plan was kind of a flat-ish balance sheet.

I think now with the shift in our approach on accelerating capital return. As John said in his prepared remarks, it's probably an incremental $1 billion of loan sales over our original plan. So that would be flat to down-ish sort of overall balance sheet, and we'll fine tune that as we see the origination levels coming in during peak, and we have a better line of sight to overall levels of growth in the business.

And we'll go next to Jeff Adelson with Morgan Stanley.

I was just curious, Jon, you made the comment on the recent college graduate unemployment trends headed in the right direction once again. And you brought up the survey of employers intending to increase hiring by about 5% or 6% this year. I guess my question is, how do you think about the benefit of that flowing through to Sallie Mae? Is that something you think can really start to flatten out your delinquency trends, which look like they kind of continue to uptick a little bit at these levels?

Yes, Jeff, maybe a couple of thoughts here. And Pete, you should jump in if you want to add anything. I'm not sure we yet see the unemployment trends and the hiring as a tailwind. I think what we're really describing is Yes, the slight air pocket that I think we saw an employment through the course of last summer has normalized. I think we've talked for a couple of calls now about the resiliency of students and the fungibility of the skills that are afforded by higher education and their ability to figure out a changing employment landscape.

But I think we've sort of seen the evidence of that but I'm not sure we're in a positive enough territory versus historical norms that I would say that's sort of deserving of a tailwind sort of classification. In terms of the delinquency trends, we're very comfortable with the delinquency rates where they are. As I said in my comments, they are in line and slightly better than expectations.

I think if you look at, in particular, the stability of the later-stage delinquency trends, they are sort of where we thought we would be I think you always have to be a little bit careful in looking at any ratio because there's both obviously a numerator and a denominator. When you sell a couple of billion dollars of loans earlier in the year than you expected, that could have a little bit of a denominator effect, I think prudence would suggest that be considered in interpreting the results. but we feel very solid about where we are from an alliance perspective.

Okay. Great. And maybe just a quick follow-up on Grad PLUS. Obviously, you're looking for that to start kicking into gear come July. Maybe just you spoke a lot about how you're preparing for that and you're talking to the school. So maybe just quick update on what you're seeing on the ground and how you think those expectations are going to play out as you hit the back half of the year and recognize it obviously, it's still pretty early.

Yes, Jeff. Obviously, it's very early. Peak season really hasn't started at all yet in any of those the grad segments we're talking about but maybe a couple of thoughts. One, I think our conversations with schools have been extremely positive. As you can appreciate, their #1 concern, post PLUS reform was what is this going to mean for their ability to fill their classrooms and support their students and sort of their higher education journey.

I think the work that we have done around product design, around underwriting, around terms and conditions, as we've gone through that with schools. I think they have been quite impressed by the customer-backed thoughtfulness that we have brought to really thinking about these as new products and new businesses and deserving of a fresh set of eyes. So I think they've liked the early reads.

And I would say, as we have implemented changes and Grad has obviously been a part of our portfolio for a long time, but a small part. We are starting to see impressive and meaningful increases, percentage increases in our performance. So those are super leading indicators and trends based on small sample sizes. But I think it's not just the reaction we're getting from schools. We're actually seeing that flow through in things like early origination numbers and the like.

So we feel good about the guidance that we've put out around originations. We haven't seen anything that leads us to believe it's not achievable, but we're going to continue to sold our way and make sure we put ourselves in the best position we can to win.

And we'd like to take our next question from Don Fandetti with Wells Fargo.

I know it's early, but I was wondering if you could talk a little bit about 27%. I think last quarter, you provided some thoughts. Obviously, you're going to have a higher base here in 2026?

I mean I think the only thing I'm really prepared to talk about with regard to '27 is kind of like the origination opportunity that we see from ground. I think we've kind of sized that roughly $1 billion incremental opportunity over time. And the way that will size in really will be modest this year and then grow more exponentially as we go to '27 and into '28 in terms of overall guidance around earnings or anything like that, I wouldn't feel comfortable necessarily giving reads on that.

Okay. And I heard the comments on the potential new partners. Obviously, there's been a lot of dislocation in private credit. It sounds like you're not seeing any kind of hesitancy or different terms? Is that maybe just because it's consumer product? Or what are your thoughts on the future demand from private credit?

Yes. I think there's been -- obviously, there's been pockets of private credit that have been challenged. I think even within the structured finance or AVF part private credit. There's been areas where there's been frauds or other issues. But that's really caused kind of like more of a flight to quality, and we've got a very high-quality asset type that remains -- still has very strong demand for it, particularly sort of in the consumer space, given the ability for us to provide duration as well as high yield and low losses.

So we've continued to see strong demand both for our own funding securitizations, but also the securitizations that we do on behalf of the loan buyers has been subscribed and well priced, and we expect that to continue as we move forward here. And certainly, in the context of beginning dialogue for setting up next partnerships. We've had great engagement from the interested parties and feel like the market demand is still really there for our product.

Thank you. And we'll take our next question from Sanjay Sakhrani with KBW.

Jon, maybe just to put a little bit of a finer point on some of the initiatives you have and the step-up in expenses in 2026. I know you guys are -- how do we -- it sounds like you feel pretty good about it. How do we like see it unfold and measure it as we look out across this year and next? I know Pete talked about a step-up in originations next year from the opportunity. But how do we see it unfold? And like do we get leverage off of that into next year?

Sanjay, thanks and great question. I think I would refer back to maybe also some of the comments I made during the fourth quarter earnings call. I think our view is yes, expenses are elevated this year on both a marketing basis as we start to go after the expanded opportunity, but also a lot of the fixed costs, some of the things we've talked about around products and systems and customer experience and the like. I think what we've committed to and what we still believe in is that rate of expense growth will moderate after this year. we may see a slight uptick in our efficiency ratio, but we actually expect at the end of the growth period for our efficiency ratio to be better than it was at the starting point.

So to put a little bit of rough justice math to it, if we were at a sort of mid-30s efficiency ratio historically, I think during this time of growth, we make it up to the high 30s, which, by the way, I think is still a pretty compelling efficiency ratio. I think if the market evolves the way we think it's going to, and if our share evolves the way we think it's going to I think by the end of the growth period, we said we would hope to be back down in the low 30s.

And so I think that is the very definition of operating leverage. And at the end of the day, we recognize the need to invest against what we both think is both a great market opportunity for us, but also a real need for students and university partners. We think that's a relatively short invest ahead of the curve with real leverage coming in not very many years after that.

Got it. And then, Pete, just so I have the numbers correct in terms of the guidance rate, the raise and the fact that you're selling another $1 billion. By my math, if you kind of use the 6% or so gain and then the reserve release, I mean it sounds like most of that raise is just the mechanics of the $1 billion being sold at some point in the rest of the year? And any idea on timing?

Yes, sure. I think in the context of sort of the full year guidance, the increase in the EPS guidance for the full year is roughly split half and half between share count reduction and incremental gain from the incremental loan sale. And so if you think about the mechanics of what we discussed here of what's happened in the first quarter, we really accelerated that through the actions that we've taken and have a much lower share count for a longer period during the year. And so that's how you should really think about that. We haven't updated any other elements of our original guidance. So the impact is really just the share count reduction. So it's roughly half and half for the full year.

And we'll take our next question from Mark DeVries with Deutsche Bank. .

Yes. Jon, I believe you indicated that the SaaS completion rates tore up almost 20% from this time last year. Do you have a sense for what's behind that? Is this a reflection of like a significant increase in just demand for higher education? Is there something wonky behind that? And if it is demand what does it say for your conviction just around your origination guidance?

Yes, Mark, I think it's probably too early to know exactly all the different factors that are driving that rate. This is obviously sort of in the moment I think what we've seen is if you exclude 2 years ago, when you'll remember the Department of Education rolled out a new SaaS reform and maybe had a few implementation hiccups along the way. I think what this really reflects is sort of a continued steady drumbeat of sort of growth, which I think matches well with what we've seen around general trends in sort of the percentage of eligible high school seniors who are choosing to go to college.

And a lot has been made around the demographic trends, but I think that batting average, if you want to call it that, of how many people actually go has also been a nice contributor to the growth in enrollment over a period of time. But if I broaden it out a little bit and look at our soon-to-be released survey because I think that gives Mark, a little bit more detailed insight I think what it really shows is the promise of higher education and the dream of higher education continues to be really a kind of key thing for many, many students and families out there.

And there's been a lot of talk about sort of the change in cost of buyer education and is it worth it? I think our survey says pretty conclusively that the vast majority of American families out there really see that it is and understand creation skills understands the key, the sort of economic mobility and understands the role that I think it's played historically that we believe it will play going forward. So I look forward to the survey coming out that will probably add, I think a lot of great data in there that Mark will give you even more insight into your question.

And we'll take our next question from Caroline Latta from Bank of America.

I think you mentioned last quarter that you expect after 2026 that the private education portfolio will, in fact, up to like 1% to 2% growth. Is that expectation changed if you were to add another private credit partner? Or did that contemplate another panel partner?

Yes. Thanks, Caroline. I think in our original sort of leverage planning that form the basis of our original guidance for this year, we kind of assumed a flattish balance sheet this year, and we assumed that kind of 1% to 2% growth going into '27 and sort of getting up to the kind of mid-single digits over time line. I think we'll -- obviously, with the change in approach around the acceleration of the share repurchase this year will probably be a little down here, call it $1 billion lower than flattish. And we would look to kind of still step back into growth over time.

I know new partnership really changes that dynamic. We still have a broad opportunity around originations growth. If not, if we don't do those partnerships or other types of loan sales, we're driving a much higher rate of balance sheet growth in that. So we do have lots of different levers that we can choose to optimize that. What it will impact, though, is sort of the mix of season sale versus new origination sale as we step into '27 and beyond. And again, that's purposeful because the grad opportunity for which we don't currently have a flow arrangement for will begin to become a much larger portion of our originations as we move into '27 and then again into 2028. So we want to make sure we've got a good complement of funding capabilities to meet that need.

Great. And then maybe just like given the buyback this year if you complete the plan will be a pretty big step up. How should we be thinking about the kind of buybacks and capital returns further out into like 2027 and 2028?

Yes. Again, I think if you look at our sort of original sort of plan, we were targeting roughly 5%, 6% of outstanding share count would be part of the buyback within a year. And I think as we start to normalize, that's probably a reasonable sort of benchmark going forward. And as always, as markets change and if there's an opportunity to do more than that than we would do what we did in the first quarter, which is accelerating some loan sales and take advantage of that market dislocation.

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

Maybe any just relative to our forecast, you had a beat on OpEx or upside EPS on lower OpEx. Maybe can you talk about the cadence on investments in the Plus program over the year? .

Yes, sure. We're getting ready for peak season, which starts in the kind of the summer. And so if you think about the comments we made at year-end when we talked about expenses of the increase year-over-year, we said roughly 1/3 was increase around marketing and customer acquisition and roughly 1/3 was the preparation opportunity in terms of the things Jon talked about around program design and customer experience and some of the tech changes will lead to a label. And so that readiness will be more front-loaded before peak and the marketing spend will be more in the moment in that peak season. So again, our sort of staging of expenses and our plan for expenses, we were modestly ahead of plan for the first quarter, but we feel still comfortable with our overall guidance range for the full year.

Okay. And then second question is kind of the evolution of the program management servicing fees. Was there anything in this quarter with that? And then how do we think that grows over the course of this year?

Sure. So the inaugural partnership that we linked with KKR in the fourth quarter of last year has the program management fee built into that. And so as we have completed sales of assets into that, those program management fees will start to earn on sort of the AUM, if you will, under management. So we did another $1.3 billion of sales to that partnership in the quarter, and we will continue to build on that. And as we grow the next partnership, our expectation is that those partner management fees are something akin to those program management. These will be part of the economics of those deals as well.

So our intent, again, with this is we continue to build more recurring fee-based revenue over time. and give ourselves a different sort of capital allocation capability with these forward flow sales.

And we'll go next to the line of Rick Shane with JPMorgan.

I'd like to talk a little bit about credit, and you guys provided an update on your net charge-off guidance for the year and reiterated your prior guide. I'm curious when you think about the credit performance of -- the credit performance of the portfolio, whether is where it is in your targeted range? Is it within the range? Is it above the range? Is it below the range long term? And to the extent it is varying from the range, is there anything you're doing on the underwriting side to either tighten or widen the credit bucket in order to sort of meet that efficient front here?

Rick, it's Jon. A couple of thoughts, and tell me if this gets to your question. First of all, I think we are operating within sort of long-term credit range that we talked about. I think we said a couple of years ago, we thought the right destination was high 1s to low 2s. I think we spent a lot of time in the fourth quarter earnings call when we were laying out guidance, doing a bit of a crosswalk around that percentage to the loan or the charge-off guidance that we've given for this year, recognizing that the wildcard there was the shift in strategy to sell new originations versus seasoned portfolios and a little bit of the distortive effect that, that had on our legacy ratio. But I think we believe we're operating within that range and certainly feel good about the guidance that we've given out.

I think it's important to remember how we got there. And we've talked about this a bit over the years, but we started 3 or 4 years ago, a very persistent, purposeful program to really look at and to optimize the credit buyback that we have and to make sure that we felt great about all of those originations. And we've once a couple of different times, the extent of that. But suffice it to say that I think the changes that we made had a meaningful impact on origination volume and one of our great sources of pride was our ability to grow both nominal levels of originations and share while still tightening the credit box during that whole time.

I do think there is still a tail to come, and we've provided these details from time to time, but we still do have people who took those loans as freshmen and soft mores and maybe haven't entered full P&I yet who are still coming into the heart of their repayment and sort of maximum stress period underneath the old sort of underwriting regime. So I think in some respects, the full effect has yet to be felt in the portfolio.

But we feel great about those credit changes, underwriting changes we've made we feel great about how our loss mitigation programs are performing, and we think we are generating the exact loss profile that we would hope for during the time that I would point out has been relatively stressed for some of these borrowers with the elevated unemployment rate that I talked about before over the last 6 months. So I think all in all, we feel really good about these results and look forward to the portfolio continuing to season.

I appreciate that. I'm curious, and I apologize if maybe -- I don't know if I'm missing something, do you provide an average loan in repayment number anywhere in the disclosures? And the reason I ask is, obviously, this quarter when we calculated a net charge-off rate as a function of loans and repayment. I'm trying to understand how much that might be distorted by loan sales. And one question I guess I should know the answer to and I just don't off the top of my head is, are there seasoned loans in repayment that are part of the pools that you're senate new originations that are less than 12 months seasoned?

All of our portfolio sales are sort of representative samples of the book. really the only exclusions there are loans that are in later stages of delinquency are typically excluded from those pools. So as we move as we make portfolio sales, as Jon said, that can have an impact depending on when in the quarter or when in the year we make those sales. because it does impact the denominator of some of those ratio calculations.

I would also highlight again some of the commentary we made in the fourth quarter, surrounding our disclosures in the 10-K because we calculate most of our loan disclosures on loans held for investment because we are moving loans to held-for-sale status in association with these forward flow agreements, that does also have a nominal impact on some of the calculation. .

And Rick, yes, just for the avoidance if any confusion, I think Pete did a nice job of laying out in his talking points also what were the new origination sales, which were $1.3 billion, those are obviously what the name would suggest, new origination. So I think we do try to break it out separately and obviously, understand the importance of needing to continue to do that, both in understanding credit metric impacts but also premium impacts.

Thank you. 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.

Erica, thank you, and thank you, everyone, who joined this evening. We appreciate your interest in Sallie Mae and look forward to updating you again when we get together in 3 months for our second quarter earnings call. With that, Melissa, I'll turn 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 the Sallie Mae First Quarter 2026 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.

Well, thank you, everybody, for being here. I want to thank Jon for being here selling me the last slot of the 30th RBC conference. .

Encore slot.

Yes. This is the encore slot. But I want to say, save the best for last, but I think it's a dramatically undervalued company, and we're going to try to get through some of the big objections that people have. But it's -- I think it's probably best. I think there's a lot of generalist interest and I know there is from the sign-up sheet. So give us a 30,000-foot view of what is Sallie Mae, and then we'll get to some of the other strategic objectives of the company from here. .

Yes, Jon, thank you, and thank you for the chance to be here. I know this is a huge event for you, and it's great and we have wonderful meetings today and appreciate all the support. For those of you who don't know Sallie, we are technically a 50-plus year old company but the real sort of current version of the company is about 12 or 15 years old now. And we are predominantly or exclusively a private student lender. And so to put that in context, our sort of position with customers is that they should find all the free money that they can to attend college that could be family support, that could be scholarships, that could be grants, they should then get all the subsidized money that they can. And then if there is a gap left at the end, those last dollars to make access to or completion of their higher education journey reality, they should come to see us.

So the way that, that plays out, practically, we will lend about $12,000 or $13,000 per loan. An average customer will have about 1.5 loans with us. It will take them about 7 years to repay their loans. So this is very different from what you might hear about with some of the federal programs that are out there.

In terms of student success, we know the vast majority of our customers are quite successful with the loan and with the product. We have about a 2% annual net charge-off rate, so comparatively low. When we also do our surveying of customers, we will hear a lot about sort of the last gap financing dollars really being that sort of final thing that put them over the edge in terms of being able to attend the college that they wanted to attend or earn the degree that they wanted to earn. So overall, a business that we're all really excited and passionate about. Almost every member of the management team has their own version of a story of how access to an education played a really pivotal and important role in their life. And we're really thrilled with the ability to pay that forward with our customers. .

Good. Yes, we just talked about that with -- mic's off. There's a lot to talk about going forward. But just what are some of the things that you're the most proud of that you've accomplished over the last few years. .

I've been CEO for 6 years and had the chance to work with a great group of team members and Board colleagues. And I think there's 3 or 4 things that we're really proud of. First, we have built what I think is just an absolutely fabulous customer acquisition machine. We now form a client-initiated relationship with about 4 million customers a year. That's roughly 2/3 of all the high school seniors and families who will matriculate the next year to college.

And we help the vast majority of them with things that don't involve lending at all. And that could be accessed to scholarships, that could be access to other collateral information to help them navigate this journey to through or after school. It could be helped with their federal loans and applications. And we do that really because at the end of the day, we sort of stake our north star on this notion of student success. And so being that education solutions company, the one-stop shop for their needs is really important to us.

Secondly, Jon, we've had a lot of fun really working on innovating and improving our core business. And whether that's at the top end of the marketing funnel all the way through to how we work with borrowers who are in financial distress we've been able to, I think, find really nice improvements to every aspect of the business. And that's driven down key metrics for us like cost to acquire. It's driven up our NIM over time. It's driven down our loss rates. So we're proud of that innovation in the core business.

I think third, we've become a very trusted name in the broader policy with circles around all things higher education. And 2025 was clearly a year with lots of changes in the federal program. We like to think that we were a real voice of moderation and reason in those dialogues. We think we were credible with both sides of the aisle and really making sure that we have responsible borrowing, full access to and completion of higher education is something that our views were sought out on.

And then maybe last, but certainly not least, we have been, I believe, real innovators in the area of capital allocation and capital returns, and that through a variety of different strategies the number I'm most proud of is in the last 5.5 years, we've bought back roughly 55% of the shares outstanding of the company. That's generated, we think, really nice total shareholder returns over that period of time and look to continue to be active in that space going forward.

Okay. Great. And also, if anyone has questions at all during the session, just put your hand up and we'll get them answered. There's obviously a lot of ground to cover. So this -- there's a lot to talk about on Grad PLUS, and we'll get to that. But maybe touch on the 8-K that you filed after the close, and I don't want to say that's a legacy business in any kind of way, but talk about that just for a second.

We've been active and maybe I'll zoom out a little bit and put it into the broader context. We've been very active over the last 2 or 3 weeks in the capital markets. Things that were important to our business, but we also think that there are things that during this time of market disruption really show the underlying value of the products that we provide. So we announced last week that we had completed our first on-book securitization of the year. We did that at pricing that was superior to inside pricing of our last deal. We were very proud of that. We thought that was during a tumultuous market, a real indicator of source of strength in our underlying assets. .

On Monday of this week, we announced a $200 million accelerated share repurchase arrangement, that in addition to share repurchase activity that we had already undertaken brought us up to about $300 million of delivered capital against repurchasing stock at what we think are very attractive valuations. And then in that press release, sort of hinted at the fact that there was more work to be done. And I would sort of think about that plan is really sort of the recalibration of the capital return we had planned already for this year. But again, we thought and we knew we could do more.

And so our great team, our capital markets team went out into the market. We executed a loan sale process. And I'm happy to report that as of about midday today, had reached indicative terms on a $2 billion loan sale that will be closed if all goes according to plan in the first quarter here of this year and included in our first quarter earnings results.

I think the more important thing for this conversation, given this is really late breaking news is, we had gotten board approval this first quarter for a $500 million share repurchase authorization split over 2 years, and that's not uncommon. That's what we've done historically. We now believe that with this loan sale agreement in place, our expectation is that we will exhaust most, if not all, of that $500 million authority in calendar year 2026. And so again, that gives us more tools to respond to this period of market dislocation that we're living in.

Okay. A market kid in a candy shop. I mean, that's incredible. .

You can take the big soccer behind the counter. Go for it.

I haven't seen the 8-K, I've been up here for 2.5 hours.

You're not hanging on every word we're putting out .

Well -- can you talk about the gains? Or what was the demand like?

Yes. No, we're not going to talk about the gains ahead of time. We never do that before the deal has closed. And before we announce earnings. Suffice it to say, it is well in line with our expectations. We think it is sort of attractive economics in the grand scheme of sort of what we were planning for, and we're pleased with the outcome and more to come on that. .

And how about the securitization? How did that go, generally?

Yes. securitization, I think, went great. This was during some of the very most sort of intense periods of market dislocation, and we ended up inside of our previous pricing and are thrilled with the execution on that several times oversubscribed, and so I think it really just couldn't have gone any better.

Okay. Okay. So it's interesting because we're still pushing off Grad PLUS but you just executed a loan sale. You just talked about a securitization being nice and tidy, clean and tidy. But at the same time, people are concerned about AI wiping up the prospects of new college graduates and maybe even if you take it to the further extreme, the co-signers. What's your answer to the threat of AI with the recent college grad job market and white collar jobs in general?

Yes, Jon, great question. And first of all, I would be remiss if I didn't say this is not the first time we have seen dislocations between the equity markets and the loan sale markets and fixed income markets as it relates to our name. So it doesn't happen all the time, but we've seen this movie before.

On the AI front, to me, it's sort of a story in 4 parts. And number one, while I'm not a futurist, we've obviously looked long and hard at the AI threat. And I guess our emerging internal view is AI is a powerful technology. It's clearly going to reshape big parts of how the industry -- all industries work. It will clearly have an impact over time on how work gets done. But I think it is our view that it like many other technology innovations that have come before it, its evolution is going to be more complex and more nuanced than maybe some of the sort of simple resorts that are out there.

And I think if you look over time, there are always cases where innovation takes long in some places, less long than others. There's always places where it causes disruption. At the very same time, it's causing advancements and opportunities in other places. And so I think this notion of it's going to be nuanced, but I think our belief is, in aggregate, it's going to be a procyclical pro business, pro economic set of innovations is really our kind of our working hypothesis. And at the end of the day, you can't make huge sectors of the economy more productive and not have the benefits of that productivity go someplace. And I think that's one of the key messages that's been sort of lost in some of the positions that's been put out there.

Yes. Secondly, I think what we're already seeing though is schools, colleges, universities are responding. And they are, I think, understanding that their students are going to need a different set of skills and a different set of capabilities going forward. And they are innovating with new programs, they're innovating with new support services around sort of employment. They're really, I think, looking long and hard at the affordability question within their university in ways that I've never seen before. So this spirit of school innovation, I think, is really taking root and will be very positive for our business, but more importantly, for students who are going to and completing their degrees.

Third, I think we really underestimate the resilience of college grads and in particular, new college grads. And you think about this group, they're trained, they're technologically savvy. They're hungry. They're scrappy. And they are looking to go out there and to get started. And I don't think you have to take my word for it. I think if you look at recent college grad unemployment rates, they really tell the story. So if you rewind the tape to last spring, we had Independence Day. We had a lot of talk from companies about the early impacts of AI, a lot of talks about sort of cutting employment and hiring on campuses. And we saw that in the early grad unemployment rates. They always spike over the summer as people graduate and then come down over time.

And at the height, unemployment, college grad unemployment, recent college grad unemployment was sort of 1.3, 1.4 percentage points higher at the peak last summer than the year before, so '25 versus '24 as of data that came out today, that gap has closed to 0.1%. And so to put that into real terms, it's taking students this year about a month or maybe 2 longer to find a job than it did at the same time the year before. And so that's a level of resiliency that I'm not sure sort of the pundits get right when they talk about the big AI story.

And I think sort of the final part I would put out there, Jon, is we are, as a company, built to be successful in this model and continue to invest in that. So that's things like a 93% cosigner rate on our borrowers, that gives a tremendous amount of support to those students, and it gives us a tremendous amount of confidence in those loans. It's things like a 20%, 25% ROE on our loans which if we do hit an air pocket and have some higher credit exposure, unlike some other products, there's a lot of profitability there to absorb those losses while still being very high return and very attractive.

And I think most importantly, over the last, call it, 4 years, we've taken really hard action that I'm not sure has always been fully appreciated to continue to really refine our underwriting approach. So to put numbers on it, depending on how you count it, we have reduced our annual origination somewhere between 10% and 15%, all with a focus on getting a greater resilience in credit performance within our book.

And so when I kind of take all of that together, I think the AI changes are likely to be more pro-economic sort of more sort of spread out over time. I think schools are doing a great job responding. I think students are super resilient and scrappy and ready to get after it. And I think we've put ourselves in a really good position to be able to be successful no matter which version of that AI narrative actually evolves. So for all those reasons, I'm excited about what's ahead for us.

Okay. Good. So secondary markets are efficient. You did about $7.4 billion in originations. Things are going well. You're buying back a lot of stock and then the market opens way up with the reform that's come out of Washington. So talk a little bit about what's ahead for you? What's attractive about it and just generally size and frame the Grad PLUS opportunity? .

So for those of you who don't know, we put out some materials in our last earnings report. It gives a bit more of a detailed description of the exact reforms. Jon, for the sake of time, I won't go through all of those. But suffice it to say, it has effectively sort of capped and limited the federal government's involvement at both the sort of undergrad and grad level through the Parent PLUS and the Grad PLUS program.

As we have put that through what I think is a very deep and detailed credit sort of analysis and underwriting analysis. We think that is -- you said $4.5 billion, $5 billion a year of annual originations, assuming our current credit box and obviously, if we did something different, there a chance to expand that opportunity. I think I would be remiss if I didn't say that I think the reform is important, first and foremost because it makes the system healthier and better. There's a lot of evidence out there that the uncapped and unlimited federal lending was leading to higher levels of indebtedness that was probably healthy for these students and families and also very directly contributing to the rate of higher education inflation that I think has been haunting the sector probably for the last 30 years, but certainly for the last sort of 5 to 10 years.

And so I think it's a positive step forward in terms of reforms, probably more to be done there, but a positive first step forward. I think it means for us, we have the opportunity now to help support and serve a lot more customers. And some of that business is very familiar to us and really very directly related to the particularly undergrad business we have always done. Some of that business very much rides the same sort of chassis and rails, but will take some degree of incremental investment. But again, we think over the next 3 to 4 years, which is how long it will take for the reforms to fully mature and season in, it will be a really nice increase to our annual originations, a really nice increase to our business as a whole and represent the same commitment to high-quality, high-performing assets that we've always had.

Okay. And then to build out your infrastructure to take on some of this new volume required a step function in investment maybe. I don't know if that's too strong in the term. Where are you in the process? What you think people maybe got wrong or misunderstood about what you had to do to take on another $5 billion -- potentially $5 billion in originations?

Yes. There's a little bit, which I think is investment in sort of ongoing sort of resources and capabilities and that's part of it. There's clearly some new products. There's clearly some new capabilities that we will need to have. I think the thing that's most understood though -- most misunderstood is a lot of the increase in spending in my mind is really the result of the market sort of seasoning effect and growth effect as we phase in the reform.

So what do I mean by that? Under the reforms, you are only sort of capped in your access to federal programs, if you start school later than this summer. So everyone who comes before that is still under the old program. What that means is this year, we'll have 1/4 of all college students under the new program. And next year, we'll have 2/4 or half and then 3/4 and then all. Same thing for the different graduate school programs.

If you think about the effect of that ramp though, it impacts revenue in a couple of ways. One, this year, we'll only have 1 semester of originations, not 2 under the new program. That's the difference between the academic year and the calendar year. So that's pretty understandable. Two, we know in our business, what we call serialization is a big deal. So the most expensive thing that we do, for example, is to acquire that new customer the first time. Having them take their second disbursement from us, having them come back to us their second year or their third year is much more efficient from a marketing perspective. Well, if you think about it in the first year, none of that serialization happens. So there's a whole host, maybe a dozen of these types of sort of forces at work that just caused the first couple of years to not be as efficient as it will be when fully implemented.

We've tried to address that by being pretty declarative about where we see our efficiency ratio walk going. So today, we have an efficiency ratio in the mid-30s, which I would argue is pretty darn good. I think in the worst of sort of this ramp up, it will go to the high 30s, which I think there's probably a bunch of my CEO banking colleagues out there who would take that in a heartbeat. But I think we believe that after we get through the ramp period, we will end up in the low 30s around efficiency ratio. So net-net, a little bit of a price to pay for a couple of years, but we think all in service of an improved level of operating leverage and efficiency going forward. .

Okay. Good. And you feel like $5 billion is the number, that's the opportunity set that you have?

We will always aspire to more. We will always aspire to serve more customers. We will always aspire to sort of challenge the contours of our credit box. And I think we will learn a lot, Jon, in the first year, which will really start this summer about where there is opportunity to sort of do more or different. But honestly, a 70% increase in originations is pretty darn impressive in my book. And if it ends up being 75% or 80% so much the better. But I think we're focused on making sure it's at least the 70%.

Are you hearing anything on competitors? The competitor reaction to this opportunity.

It is important to say, first of all, it's a new market for everybody, right? This is a function of the federal government stepping out and creating new space for private enterprise to come in. We have certainly heard anecdotally through CEO comments and other interviews of folks intend to play here. We can see a little bit on the edges of what we suspect are various marketing tests and other programs that are starting to pick up in the marketplace. And we are going into this with a full expectation that this will be a full-blown heavyweight competitive title fight.

And I think a big part of why we want to make sure we invest appropriately is we don't want to show up unprepared and out of shape for that title fight. So I'm sure it will be a competitive market. We really like our advantages. We like the proprietary data and insight that we have around our underwriting models, we like the relationships that we have with schools out there and sort of the access that we have to the financial aid offices. We think that gives us a real advantage. We think we have some really deep proprietary marketing channels and insights that will serve us well, and the list goes on. So we like our odds, but I'm sure it will be a competitive title.

Any nuances in terms of how you acquire the volume?

There are certainly nuances around how we acquire the volume. And I think like many products today, this is a sort of a multi-touch acquisition strategy for all of our customers. We've talked about it before. I think we are really proud, and I mentioned at the beginning of that 4 million customer acquisition engine that we've built, we've built that in a really efficient way. with a very low CTA on that. And that allows us to really start a dialogue with customers that we think will play out either on their undergraduate journey or eventually even on their graduate journey if they don't need us on the underground side.

Okay. Good. Touch briefly on the distribution model or how you handle all of these volumes for the benefit of people that may not understand it in terms of the partnership agreements?

Yes. So historically, there have been 2 ways that we have funded the growth in our business. We are a regulated bank. So we have a deposit franchise and sort of an attractive banking option there. And at the other end of the spectrum, we have engaged over the last 5-plus years in a pretty active loan sale process. .

Each of those programs has advantages and disadvantages as most things in life. The bank funding provides very stable, consistent, predictable, high-quality earnings over time. but you maintain full risk ownership and in our asset class, the loan loss reserves, the CECL costs and the capital costs are high. So there's a give and get. The loan sales side has historically been great, full transference of risk, nice premiums on the assets that allows us to deploy capital.

And as I said earlier, buyback over half the company. The downside there is the earnings, the premium, I think, have been viewed as more volatile over time and perhaps sort of a lower cost of earnings -- it is lower quality of earnings. And so we've kept an eye on this for a few years, but this fall, we announced a strategic partnership with KKR. We love that partnership. We think it's a model for others that may evolve over time. But we really liked it, Jon, because it was a bit of a hybrid between the two. It was all of the -- or much of the capital return and premium options of -- and risk transfer options of the loan sale, but it also provided sort of opportunity for there to be ongoing economics in the loans over time. And so we really like that.

And that was important before Plus reform, it became even more important after Plus reform. Because when you start to think about the ability to fund not $7 billion of originations or $7.5 billion, but $12 billion, $13 billion of originations several years out, having multiple different sources there of sort of funding and business arrangements just gives us a lot of options to optimize the mix. .

Okay. Good. I do have a couple more questions, but does anybody have any? Okay. Good. Credit is a topic. You guys have a pretty tight band for credit expectations for the upcoming year. How are you feeling about credit in general? It's obviously on investors' minds. How do you feel about the trends? .

Yes. We put out or put up credit performance in 2025 that was in the sort of the mid-section of our guidance range and kind of within the range of what we think is sort of the right long-term sort of credit expectations for the business. This year, our guidance was very much focused on sort of a stable credit outlook. That's how we described it. And I think if you look at our guidance, it very much fits into that. .

I think for us, the big question has been, for those who know us, we started a number of years ago, a very different program around loan modifications and sort of how we treat and work with customers who are experiencing some degree of financial distress, and really, January was the first time we started to see what would happen when those customers rolled out of their loan modification programs. And sort of began to enter back into sort of a normal relationship with the company.

And I want to stress a 1.5 months worth of data is really not enough to draw any pattern. And I'm loath even to say it. But based on what we've seen today, we believe those are in line with actually slightly better than our expectations of how those customers would perform. So it's here in early March, it's way too early to declare success, but we like our position coming into the year and the signs that we've seen so far seem to support that contention. .

Okay. This is great. Anything we missed? Anything else you want to touch on? .

I think you hit all the really big ones, and I see we have 30 seconds -- 7 seconds left. So... .

You have a train to catch, I'm ready to shut this down. .

And the bar is about to open.

30th Annual conference. I want to thank you very much for being here at the very end with us. A lot of good stuff happening within the company. Thank you very much, Jon. .

Well, thank you. You've been a great host.

All right. Good afternoon, everyone. Thank you for joining us. For those who don't know, I'm Mihir Bhatia. I cover consumer finance and payment companies here at Bank of America. Right now on stage, we have Sallie Mae. I'm delighted to welcome Peter Graham, CFO of Sallie Mae here. Welcome to the conference.

Thanks for having us.

As you guys know, Sallie Mae is a leader in the private student lending space. They provide financing and resources to support college kids and they help customers achieve their educational goals. So over the next 35, 40 minutes, I'm going to ask a few questions. We'll try to keep some time at the end for questions. But if anyone has a burning question during, please feel free to raise your hand and we we'll get your question in, too.

But Peter, again, thank you for coming to the conference. Maybe to get started, just talk to us a little bit about, how are you thinking about the year, how are you -- maybe the next few years at Sallie Mae. You guys are going through a little bit of transformation of the business model. Maybe just talk about that a little bit and just what are you looking to achieve in the next couple of years?

Sure. We're excited about sort of this next phase of the company. We believe that students will continue to pursue higher education to attain the skills that they need to compete and win in the economy of the future. The backdrop of the federal reforms in the student lending that was passed last year provides us a big opportunity to expand our reach and originations into different parts of the market that we haven't competed in before. And we're excited about that. And then kind of the third piece of it really is the new strategic partnerships business that we're creating, starting with the first agreement that we signed with KKR in the fourth quarter of last year.

That gives us an additional capability to really fund that acquisition opportunity in a very durable and capital efficient way. So we feel like all of those building blocks are there for us to really have a really impactful, but also a good run in terms of financial profile of the company over the coming years.

Good and want to dig into some of that over the next half an hour or so. So maybe let's just start with 2026 guidance. You laid it out a few weeks ago, asking for 12% to 14%, hoping for, expecting 12% to 14% private loan originations year-over-year. Maybe walk us through some of the moving pieces of that. Obviously, there's Grad PLUS in there. But how much of that is Grad PLUS versus the rate backdrop? Help us break that down and put some parameters around it?

Yes. Sure. We gave our guidance sort of knowing the impact of PLUS reform will start to filter through beginning in the peak season of this year. I think it's important to kind of highlight that. A component of that, will come through just a broader market for our traditional products and funding undergraduate students. And then obviously, the newer or bigger part of the market for us is going to be the grad opportunity. The thing to keep in mind, although we have estimated that, that's a $5 billion opportunity for us once it becomes fully scaled. Really this first year is only going to be half of the first year of that opportunity just given the way that the rules were structured. They go into effect for new enrollments beginning in the second half of this year.

So think about it like at the beginning of the next academic year. And because of that, it will be either new freshmen or new entrants to grad programs, and it will just be that first fall semester of that first academic year. So that will be the smallest sort of portion for us. And then that will build into '27 and into '28 as the rules fully kick in and more and more students become subject to the modified rule.

So like maybe to put a little bit of numbers just to make sure we're all on the same page, $5 billion is the total opportunity on Grad PLUS. You are saying this fall you start with half of that and...

No, it's not like -- $5 billion is once it's fully scaled. So think about it from a perspective of a traditional 4-year undergrad. Only the new freshmen are going to be subject to the new rule here. And then those students plus the new freshmen next year. And then the next year, those students plus those 2 years. So it will take -- for undergrads it will take 4 years to be fully phased in. Grad programs tend to be shorter duration. So on balance, we think it phases in over kind of a 2- to 3-year time frame to get up to that sort of full $5 billion number.

That's helpful. And then when we think of the origination guidance, 12% to 14%, what gets you to the high end of that range? Is it execution? Is it market share gains? Is there -- likewise is that more just like...

I think, it is kind of all of the above. It's the opportunity that's coming to us in terms of new-to-firm, particularly in the grad space. And then it's the other components that are going to be feeding into the traditional sort of undergrad because of the caps that have been placed in the undergrad space. And so it's kind of all baked into that overall guidance. If you think about our kind of normalized run rate, originations growth would be kind of mid-single digits and so the delta between that and the guidance we've given this year is that sort of incremental opportunity that we view as coming from the changes in the programs.

Got it. And then just maybe turning to the loan portfolio. I think the guidance is for loan portfolio to be flat to slightly down. I understand you have the inaugural partnership in there. How are you thinking about balancing that opportunity for more partnerships there versus portfolio growth that you probably want to achieve just for NIM and earnings purposes?

Yes. That's a good question. I think the thing to think about is the framework that we've laid out for how we're going to sort of manage the different sources of funding that we have to go after the originations. We want to maintain a healthy and well-functioning bank and we'll always have that as a key part of our business model. We've historically had season portfolio sales as kind of like an additional sort of funding source and also to sort of manage the rate of growth of the balance sheet. And now with the strategic partnerships we've got an additional source that gives a more durable and programmatic way to capture the origination opportunity in a very capital efficient way and will drive meaningful capitalized fee income over time. And so we think about sort of balancing all 3 of those elements as we go after the total original opportunity that we have in front of us over the next few years.

As we're starting to ramp up the partnerships model, we'll put -- begin to put more originations -- new originations into those programs and also potentially do season portfolio sales like the one we did in the fourth quarter to get the KKR partnership started. And so it will be kind of the all of the above strategy with those levers in mind. We've given guidance on expectations for this year. We expect because we've sort of jump started the KKR partnership, we expect to be slightly down to flattish in terms of overall loan portfolio size year-on-year and we'll kind of step back into growth kind of 1% to 2% each year and ultimately get to kind of a mid-single-digit kind of rate of growth of the bank's balance sheet. But that can always be adjusted by the lever of sort of the season portfolio of sales.

Got it. In terms of the partnerships, obviously, you have this jump starting of the KKR partnership going on. I guess is that just, when we think of like a typical partnership as you talk to other partners, is that generally going to be what happens. You're going to have to have something to like jump start a partnership and then go, or is that unique to this inaugural partnership?

Well, if you think about it, the -- we've shifted from selling a season portfolio of loans, which are typically -- which have typically been sort of funded via securitization take out. What's different about this partnership with KKR is we're selling newly originated student loans. In fact, we're selling them before they're even fully disbursed, right? And so without having a kind of seed portfolio of season loans in there, the structure really wouldn't have any cash flows for an extended period of time. So I think, it kind of is a way to balance out the need to get cash flow flowing in the structure so that leverage can be applied to that. And so our expectation is as we move forward. And if we create new structures like this, that there would be some element of a seed portfolio needing to go in with that.

Any way to think about a potential time line on adding more partners? Is that something you're actively -- are you interested in?

Well, I think the thing to understand is, this first partnership really was started before we knew about the PLUS opportunity. It was really structured as kind of taking a portion of the loan sales that we would have done via traditional portfolio sales and putting it into a new originate-to-sell kind of model. With the opportunity that we have over the coming years around the PLUS volume, coupled with our desire to expand credit box to be able to assist as many students as possible. My expectation is that within the next 12 months, we'll either announce another sort of expansion with KKR or will add another partner or some combination thereof.

And I think I'd be remiss not to ask, obviously, there's been noise in private capital -- on the private capital side. Has any of that flowed through to you guys? Or just too early, not really -- it's not really on the consumer...

I think that noise is really in specific parts of the private credit ecosystem. I mean, from our perspective, the amount of funds flow that's coming in to private credit, that's really kind of long-duration insurance and annuity type money. Our asset class is really fit for purpose for them building those portfolios. So we see that as a kind of continued support for demand for the student loan asset class.

Got it. Maybe just staying -- last question on this, like partnership piece, like maybe just on the inaugural partnership. Talk about the steady state economics like once this KKR partnership or the inaugural partnership is up and running. How are you thinking of that? How does that compare to just holding the loans on the balance sheet?

Yes. This partnership structure really is superior in terms of total economics to holding on book or to the traditional sort of season portfolio loan sales. It creates a long-term, stable and durable source of fee-based income. And it's a way for us to -- in a very capital efficient way, fund origination while still keeping the customer relationship. Because we maintain all the servicing on the loans that are going into the portfolio.

And in terms of the risk, there's no risk retention. Is there risk...

Exactly, it's structured as true sale and full risk transfer. The fee structure does give us -- there's a secondary fee that is performance-based. It's the smallest portion of the total fees. And it has a reasonable sort of return on asset thresholds that if we hit our underwriting sort of hurdles will meet those thresholds and get the supplemental fees. If we don't then KKR doesn't have to pay us for those fees, but there's no claw back of any of the other economics that are in the structure.

All right. Maybe just staying with credit, talk about credit performance expectations for 2026. Particularly, one question we've been getting, just any comments we can -- any kind of way to think about when you'll have the releases versus rebuilds, with some of the sales, the macro overlays, modifications, everything moving around?

Yes. I think I'd start by saying the guidance we put out on net charge-offs really is consistent with stable credit this year versus last year. And the metrics might shift a little as the sort of balance sheet classification of things moves around with this new originate-to-sell model. But overall, the environment we feel is pretty consistent with last year in terms of our expectations around credit.

In terms of reserve builds or releases like I would never want to get in the game of forecasting CECL. Like I don't think that, that's a reasonable thing for me to try and do. What I would say over time, we expect that the grad -- sort of the grad cohort is going to be a higher credit quality on average, probably a shorter duration than our core undergrad product. And so it should tend to result in over time lower absolute reserve requirement, but it will take some time for that to sort of filter and phase in.

In terms of the partnership impacts, really, the fact that we're originating or selling new originations, it will have a modest impact on the reserve rate just from a perspective of those newer originations carry an overall lower absolute rate than the broader portfolio. But I would expect that to be at the margins rather than anything that's really noticeable.

Right, the credit quality of the sales that you're doing, in the inaugural partnership. Is it very comparable to the rest of the portfolio? Is there any...

Yes. It's really designed to be sort of representative portion of originations that we do each month. It's really structured around concentration limits that are in the rating agency models for securitization. So just kind of think about a grid like that, that has different components on fixed versus floating or payment status deferred versus being in the IO or fixed pay and the like.

Maybe let's turn to expenses for a second. Obviously, an investment year for you all, also a big origination year. So not surprising that expenses are expected to be higher. But I think like one thing that would be helpful for investors is to really understand some of the strategic investments you're making this year. I don't know if there's a way to dimensionalize it, but at least talk qualitatively about where are you investing? Like what is that setting us up for next year or the year after?

Yes. So if you think about kind of, call it, 16%, roughly to the midpoint of guidance, year-over-year increase. I'd say 40% of that-ish of that increase is things that we would deem investments. So think about that as the work we're doing around product design to go after the various programs of study in the grad space, everything from market research on features that we should build to building new credit models, to sort of embedding that in the customer experience through technology investments. As well as at the margins, some extra head count associated with running those new programs.

But once we get through that build phase, that will really become more like run rate part of our business and not subject to the same year-over-year increase after the first year. Probably 20-ish percent of the year-over-year increase is normal kind of inflation that happens in any business that we would have had even without this grad opportunity. And then the other sort of remainder, 35%, 40% is increased marketing that we anticipate we'll need to spend to go after a completely new consumer profile.

So if you think about an undergrad enrolling freshmen, high school senior thinking about going to college and their parents making decisions, like that's a very different consumer profile than somebody who's graduated, maybe worked for a couple of years. Has their own sort of life and is making that decision about do I go to grad school, is the investment going to be worth it. what's my course of study and the like?

So that's going to be a very different exercise for us and one that we're being very thoughtful about how do we build the right products that are going to be differentiated that will attract them and also what are the right strategies to build to go and drive new to firm customer relationships.

And the last one, maybe like talk a little bit about what Sallie Mae's right to win? Like why would someone choose Sallie Mae over? And there's obviously competitors who also identified this opportunity.

Sure. Sure, I think our existing position in the undergrad space is probably a key kind of differentiator. The sales force that we have that's out building relationships in the financial aid offices around the country, it is the largest in the industry. We've got relationships with over 2,100 schools currently. And so that's a good base to be starting from when going after another segment of the higher education market. And because the primary provider of funding into that space has been the federal government, and they're getting out of it, like nobody else has the experience either.

And so like we're starting from a pretty strong point. But we expect it's going to be a competitive marketplace. There's been a number of participants in the current market that have said that they're going to go after the space. And we expect competition to be pretty strong. But the competition in the undergrad space is very strong as well. And I think that's good for a healthy functioning market and will result in good outcomes for the students as well.

Do you worry about competitive intensity driving down returns?

Well, I think in the first year, we know that our marketing is going to be inefficient. I think everybody's marketing is going to be inefficient. I think that's the biggest lever that we will have after the first year is to continue to optimize on that marketing and drive that cost down in the same way that we've driven efficiency into the marketing that we do in the undergrad space. But my expectation is we'll be pretty inefficient in the first year as new-to-firm customers are always less efficient. You get a big benefit from serialization once you get that customer the first time. And so we'll build into that over time.

Is there anything inherently different about the population where you wouldn't get the benefits in the serialization in the second like as that following your...

I mean it's a situation where kind of generally once someone starts a course of study, they're committed to finishing it.

Right. But are they committed to Sallie Mae...

They're not like committed to us, but I think it's on us to build a product that is differentiated and that resonates with them and we'll always have some element of pricing competition each year as they come up to make that decision on what do they do for the next loan for the next year. And I think, in general, probably grad students are probably a little more price sensitive, a little more sassy about that than maybe an undergrad borrower might be.

Got it. I want to go back to the investor forum for a second. You had laid out quite, I thought, impressive path, $14 billion of originations, $7 million of loan sales. What are the building blocks to get there?

Well, again, I think, this year is going to be kind of a really strong proof point. And so the -- it's on us this year to execute on our strategies in terms of going after that first tranche of the origination opportunity. Being ready for that by building out the right products and product features that are going to be attractive to the different programs of study. That we believe will be important to stand out in a competitive marketplace.

We've got the funding capacity for that in place now, particularly with completing this inaugural partnership with KKR and that builds a base for us to kind of build upon as we move forward and the origination opportunity really starts to scale next year and beyond.

And then maybe like would you sit and like you look at -- you meet with the team, you understand the business, you know where the opportunity is, how you're attacking it? Like what is like maybe the one or two like big risks from an execution standpoint that you're really like, this is the peak we really need to hit.

Yes. I mean in terms of execution, I'd say the marketing and having the right product set is the thing that we're most focused on because that's what's really different going after this new-to-firm customer. The operating elements are very similar to what we've dealt with for years in the undergrad space. So like we've got a well-oiled machine in terms of servicing student loan product. And again, we've got a variety of different levers for funding that gives us capacity to really maximize that originations opportunity.

Maybe on the opportunity and competition. We talked a little bit about others who have identified the same opportunity. I guess just overall, if you took a step back, I mean, you've been -- you look at the industry over time, what is competitive intensity like today? Is this like as competitive as it's ever been? Is that stable, gone down a bit?

I think it's the same intensity that has always been there. I mean if you think about the undergrad space, over the last 5 years, we've had big competitors exit the space. And we and others that remain in the space have stepped in and competed to win that market share. And so I would say the intensity is pretty similar here. This is a big opportunity. And a lot of those same players that have been competing in the undergrad space have signaled their intention to go after this new opportunity.

So I don't think it's going to be more intense than what we've seen before. I think it's going to be about the same level of competitive intensity. But I do think that sort of in terms of investment in marketing in the first year is really going to be important for us to really build that new-to-firm customer base in the first year.

On the earnings call, I think, you talked about high teens, low 20s EPS growth in 2027. What gives you confidence that you'll be able to achieve that kind of acceleration?

Yes. I think that was really grounded in. And I think, Jon, in those prepared remarks gave some caveats of if the TAM opportunity that we've identified from PLUS reform does come to fruition. And that's really what gives us confidence in that. We feel like we've built the base of funding and capacity and operating capacity to go after this opportunity. And given the scale of that growth over the next few years, that's what gives us confidence to give sort of soft guidance like that on an earnings call.

Maybe turning to the forward curve, interest rates, right? I think generally, in your guidance, how much have you baked in from like consolidation activity towards loan growth. Do you think that's going to move the needle on growth?

Yes. We have seen as the rate cuts started kicking in. We've seen some uptick in consolidations year-over-year. But keep in mind, that's from an absolute low base, right? And so we always expected that as we got a couple of rate cuts in that we would start to see that step up. We're kind of about at the level that we had anticipated we'd be at this point in the cycle. I think the thing to keep in mind is, even if we have another one or two rate cuts, we're not going to be on a trajectory to go back to the ultra-low rates that were present when consolidations were at their peak. So I don't view it as really anything that we're terribly concerned about in the context of this year, but we continue to kind of watch it and monitor it.

Are you seeing from competitors or like new entrants any kind of like uptick towards that...

That consolidation space in particular?

Yes.

The -- I mean, we track it by who the loan is being consolidated too, and we haven't really seen any meaningful new entrants into that market. The majority players are the ones that you would expect that have been in that market for some period of time.

Maybe like let's broaden it beyond consolidation, like yes, the existing players are going to go for the Grad PLUS, but everyone sees it. Is there any -- are you hearing any rumblings, anything of new players coming in, anyone?

I haven't heard anything of significant new players that are planning to enter student lending space. I think it's one where like even though it's a big opportunity, call it, 70% growth when it's fully scaled, like it's still a relatively small market. So like banks like BofA or JPMorgan are not, that's not big -- that's like a breakfast snack for them. They're not going to spend the time to go really get to that market.

What about fintechs or like some of the -- are you seeing like with all the private capital out there, are there anyone from that side?

Yes. I mean I think really as a product, the features that are embedded within the product, the deferral periods and the like. I mean it's not impossible, but it's a complicated product to service. I think that's why some of the banks that exited got out of the space was because of the servicing complexity. So I would never sit on stage and say, it's not ever going to happen, but we haven't seen any evidence of really any kind of new entrants into the market in that way.

Let's turn to capital return, right? Just the business is evolving. Just remind us, how are you thinking about capital return from here? I don't know, maybe call it a 3-year time horizon?

Sure. I think I would be remiss if I didn't remind of kind of our history. So over the last 5 years, we have, through our various types of share repurchases bought back a little over 55% of the outstanding flow to the company. We just, concurrent with earnings, announced a new $500 million authorization that covers a 2-year period. So we're committed to capital return. And we feel like, particularly with the opportunity that's coming and the growth that's coming and the creation of the private credits partnership model, which provides a really capital-efficient way of going after originations growth that will provide a significant opportunity for us to return capital continuously into the future.

Okay. And then another question we get from investors is around NIM, particularly as we think about the low to mid-5% range. Like what are the moving pieces as we think about it, both from a funding cost side, portfolio transition? And then just to the extent rate cuts come through, what kind of impact would that have?

Yes. We run a pretty matched book, and that's what gives us sort of confidence in giving longer-range guidance like that. I think in our kind of planning for this year. We've got, I think, 2 rate cuts baked into the overall plan. So that's pretty much down the middle of what I think consensus is for what the Fed is going to do. And so we feel confident that we'll continue to operate in that zone.

Got it. Maybe unemployment, right, particularly new grad unemployment, that's a big topic always, I guess what's your view on that conversation around new grad unemployment? What are you seeing in your data? Do you have a thought on what that looks like as we approach May, June graduations?

Yes. Sure. I think there's been a lot of focus on that. Obviously, a lot of headlines around AI and its impact on the white-collar economy and lots of stories about recent grads having difficulty finding jobs. I think if you look at the underlying data, admittedly, the new college grad unemployment rate was modestly higher this year than the year before. It tends to have a seasonal pattern where some are following spring graduations that unemployment rate is the highest, and then it kind of drifts down over the course of a year as those grads find jobs.

I think if you look at the sort of months to find jobs post-graduation, it's extended by a month or 2 over sort of historic levels, but it's not the same doom and gloom that you would infer from some of the headline articles that you read. So it's something that we've got our eye on. But the thing to remember is our product and our business is built around that stress that is always there in student lending. The highest stress that we have in our portfolios is the first 12 to 18 months post-graduation. When these new grads are finding their way in the world and getting their first jobs and kind of getting set on a good financial footing. That's why our product has built in deferral period. Our assistance programs, we have available to new grads and extended grace program that gives them a little more time if they need it.

And then ultimately, if they need assistance beyond that, we have a variety of loan loss mitigation programs that they can qualify for to give additional assistance beyond that and the co-signers.

That's what I was going to ask...

Ninety-plus percent cosigner rate on the new originations. So they're -- for the most part, they've got parents who have vested in their success, and we'll help them get set up.

Just how often do you go back to the cosigner and the cosigner has to step in?

I mean, it's a tool that we have if we get to a point where we're in a collection situation and there's a cosigner on the loan, then certainly we'll go and speak with the cosigner. I think that's part of sort of why we believe that our 30-plus delinquencies aren't really a strong indicator of net charge-offs because what tends to happen is a student or a new grad gets into delinquency and as soon as that starts to happen, we're not just reaching out and talking to the grad. We're reaching out and making sure that the cosigner on that loan understands that there is a situation they need to be focused on. And so whether that's the student getting their feet under them and getting like, "Oh, I didn't know I needed to set up direct deposit to get my payments going" or that's the parent stepping in to help kind of ease the way.

We don't always have good visibility into that, but that's a contributing factor to why we have a high self-cure rate of 30-day delinquencies that don't always roll into the later stages.

Any changes to that, how that has been...

We haven't seen any material change in that.

Got it.

And if you look at the sort of late-stage delinquencies and roll rates that have been pretty stable. We gave some data on the earnings call around kind of the [ liquidity ] ratio, and that's another sort of mathematical description of that phenomena that 30 days doesn't always translate into charge-offs.

I do see there just 4 or 5 minutes left. So if anyone has any questions, happy to open it up right now, anyone? Okay. I'm not seeing any hands. So I'll ask my next question. In terms of credit behavior, a lot of people like loans and delinquencies. When you look at your population, any difference in -- I mean, I don't know how many people have like a private loan without a federal loan, but is there any difference that people who have private loans versus -- have federal loans versus don't?

Yes. I think the important distinction to make there is because of our role historically as a gap funder, the vast majority of our borrowers have a federal loan already. But the converse is not true. So like most federal borrowers don't have private student loans. And so we do monitor behaviors of our borrowers in the context of what's being reported in terms of delinquencies in the federal space as the restart kicked in over the last couple of years? We have not seen any meaningful impact in our borrower base in terms of payment patterns or anything like that as the restart has happened.

Got it. I will end with this one. You do these meetings, you talk to investors, not just here, but in your day-to-day job at [ part ]. As you talk to the -- maybe talk a little bit about what do you think is like maybe a little underappreciated about Sallie Mae or maybe misunderstood where people are worried about something, where it's not really that big. You mentioned the 30-day delinquency thing right now, but anything that, any gaps that you see are very persistent, consistent?

Yes. I mean we're a consumer finance company. And so credit is always something that people are going to be concerned about and focused on, but I don't think we're an outlier in that regard. In terms of sort of investor understanding, particularly in the last, call it, 6 months as we've rolled out the new structure, and we've done the Investor Day and done the earnings call and all of the investor meetings that we've had. I feel like investors really understand the potential for us to deliver here. They're generally supportive of the strategy that we've articulated. And so as a result we're really excited about the coming years as I started with, like students are going to continue to pursue higher education, and we'll see that support originations growth in the future.

This PLUS opportunity is kind of like a once-in-a-career opportunity in terms of scale of originations growth in a business and we're pursuing that very diligently to be ready for that growth in terms of product design and features and marketing strategies and the like. And the funding capabilities that we now have that are complemented by the strategic partnerships business is going to be a really important tool for us to really maximize our ability to go after originations and do that in a way that is very capital efficient and creates long-term durable fee-based income. So we're excited about the next few years. It's going to be a fun ride right?

Great, thank you so much for time.

Thanks for having me.

Thank you.

Welcome to the Sallie Mae Fourth Quarter and Full Year 2025 Earnings 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, Lorie. Good evening, and welcome to Sallie Mae's Fourth Quarter and Full Year 2025 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our CFO; and Melissa Bronaugh, Managing Vice President of Strategic Finance. After the prepared remarks, we will open the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here 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. For volume, these factors include, among others, results of operations, financial conditions and/or cash flow as well as any potential impact of various external factors on our business.

Additionally, this discussion in the earnings presentation include non-GAAP financial information, including non-GAAP delinquencies, including strategic partnerships in repayment, non-GAAP reserve rates, including strategic partnership, warehouse loans and non-GAAP NCOs as a percentage of average loans and repayment. All non-GAAP financial information should be considered as supplemental to, not a substitute for or superior to the financial measures calculated in accordance with GAAP. The company believes that these non-GAAP financial measures provide users of our financial information with useful supplemental information that enable a better comparison of the company's performance across periods. There are many limitations related to the use of these non-GAAP financial measures and their nearest GAAP equivalents.

For example, the company's descriptions of non-GAAP financial measures may differ from the non-GAAP measures used by other companies. For descriptions of the non-GAAP financial information included herein and reconciliation to the most directly comparable GAAP measures, please refer to the appendix to the earnings presentation beginning on Slide 13. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements, including non-GAAP forward-looking statements to reflect events or circumstances that occur after today, Thursday, January 22, 2026. Thank you. And now I'll turn the call over to Jon.

Thank you, Kate and Chloe. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Fourth Quarter and Full Year 2025 results. I'm pleased to report on a successful year and discuss our strong outlook for 2026. Overall, the private student lending sector remains robust and is positioned for further success. College enrollment and specifically enrollment trends for many of our largest Tier 1 schools are up, indicating students and parents continue to see the value of higher education. Our cosigner rates for new originations have also increased, indicating parents and loved ones are willing to co-invest in the education for their students. Recognizing that some recent graduates are feeling the impact of current economic uncertainty and technological change, unemployment rates for recent graduates are still comparatively low and most are finding gainful employment within 6 months of graduation. As AI transforms the professional landscape, we believe education will be even more important as students acquire the skills necessary to remain competitive in the future. Undoubtedly, schools and programs will evolve, creating new areas of study to meet those needs.

We look forward to supporting our school partners and students throughout this evolution. We are excited about the opportunity created by the recent federal student lending reforms. These changes should reduce the likelihood of students and families taking on unsustainable levels of student debt. These reforms also create the opportunity for us to help more students and families. We believe that when fully phased in, plus reform could contribute an estimated $5 billion in annual originations for Sallie Mae representing approximately 70% originations growth over 2025. In 2025, Sallie Mae delivered our inaugural private credit strategic partnership. This innovative first-of-its-kind agreement combines the more predictable earnings profile of our bank with the capital efficiency and risk transfer benefits of our loan sale program. We believe the economic value of this partnership is comparable or superior to other funding models. This arrangement includes no clawbacks and the supplemental fee which represents the smallest portion of the overall economics is tied to clear, reasonably achievable return thresholds.

In addition to the strategic progress, we also delivered well against our guidance for the year. GAAP diluted EPS in the fourth quarter was $1.12, and our full year GAAP diluted EPS was $3.46 compared to $2.68 in 2024. Private education loan originations for the fourth quarter of 2025 were $1.02 billion. And for the full year, we originated $7.4 billion of private education loans, 6% over 2024 and at the higher end of our revised full year guidance. Net charge-offs for our private education loan portfolio were $98 million in the fourth quarter of 2025 and $346 million for the full year representing 2.5% of average private education loans and repayment, which is down 4 basis points from the full year of 2024. Pete will now take you through some additional highlights. Pete?

Thank you, Jon. Good evening, everyone. We continued our capital return strategy in the fourth quarter repurchasing 3.8 million shares for $106 million for a total of 12.8 million shares for $373 million over the full year 2025. Since January 1, 2020, we've reduced the shares outstanding by over 55% at an average price of $16.93. Our prior share repurchase authorization was nearing completion. And tonight, we are announcing a new 2-year $500 million authorization. Our net interest margin was 5.21% for the quarter, 29 basis points higher than the prior year period and 5.24% for the full year, up 5 basis points year-over-year. These results demonstrate the effectiveness of our asset and liability management strategies, which delivered NIM in the low to mid-5% range.

In the fourth quarter of we recorded a $19 million negative provision for credit losses, largely driven by the release of reserves tied to the $1 billion seasoned loan portfolio sale and a selection of a portion of the 2025 peak season originations for sale to the KKR strategic partnership. In our Investor Forum last month, we noted that as our updated strategy begins to scale, key performance metrics would begin to shift. As part of our evolved strategy, we are no longer exclusively selling portions of our seasoned loan portfolio. For the first time, we are also selling newly originated loans. This will change the composition of our bank-owned loan portfolio. Additionally, we are selecting each quarter a representative portion of new originations and warehousing them for sale in the subsequent quarter. As a result, we expect a portion of our new originations each quarter to be designated as held for sale. As many of our credit metrics are calculated using only loans held for investment, or include a portion of newly originated loans as part of their calculation. This change in loans held strategy has begun to influence a number of reported metrics.

To support your analysis and ensure transparency, we have added an appendix beginning on Page 13 of the earnings presentation furnished with our release this evening, outlining how these metrics have begun to shift and providing the clarity needed to establish refreshed baselines for forward-looking models. Importantly, the shift in these metrics is primarily driven by calculation mechanics rather than a change in the underlying performance of the loans in our portfolio. It's important to note certain information referenced today and provided in the earnings presentation includes non-GAAP metrics. We believe are useful to understanding the comparative performance of our portfolio. A reconciliation of the non-GAAP to GAAP metrics can be found in the appendix to the earnings presentation on Pages 18 and 19. With that foundation in place, we can turn to the discussion of our credit metrics.

The total allowance as a percentage of the private education loan exposure, which we refer to as the reserve rate was 6% at the end of 2025, up from 5.93% in the previous quarter and 5.83% at the end of 2024. As shown on Page 15 of the earnings presentation with adjusting for the change in loans held strategy, the non-GAAP reserve rate would have been 5.92%. Net charge-offs for our private education loan portfolio in the fourth quarter of 2025 were 2.42% of average loans and repayment compared to 2.38% in the year ago quarter. As shown on Page 16 of our earnings presentation, when adjusting for the change in loans held strategy, the non-GAAP net charge-off rate would have been 2.40%. Private education loans delinquent 30 days or more represented 4% of loans and repayment as of the end of the year, unchanged from the third quarter and up from 3.7% at the end of 2024. Adjusting for the change in loans held strategy, the non-GAAP delinquency rate would have been 3.88% as shown on Page 17 of the presentation. Over the second half of 2025, we saw an increase in early-stage delinquencies, prompting questions whether that was a precursor to higher charge-offs.

As we noted then and continue to believe now volatility in early-stage delinquency is not necessarily a reliable indicator of future net charges. As shown on Page 10 of the earnings presentation, an analysis of the relationship between annualized 30-day plus delinquency and net charge-off rates shows a 12 percentage point improvement in the link ratio since 2022, demonstrating the diminishing connection between the 2 metrics. We believe this is driven at least in part by improvements in our collections effectiveness. Moreover, late-stage delinquencies and roll rates have remained stable consistent with our expectation that most early-stage delinquencies self-care. As discussed for several quarters, our expanded loan modification volumes are nearing the point of being fully seasoned. And we will begin to see borrowers whose loans were modified under the expanded loss mitigation programs at the end of 2023 exiting these programs throughout 2026. While longer-term performance will become clearer throughout the upcoming year, we continue to be pleased by the results we are seeing from borrowers currently enrolled in these programs.

As you can see on Page 11 of the earnings presentation, more than 80% of these borrowers successfully completed their first 6 payments. Additionally, close to 75% of borrowers who are -- who enrolled in a loan modification during the fourth quarter of 2023 are current at the end of 2025, representing over 24 months of positive payment. This performance is consistent with what we are seeing in other modification cohorts. Noninterest expenses for the full year were $659 million compared to $642 million in 2024 a modest 2.6% increase year-over-year and below the midpoint of our guidance. We're pleased with this outcome, which reflects our disciplined expense management, continued focus on efficiency. This discipline enabled us to deliver an efficiency ratio of 33.2% in 2025. And finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 18.6% of total assets. At the end of the fourth quarter, total risk-based capital was 12.4% and common equity Tier 1 capital was 11.1%. We believe we are well positioned to grow our business and continue to return capital to shareholders. I'll now turn the call back to Jon.

Thanks, Pete. Let me conclude with a discussion of our 2026 guidance and provide some additional context on potential future trends. 2026 presents an exciting opportunity for our company to serve more students and families. In the second half of the year, we expect that the first wave of students subject to the new Plus caps will begin their undergraduate and graduate journeys. This impact will be relatively smaller in the first year of phase-in nonetheless, we expect full year 2026 private education loan origination growth of 12% to 14%. We believe this is an incredibly attractive opportunity for our company and we need to invest ahead of the anticipated volume. As such, expected noninterest expenses for full year of 2026 will be between $750 million and $780 million. Driving this year-over-year increase are 3 factors. Approximately 20% is growth associated with cost increases tied to normal market conditions. Approximately 40% of the increase reflects onetime investments in product enhancements, refined credit models and other strategic enablers. And the remainder stems from higher marketing and acquisition costs required to capture the additional plus related volume. We do not expect this level of year-over-year expense growth to continue.

In 2027, we expect the rate of operating expense growth to be roughly half that of 2026 as the cost of growing volume is offset by efficiency gains and the sunsetting of onetime investments. Assuming our volume estimates are correct, we anticipate that we will improve our efficiency ratio each year with the goal of being back in the low 30s no later than 2030. Given the strategic and financial attractiveness of our private credit partnership business, we expect to grow that business in 2026. As a result, we anticipate private education loan portfolio growth to be flat to slightly negative year-over-year. Beyond 2026, we expect to maintain an appropriately sized bank that continues to serve as a strategic growth engine, a funding risk mitigant and a healthy competitive alternative to our private credit partnerships. Accordingly, after 2026, we expect to grow the bank portfolio gradually by roughly 1 to 2 percentage points per year until reaching a steady state annual growth rate in the mid-single digits. To support this trajectory, we estimate that roughly 30% to 40% of our private student lending originations will flow through strategic partnerships, with additional balance sheet growth managed through seasoned portfolio loan sales.

We expect net charge-offs for our total loan portfolio will be between $345 million and $385 million. As shown on Page 16 of our presentation, we believe this is consistent with a stable credit outlook. Let me conclude with a discussion of full year diluted earnings per common share which we expect to be between $2.70 and $2.80 in 2026. This range reflects the deliberate choices we made to launch the strategic partnership in 2025 and invest aggressively to capture the Plus opportunity. While 2026 is a critical year in our strategic journey, I'm even more excited about what comes after. While we cannot predict the future macroeconomics or other changes, if the plus TAM materializes as we have predicted, we would expect to see EPS acceleration beginning in 2027, with high teens to low 20% growth. Beyond 2027, we expect our EPS growth to remain elevated for several years as the plus opportunity is fully realized and our strategic partnership business grows.

In closing, we are excited about our company's future and the opportunities ahead. We believe students will continue to seek access to higher education to obtain the skills necessary to compete in the future. The plus reform will open the door for Sallie Mae to compete for and win business with an exciting new group of customers creating meaningful upside for future originations and then our private credit strategic partnerships business will give us a capital-efficient and risk-balanced way to fund growth while building more predictable and recurring earnings streams. Taken together, we believe these dynamics should translate to very attractive value creation opportunities for the company and for our investors. With that, Pete, let's go ahead and open up the call for some questions.

[Operator Instructions] Our first question comes from Caroline Latta with Bank of America.

Can you talk about how you guys think about the postponement of wage garnishment and treasury offset will impact the performance of inschool and private student loans?

Yes, sure, Caroline, happy to. First of all, I think it's important to remind folks that while many of our customers have federal loans, most federal loan customers do not have Sallie Mae private student loans. And I think in general, and we've talked on past calls about just the difference in performance and impacts that we've been seeing as the federal program has gone through various stages of its evolution. In general, I think for any customers who have federal loans who are severely delinquent. And I think our estimates suggest that number is quite small. The postponement is obviously a net-net benefit. But I don't think we would expect that to have a significant impact on our business, just given the difference in customer bases.

And then a quick follow-up one. You guys highlighted the $5 billion in opportunity from the grad price, which is driving some of the origination growth year-over-year. Given those changes come into effect in July, how should we think about modeling 1H versus 2H growth?

Yes. I think we've talked on prior calls about kind of the staging of this. If you think about it. It is a new freshman in the undergrad class and new to graduate school for graduate programs beginning in the fall academic period. And so think about that in the context of a 4-year program that's like 1/4 of the volume and grad programs can be some a little shorter and some a little longer than that. So we're expecting the sort of the incremental plus volume this year to be relatively modest, and that's included in our guidance on growth for this year, and we expect that to step up measurably as we move through the next 2 to 3 years until it gets to kind of a steady state.

[Operator Instructions] We'll take our next question from Giuliano Bologna with Compass Point.

From the first question, when I think about the partnerships and the loan sales in 2026, is there a rough sense of where the volumes are likely to shake out for both or even some relative context because obviously, that will have a pretty big impact on where the numbers shake out for the year. I'm just curious how that looks versus the investor forum members.

Yes. So recall that the agreement for this first strategic partnership is a commitment -- a minimum commitment of $2 billion of new originations roughly time to the academic year. So we designated a portion of our 2025 peak season originations as held for sale at the end of December. And we will -- that will be part of our sale in the first quarter as part of the new originations flow portion of that commitment. Going forward, each month, we'll be selecting a representative sample of originations that occur and be designating that for sale in the partnership. I think [indiscernible], think about that is like 30% of originations. And so there will be some seasonality as we go through this year in sales of new originations to the partnership just because it's tied to our actual origination pattern. So the highest amount sold of the new originations will be tied to kind of our traditional peak season period.

And then in regards to seasoned portfolio sales, I would say that's -- the approach to that will be similar to what we've employed historically, which is the size and the timing of those will be dependent on kind of our capital needs and sort of marketplace conditions. So no real change in that regard.

Very helpful. Then you're hopefully not to convert the question, but there's a fairly decent impact from the HFS both on balance sheet and kind of what that balance will look like. Is it fair to assume that at least in '26 will probably be similar to where you are now in terms of balance? Or should we expect that to roll up throughout the year as things accelerate? And is the reference of how big that HFS book will probably be this year and how big it will end up being because it drives some decent NIM even while it's sitting there from an average balance perspective.

Yes. So if you think about it as and I mentioned this in my prepared remarks, we're going to select loans each month and we'll warehouse them at the end of a quarter and then have a subsequent takeout transaction for sale into the partnership trust structure in the subsequent quarters. So that absolute amount of held for sale in the balance sheet will vary each quarter depending on the origination profile in that quarter. For instance, the fourth quarter will be the largest because it will be a selection of sort of fall peak season originations and the second quarter will be the lowest because that's traditionally our lowest origination quarter of the year.

Got it. That's helpful. Then there's obviously the increased loan sales also changed the portfolio mix in the near term and you guys have a very [indiscernible] in appendix slides. Should we expect a little of a change in just the seasoning of the portfolio because you've had excess sales in '25, you're selling a fair amount in '26 as well, but that will change the seasoning and kind of roll the repayment over the next few years. Or is that not a portion looking down the wrong in terms of the materiality of that?

Yes. I think at the margins, well, I think the larger impact will be the fact that a portion of our new originations are going to be going off book at origination. So that will tend to cause a slower sort of replenishment of the overall seasoned book, and it will gradually get a little more seasoned than what it has been. But I think that's kind of at the margins. I don't think it's going to be a dramatic shift.

We'll move next to Terry Ma with Barclays. Terry, you may need to check the mute function on your device.

Okay. Sorry about that, hopping in between calls. So I appreciate some of the color you gave on noninterest expense earlier on the call. But like if I look at the range for this year, it is obviously still quite a step up in what you guys had last year and then even the post 26% kind of growth rate that you indicated is kind of higher than what you've seen historically. Can you kind of help us think about how you measure the ROI of those kind of investment dollars?

Yes, Terry, probably a couple of different levels to that conversation. First, I think it is important to start with why we are stepping up the investment opportunity. And we've said it a couple of times this represents in our mind, sort of the clearest opportunity to have really significant TAM growth up to 70% over the course of the next couple of years, again, assuming the analysis and the estimates that we put together are meaningful. And so I think it's important to start with -- this is not to be cliche, but really as close to a once-in-a-lifetime opportunity to expand a business as I think we're going to see in our private student lending space. And I think if you model through what is the impact when fully realized of a 70% increase in originations at for the sake of conservative ship, cut it to 50% increase, it is a really meaningful increase in earnings potential and market cap.

And so I think you have to start there and understand that, that is the mental model that we, as a management team, bring to this investment opportunity. We have, and I think have always had, and this has been demonstrated I think, by our strong efficiency ratio performance over the last couple of years, really good governance around, for example, how we do return measurement on marketing spend, how we do return measurement on sort of new product innovation and development. And I think investors should rest assured that we are bringing that very same discipline to bear in this opportunity. I think what's important to recognize and maybe 1 of the sources of disconnect, is for a whole myriad of reasons, in particular, we do not expect our marketing efficiency to be as effective or as efficient in year 1 of this sort of opportunity as it will likely be in years 2, years 3 and sort of beyond.

And if you think about it, there's a whole myriad of reasons for that. We are phasing in the eligibility of the new caps. So when we market in year 1, depending on whether you're talking in grad or undergrad, there will only be a portion of those students who will be interested in private student loans because many will still be supported by the federal program. In year 1, in particular, for example, there's no serialization benefit. We know it's a lot less expensive for us to get a serialized loan than a new customer -- than to acquire a new customer. And I haven't even started, Terry to talk about just it takes a little bit of time and enrollment season or 2 to really fully optimize all of your various both digital and traditional marketing channels. And so we don't view that as a permanent impairment to our efficiencies. But I think we do bring a slightly different view to how you stand up a marketing program for, let's say, new medical students than what has been the primary part of our business over the last several years, which has been serving disproportionately underground.

So we're excited about it. We think it is, again, in service of a really fabulous market opportunity. We hope you all agree that market opportunity is right in front of us, and we feel like we're bringing great discipline to how we're thinking about that spend.

I think the other thing I would add there is just context around efficiency, like we have a very good efficiency ratio now even at the midpoint of the range we've guided to for 2026, we're kind of still in the high 30s. And I think on a relative basis compared to others in this space, that's a really efficient operation. And we've said over the coming years, we're going to drive that back down to the low 30s. So like I think that's an additional context that's important.

Got it. That's helpful color. And then, I guess, like maybe just a follow-up on credit. Your percentage of loans and extended rate ticked up meaningfully. I think that's pretty consistent with the June wave exiting regular grace. But as we kind of think about credit for 2026 and just the guidance range that you gave, like any color on like your confidence level? Because I think you also have a way a cohort exiting Mod in December like as we look out into '26, I think by all measures, it is still a pretty kind of tough job environment for kind of new grads. So kind of maybe help us think about what's kind of embedded in your charge-off assumption range for the year and your level of confidence.

Yes, sure. I'll take the Mods piece and then Jon, you can maybe recap some of your comments around the overall environment. On the loan mods, we've been tracking now for some time and talking about successful performance in modification of making payments, and there is an additional slide in the deck that sort of highlights that. I think that from my perspective, thinking about kind of the 2023 cohort of mod enrollments, the fact that 75% of them at the end of the year are current and is another really strong indicator of success. And again, we'll see how that sort of moves through the year in terms of people graduating out and stepping back into their contractual obligations, but we feel good that we've designed a well-functioning program. It's not a need of a borrower in stress and we feel like the positive payment habits that have been demonstrated over now 24 months in that cohort are a powerful indicator of their likelihood of success as they come out this year. And all of that is baked into the range that we've given for net charge-offs for '26.

Yes. And Terry, maybe if I step back and give a little bit more context I think there's clearly been a whole series of pretty eye-catching stories that have come out in the past months about impact of AI and impact on the job market and so forth. I think the data that we see from a number of different sources tells perhaps a little bit more of a balanced story. And there is no doubt that unemployment rates for new college grads are slightly elevated today. There is no doubt that it is taking a little bit longer for new college grads to find jobs, but to put that in context, if you look at the monthly unemployment data for new college grads, you see typically a spike in unemployment over the summer and then a normalization period. And we are sitting here today based on December '25 data at effectively the same unemployment rate that we would have seen, again, for new college grads in November of '23 or '24.

So it is a slightly slower ramp to sort of full employment normalization, but it is measured in sort of 1 month, 1.5 months delta if you look at those rates, not something that is more substantial. I think it's important also to kind of put that into broader context, and I've raised this on a couple of calls or said this in a couple of calls. This is a pattern that we are well used to. We know for many years in this business, the single greatest point of financial stress on average for our customers is going to be when they're going through this transition from school to full-time employment. It's why we invest disproportionately in the programs that we have to help customers during that time and to give them sort of the flexibility and whether that's programs like you mentioned, Grace, whether that's potentially loan modifications for the small number who need that or other programs that we may have, we feel like we are really well set up to do that.

By the way, this is also a time where our 90%-plus cosigner rate is critically important. And we know both numerically and we know anecdotally from our surveys parents, loved ones expect to support their students during this time of transition. And that's a great answer for the student. That's also a great answer for us and for our shareholders. And so when you put all that together, no CEO of a credit-oriented company is ever going to be dismissive of credit. We take it seriously and watch it like a hawk. But I think what we are seeing in the patterns sort of fits the comments that I've made and it's certainly all baked into the guidance that we have just provided you.

[Operator Instructions] We'll move next to Jon Arfstrom with RBC Capital Markets.

Question for you, Jon. Your comments on the EPS outlook I guess, obviously, the market can be pretty short-term focused and that initial reaction was pretty negative to the new model on your stock, but you framed up the strong EPS growth potential for '27, I think you mentioned high teens to low 20s potential for '27 in your prepared comments. Do you feel like you have high visibility on that for 2027? And does the visibility become a little more blurred beyond '27? Or is it pretty clear to you in terms of what that runway could be?

Yes, Jon, I think the way that I would answer that is there are really a couple of things that, in my mind, have a disproportionate impact on our stock or on our performance. Obviously, the broad macroeconomic environment and the impact that, that has on credit I'm not sure I or any other bank or consumer finance CEO is going to feel comfortable looking at more than kind of a 12-month time frame. But if you kind of look at the rest of our model, I think it really comes down to do we realize the TAM opportunity that is in front of us. Are we successful at regaining the kind of efficiency ratio that Pete and I have both now talked about and a little bit a choice we get to make, which is how quickly do we want to grow our bank balance sheet versus fund that business in other ways. I think we have done more disciplined work than probably many and as disciplined as I can imagine on really understanding the TAM opportunity.

And that's not to say that there is not risk there and that there won't be competition, but I think we understand what the market opportunity is going to be. And I think we feel like it is a real opportunity for us moving forward I think I would say our expense management discipline speaks for itself. And I think, again, we get to make the decisions about sort of the right way to balance growth of the strategic partnerships business with the growth of our bank balance sheet. And I think when you put those things together, we can't overlook the other uncertainties in our model, but I think those are all things that one can look at and assign their own sort of likelihood of success to. And I think those are really kind of the major drivers of our confidence in some of the comments that we've made about '27 and beyond.

We'll move next to Melissa Wedel with JPMorgan.

Good afternoon, Melissa on for Rick today. First one would be around gain on sale margin. That looked like it came down a little bit versus prior sales that we've seen earlier this year. as you transition to sort of more of a combo approach to spot on and transfer to strategic partners, how should we be thinking about that gain on sale margin and any volatility that we could see quarter-to-quarter in that.

Yes. I think that's a good question. I think if you look at sort of a longer history of our execution on these seasoned portfolio sales you see a broader distribution than what you've seen in the current year. I'd say over a longer period of time, if you kind of throw out the highest ratios and throughout the lowest gain on sale ratios. You'd probably be kind of in somewhere 106, 107-ish on average in that context. I think there's also a timing within the year component to those sales. I think if you go back and look at the sort of quarterly sort of history of our portfolio sales. Those that are done in the first quarter tend to be at a higher premium than those that are done in the fourth quarter for a variety of reasons. And so look, the portfolio sale that we did in the fourth quarter here was in the context of a broader strategic partnership. But it also was part of a transaction that had a great deal of scrutiny around true sale and things being done at fair value. So it's well supported by sort of the statistics on the portfolio itself in the environment in the fourth quarter.

I have one more follow-up question for you, and this is around the share repurchase authorization announced today. The time period on that was 24 months. The question is, given the investment you tend to make in the platform, particularly in this next year in 2026, should we be thinking about that repurchase deployment possibly being a little bit back-end loaded in 2027?

Yes. I think we've demonstrated over the last few years that we're going to be pretty disciplined and programmatic around share buyback. And we intend to operate that way with regard to this new authorization that we've been granted. We've got very strong capital ratios at the bank and a strong earnings profile. We tend to set in place programs that will have kind of a targeted amount of buying and be in the market every day that the market is open and then a bias towards buying more shares on days when the stock price is trending down and less on days when the stock price is trending up, and that served us well in terms of deploying the last authorization that we have, and we intend to kind of continue to operate in that manner going forward.

[Operator Instructions] And this concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. John Witter for closing remarks.

Well, thank you, and thank you for everyone who joined the call tonight. Obviously, Pete and I, on behalf of the entire company are proud and happy to be able to talk to you about our 2025 performance. But I think even more importantly, I hope you walk away tonight with a real sense of sort of how strong we feel about our strategic positioning and what that means for 2026 and beyond. As always, the IR team is here to be helpful to you in whatever way they can. And we hope everyone has a great rest of the January and a great weekend. And thank you again for your time this evening. I'll now turn it over to Kate for some concluding 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 Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.

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 support 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 form, 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 produced in H1 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 selling them this year 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 As mentioned earlier, we now acquire approximately 4 million members annually, including 2/3 of all college 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 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 require 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 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 costs 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 well 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 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 service as the foundation for building this alternative new 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 value 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 in here and 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 in years 3 through 5, reflecting the strength and scalability of this strategy.

Overall, we believe the strategic partnership approach position Sallie Mae to optimize value creation and not 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 generally translate into financial outcomes and to serve as a useful reference point for you, as you refine their own perspectives. In the series of illustrative 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 completed qualitative considerations detailed within the individual slides that were filed in the presentation earlier this evening.

I'll now turn it over to Marissa to go through the

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 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 to a nonbalance 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 basis, 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 partner 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 nonloan 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 the 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 nonloan side of our business, I think that has not been built into the vignettes that are published as part of the materials.

[indiscernible] to provide more of a strategic update and what to expect from us over period. And as we sort of learn more about what those are going to look like and they're ready to hear 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 far 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 have disclose or aren't disclosed, come back into that in front 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 most of 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 role 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 kind of going back to a similar question, but you obviously get 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? o is it should be longer or similar kind of like the 5-year average life loan?

Well, if you think about our 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 options.

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 as we think that function change next year, call it, $100 million and that's scaling beyond that. It seems like the revenue generation part program should be less than that if you assume a steady-state regular sales.

I'm curious when you think about kind of the breakeven of the new strategy, is there a sense around when the rental expenses related to pursuing the opportunity should be overweighted or at least surpassed the incremental revenue from the strategic partners related to

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 asset management -- or similar to an asset management base framework for the strategic partnerships. I'm assuming that there's probably some performance or credit-related governor on the back-end economics and we're seeing greater outperformer for 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

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 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 cost to 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 here, 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 illustrate 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 expanding 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 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 an engine 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 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.

Welcome to the Sallie Mae Third Quarter 2025 Earnings 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, Cole. Good evening, and welcome to Sallie Mae's Third Quarter 2025 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our CFO; and Melissa Berna, Managing Vice President of Strategic Finance. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here 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.

For Sallie Mae, these factors include, among others, results of operations, financial conditions and/or cash flows as well as any potential impact of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements to reflect events or circumstances that could occur after today, Thursday, October 23, 2025.

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

Thank you, Kate and Clay. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Third Quarter 2025 results. I hope you'll take away 3 key messages today. First, we delivered a successful quarter and peak season. Second, we're pleased with our year-to-date performance and believe we have real momentum that will carry us through the rest of the year. And third, we're optimistic about the long-term outlook for private student lending and the growth of Sallie Mae.

Let me begin with the quarter's results. GAAP diluted EPS in the third quarter was $0.63 per share. Loan originations for the third quarter were $2.9 billion, representing 6.4% growth over the year ago quarter and 6% growth year-to-date. We were pleased to see that the credit quality of originations remain strong, showing incremental improvement year-over-year and steady but meaningful improvement over the last several years. Our cosigner rate for the third quarter was 95% compared to 92% in the year-ago quarter and the average FICO score at approval increased to 756 from 754.

These indicators reflect continued discipline in our underwriting standards. We have continued to see positive momentum in our credit performance. Private education loan net charge-offs in Q3 of '25 were $78 million, representing 1.95% of average private education loans and repayment, down 13 basis points from the year ago quarter. While we are certainly living in a period of economic ambiguity, we have not observed any material change in our borrowers' ability to meet their obligations to Sallie Mae.

During the third quarter, we successfully completed the previously announced sale of approximately $1.9 billion in loans, generating $136 million in gains. We continued our capital return strategy in the third quarter, repurchasing 5.6 million shares at an average price of $29.45 per share. Since initiating this strategy in 2020, we have reduced our outstanding shares by 55% with an average price of $16.75. Pete will now take you through some additional financial highlights of the quarter. Pete?

Thank you, Jon. Good evening, everyone. Let's continue with a discussion of key drivers of earnings. For the third quarter of 2025, we earned $373 million of net interest income. This is up $14 million from the prior year. Our net interest margin was 5.18%, 18 basis points ahead of the year ago quarter with 13 basis points behind the prior quarter given the drag from the [indiscernible] liquidity that we hold to satisfy the requirements of peak season.

We continue to believe that the annual NIM target in the low 5% range -- low to mid-5% range remains appropriate over the longer term. Our provision for credit losses was $179 million, down from $271 million in the prior year. This was largely due to $119 million of provision release resulting from the third quarter loan. Our total allowance as a percentage of private education loan exposure modestly improved to 5.93%, slightly below the prior quarter's 9.5% and at just 9 basis points above the year ago quarter.

The change from the year ago quarter results from a few factors. As we noted last quarter, the Moody's economic forecast that we use in our CECL models have deteriorated driving a significant portion of the increase to our allowance. This model-driven impact was partially offset, however, by continued improvements in our credit performance and portfolio quality.

At the end of the third quarter, 4% of private education loans and repayment were 30 days or more delinquent, up from 3.6% at the end of the year ago quarter. It's important to note that this year-over-year increase is largely attributable to changes we made last year through our loan modification eligibility criteria. Specifically, since October of last year, we restricted loan modifications to those who are at least 60 days delinquent. This change was purposeful. Based on our observation that many early-stage delinquent borrowers tend to self-cure without intervention.

We believe that approximately 25 basis points of delinquencies this quarter can be attributed to borrowers and who would have qualified for a modification prior to entering our reported delinquency buckets under the prior eligibility criteria. Importantly, we've seen stability in our late-stage delinquencies and roll rates.

Our loan modification programs continued to deliver strong results. When we look at borrowers who have been in the program for over a year, 80% are consistently making payments. Additionally, following the previously mentioned change, monthly loan modification enrollments [indiscernible] have now stabilized around half the level that they were prior to the change. We continue to believe that our loss mitigation programs are helping our borrowers manage through periods of adversity and establish positive payment habits.

Third quarter noninterest expenses were $180 million compared to $167 million in the prior quarter and $172 million in the year ago quarter. This aligns with our full year outlook and positions us well as we head into the final half of the year. And finally, our liquidity and capital positions remain strong. We ended the quarter with a liquidity ratio of 15.8%. Total risk-based capital was 12.6% and common equity Tier 1 capital was 11.3%.

We're encouraged by the exciting opportunities ahead as we continue to grow and evolve our business, enabling strong return of capital to shareholders. Now I'll turn the call back to Jon.

Thanks, Pete. I hope you share my belief that our third quarter performance reflects strong execution and positions us well to sustain momentum through the remainder of 2025. As we look ahead, we're optimistic about the impact of recent federal reforms and the opportunities they create for our industry and for Sallie Mae to better serve students and families. As the leading private student lender, Sallie Mae is well positioned to support them through this transition. At the same time, we recognize that these changes create new challenges for our school partners. We are proud to be working closely with many of them to design innovative solutions that help ensure students can access and complete their desired degrees. .

In parallel, we have been actively exploring alternative funding partnerships in the private credit space to expand our ability to serve students. We expect to announce a first-of-its-kind partnership in the near term and we'll share more details soon after. We view this as a strategic step toward unlocking the value of our attractive customer base, setting the stage for sustainable growth of capital-light fee-based revenues. We are looking forward to sharing more at a second investor forum later this year.

Let me conclude with the discussion of 2025 guidance. To kick off, this partnership, we anticipate selling both a small portfolio of seasoned loans and a portion of our recent peak season originations either in the fourth quarter or early in 2026. Accordingly, we expect to designate a portion of our loans as held for sale prior to the end of the year. As a result, we now expect our GAAP earnings per common share for 2025 to be between $3.20 and $3.30. At the same time, we are reaffirming all other elements of our 2025 outlook including originations growth, net charge-offs and noninterest expense metrics, reflecting continued confidence in our strategic trajectory.

With that, Pete, 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. I guess maybe 2 thoughts and questions. The first, I guess, is, is there a way to kind of think about the performance of the current delinquency out a little further than the end of the year. give guidance past the current year. But -- and we've looked at roll rates and we see that they've gotten somewhat better, but there has been some concern about the level of delinquency. So could you -- is there any way to kind of give us a sense as to how you expect that -- the current book to perform over the next several quarters?

Yes, Moshe, it's Pete here. I think, look, we've been really pleased with the performance of the loan mod programs. We are encouraged by the stability we've seen in terms of new entrants to the programs that we've seen over the last few quarters. Given the seasonality of our business, yes, early-stage delinquencies ticked up a little bit in this quarter, but we don't view that as anything troubling in terms of longer-term trends.

And we expect to continue to see stability in the late-stage delinquencies and our roll rates. And so we're comfortable with the guidance we've given through the end of this year, and we continue to believe that, that kind of high 1s, low 2% net charge-off rate is the right way to think about us over a longer term.

Got it. And obviously, the your new partner in terms of the sale is obviously also, I would assume, given that some thought. Is there any way to give us any further texture around how to think about the -- that sale and how -- what the terms would be like?

Again, we're still in final sort of final stretch of the deal coming together, and we'll release appropriate level of detail when we complete that, and we look forward to talking in more detail about what that means for the future as we go into the [indiscernible].

We will take our next question from Jeff Adelson with Morgan Stanley.

I mean even a long day for taking my question. Just wanted to circle back on the modification question. Listen, I recognize that the pace of modification has slowed. And if we look at the 10-Q disclosure on the payment status table, the volume of modifications over the past 12 months has come down a lot. But if we do look at that table, it does seem like there's a higher percentage of 12-month mods rising on a delinquency basis. So just maybe some color there? And how are you thinking about the roll off of those modifications as borrowers are graduating out over the next 12 months? .

Yes. Again, we are happy with the performance of people in the mud for those that have been in for 12 months or longer. There's strong sort of pan patterns amongst that cohort. And we believe that these programs have been successful in helping people through a period of stress to establish positive payment patterns. And so we're optimistic as we look to those sort of first graduating way from these that will have a high degree of success. And that's something that we're keeping an eye on.

And just on a partnership opportunity, any sort of early details you can give us ahead of the Investor Forum later this year, just maybe any sort of insight into the economics, length of the terms? And are you going to potentially be starting to use some of the current book? Or will that be more for the forthcoming opportunity with [indiscernible] going away? And just any sort of like high-level commentary on how that might shift economics. .

Yes. again, we're close to being done, but we're not done. So I can't share too much detail. We've said pretty consistently that we were looking to establish a multiyear arrangement with a strategic partner, and that still holds true. I think if you consider Jon's comments around our revision of guidance, the fact that we're designating a portion of our portfolio of loans as held for sale as we go into the fourth quarter. that's an indicator that we have loans in the current book that are going to be part of it.

We'll move next to Mark DeVries with Deutsche Bank.

I have a follow-up question on Moshe's first question about kind of the the outlook for credit, given where we are with the delinquency trends. I mean I get that I think you indicated roughly 25 basis points of the delinquencies are due to kind of changes in eligibility for the loan mods, but that would still imply we're kind of up year-over-year on -- I think you commented on stable, not necessarily improving roll rates. So is it still right to assume that delinquencies at best or kind of I mean, charge-offs as we look forward, are going to be kind of flat, if not slightly higher, just given we're up year-over-year on delinquencies net?

Yes, Mark, it's Jon. I'm not sure I have a lot to add over what Pete said to Moshe. But look, I think if you look at the overall delinquency trend, I think the change in program terms really accounts for the majority of the change in delinquency rate year-over-year. We obviously have a methodology for figuring that out that points to the specific cases that we know with certainty.

By the way, there's a sort of confidence band around that, it could be even a little bit higher. But I sort of consider [indiscernible] and the performance in ambiguous economic environment, it's hard to make predictions now 15 months out, if you start to think about the end of next year. So we're not going to do that here today. But I think we continue to feel confident in sort of the long term through the cycle sort of metrics that we laid out before, the 1.9 to sort of 2.1 numbers that have been commonly cited. And I think we believe that we're delivering on those commitments pretty well. And are excited to continue that progress next year.

Okay. Fair enough. And then just turning to, I think, the marketing strategies that you talked about being kind of the reason that you had to kind of reduce the origination guidance for this year, are these strategies that you've kind of revisited in potentially looking for ways to kind of reaccelerate origination growth as we look into 2026.

Yes. I mean, I think, Mark, a couple of thoughts. One, I think we put up over 6% origination growth for the quarter year-over-year. That's really strong and, I think, attractive origination growth, and I think probably fairs and compares well with what a lot of other consumer credit oriented companies would do. So one, I don't think we're making any apologies for the level of originations growth that we've seen.

Two, as I think Pete shared at a conference earlier this fall, there's gives and gets every year in how we think about originations growth. We, every year, strive to be better, more efficient, more effective in our marketing. I think we've done that. You've seen that in our cost of acquisition coming down over time. We've also been really thoughtful about ways that we can continue to hone and refine our underwriting models to make sure that we are sort of getting the very best type of customer that we can and the ones that will really maximize our ROEs and I think Pete shared that over the last 3 or 4 years, we've taken rough justice $600 million to $700 million a year out of our annual originations. So the growth rates that we're talking about, which I think are really attractive growth rates are happening simultaneously to us improving pretty dramatically the quality of our origination. I think that's a trade our investors really do like and should like. That's value creation.

I think this year, we had a plan that we thought would get us to slightly higher originations growth in light of the headwinds of sort of those underwriting changes. I think we executed most of it. We didn't quite get all of it. But again, I think we believe we are on a trajectory and we've built a marketing machine that will allow us to continue to sort of maintain and at times potentially grow our already industry-leading market share. We see no reason to believe that we won't continue our successful growth next year. And we look forward to not only competing for the traditional business we have, but quite frankly, also competing very hard for the Emerging Plus opportunity as it unfolds.

We will take our next question from Terry Ma with Barclays.

Just wanted to follow up on credit. I just think simplistically, historically, there is a positive correlation between delinquencies and net charge-offs. So if we sit here today and look at the 4%, like any color you can kind of give us on like why that wouldn't kind of imply maybe higher charge-offs for 2026?

Yes. I think I covered it in my prior comments, Terry, that like we feel like the combination of the loan modification programs we put in place are going to behave as we intended them to do when we design the programs. And what we're seeing so far with those programs is that we've got stable levels of late-stage delinquency and the roll rates are stabilized as well. So like that's our expectation going forward. Again, barring any exogenous sort of a market event, we feel like we're set up for success there and we reconfirmed our guidance for this year, and we reconfirmed our longer-term read on destination net charge-off range. I'm not sure what more we can say.

Okay. Fair enough. And I guess, like in your deck, you mentioned grad originations are up 11% year-over-year. Any color you can give us on kind of what's driving that, whether it's behavior changes from borrowers as a result of the bill that passed earlier? Or are you just kind of gaining share?

Terry, we won't have share numbers for the quarter for probably another month plus on that. We have always had a grad business. It is 1 that in the grand screen of all the grad business out there was relatively small because of the Grads position from the government. There were only pockets where we felt like we could really profitably compete with the Grads plus program. We have, obviously, since plus reform was announced, started to pay a lot more attention to the opportunities to innovate in our graduate marketing. I think we felt like it was important to sort of continue to break out our sort of brand performance. And so -- my guess is the result is probably in part the change of a little bit of customer behavior. I think we don't quite know that yet, but it wouldn't surprise me.

I think it's also just a focus of us beginning to gear up and get ready for what we think will be a much larger opportunity ahead, but we see it as an exciting opportunity for us, not only in next year's volume, which given the phase-in of the plus reform is going to be smaller, but really playing out here over the course of the next couple of years.

We'll move next to Don Fandetti with Wells Fargo.

In terms of the recent credit and ABS market volatility, do you think that's going to impact your gain on sale margins for the Q4, Q1 production? And is the 7% this quarter sort of a good base level run rate. .

Yes. I think what I would say there is -- there's different phases in the cycle. We've done over time, pretty successful loan sales over a multiyear period and kind of that sort of mid- to high single-digit range. Sometimes we've gotten above that, sometimes we're a little below that. But I think it's really tied to kind of where spreads are, in general, at any point in time when we're executing a trade. At the margins, it can also be impacted by the implied structure that the purchaser is until we use for their leverage takeout as well.

We'll take our next question from Sanjay Sakhrani with KBW.

Pete, I just wanted to make sure I understood sort of the fourth quarter impact on moving those loans to held for sale. Does that mean that you sort of recognize -- do you -- will provisions over -- I'm just trying to think about like it has an earnings benefit, correct? It's not the actual gain on sale that you recognize? .

Correct. So when the accounting for held for sale, it's essentially a lower cost [indiscernible] market. So to the extent you expect a premium, we don't really have a change in the value of the loans themselves. You can continue to carry them out there sort of par basis for lack of a better term. And then to the extent they're in held for sale, you don't have to put a CECL provision against them. So the impact that we've reflected in our updated guidance is the release of that provision.

Got it. And is there any way to sort of dimensionalize that as far as sort of what the contribution was to the annual guide? .

Again, you need to know the exact amount of loans that have been reclassified, which we haven't disclosed, and it's roughly the CECL reserve rate that we talk about each quarter that gets released.

Okay. you guys haven't disclosed that yet what you've reclassified. .

Correct. .

Okay. And then, Jon, just one follow-up on this repayment wave that's coming through in November. Obviously, lots of discussion about graduates and the challenging job market. I mean, is there any -- I know all the commentary that you have was pretty constructive in terms of what you're seeing. I mean, do you guys have any foresight into sort of how those cohorts will behave as they come into repayment? Or is that sort of a point of square image type of opportunity event?

Yes, Sanjay, great question. And look, I read all the same stories that I'm sure you and others read and sort of see the same fact. Let me see if I can paint a little bit of a a picture here. But I would start by saying the period where students graduate and transition into their adult lives. We know is -- always has been and I suspect always will be one of the most difficult periods in sort of their life, and that's reflected by the fact that rough justice half of all financial distress that we see, and this has been true, Sanjay, for many, many years, happened in that first year or two after they finish their higher education experience and enter repayment.

So this is always the time where unemployment is higher. This is always a time where financial distress is a little bit higher. And by the way, that's our business. That's why we've built the programs, we've built. That's why we're really expert in sort of understanding how to market to and educate our students and their cosigners about the transition to higher education and the like. It's a known period of sort of performance importance for us. So that's sort of thought number one.

Thought number 2 is if you go back and you look at what's been going on with early graduate unemployment rate. So think about students who are sort of 20 to 24 years old. And if you take out the COVID year or two, which was obviously unusual, what we have seen for the last 3 or so years is early kind of graduate unemployment rates are slightly elevated from where they were pre-covid. What's really interesting is despite all the stories of sort of gloom and doom for the current graduating class, the current unemployment rate for early-stage graduates is only up about 10 basis points over last year. And that's even smaller on a percentage basis than what you might imagine. And I'd encourage you to go back and look at the data for yourself.

And so while I said earlier in my prepared remarks that we are certainly living in I think my term was ambiguous economic times. I think I was also pretty clear in saying, we just haven't seen that yet in our operating results. Now as the leader of a credit-oriented company, I'm not ever going to tempt fate by sort of trying to predict what the future economic environment is going to be like -- but I think we would say the unemployment story is always a challenge. We are really well prepared and suited to manage it. The impact year-over-year, I think, are not what maybe is the popular perception out there. And I think sort of the data tells a pretty clear story. And we haven't seen it in our performance. But we're not taking that for granted. We are continuing to work really constructively with our borrowers. We're continuing to up our outreach program for soon-to-be graduates to really help ease their transition into repayment because we do view this as a really important performance moment for us and really more importantly, or really an important moment for our students and their families and helping them be successful in this transition.

We'll move next to Rick Shane with JPMorgan. .

A couple of things. Look, the decision to sell loans in the fourth quarter, doing some rough math, it looks a little bit different from what you guys outlined strategically 2 years ago in terms of growing the book a little bit faster and reducing or at least keeping flat the actual dollar volume of loans sold. So I'm curious sort of what shifted in your thinking there. And then I want to make sure I understand the answer to Sanjay's question because it sounds like there are basically 2 scenarios here. One scenario where loans are held for sale, you release the reserves, but you don't recognize the gain on sale.

Second scenario is you complete the sale and you get both the gain on sale and the reserve release. Given where gain on sale margins are, it would seem that the variance between those 2 scenarios is significantly more greater than the variance between the high end and low end of your guidance. And so I'm trying to make sure I understand this fully.

Yes, Greg, let me take those in reverse order and I'll invite Pete at the end to jump in if I miss anything. We have not assumed anything in our guidance about a gain on sale. I think we said very clearly that the actual loan sale would happen either in the fourth quarter or in the first quarter. We don't know that timing yet. We felt like it was inappropriate for us to incorporate the gain into our outlook. So there is nothing about the gain in our guidance.

I think what we said was we expect to sort of conclude and to hopefully sign this deal here in the near term. When we do, we will identify the loans that will be a part of that sort of initial deal. And as I think is appropriate and good accounting, we will, therefore, start to account for those loans differently at that time. regardless of whether or not the actual closing date for that sale has a 25 handle on it or 26 handle. So hopefully, that sort of answers your question. And again, we tried to be as clear as we can be about that so that you can model it appropriately. I think in terms of your question, I'm sorry.

I would like to say that's helpful. Basically, the reserve release is contemplated in that guidance, but you're not embedding a gain on sale. If the deal closes in the fourth quarter, it's probably upside to the number.

Correct. In terms of your question of sort of what strategically has changed. I think the answer in short form is nothing, but I think it's a little more complicated than that. We are still very, very committed to the strategy that we -- the general strategy that we laid out at the investor form 2 years ago, December, which is the idea of modest balance sheet growth in the bank, using loan sales to moderate that growth, still have aggressive return of capital and so forth.

What I think has changed since then is really 2 things: 1 plus reform. -- which if you look at it when fully implemented, has the opportunity to increase our annual originations meaningfully. And I think we've given all those numbers on past calls, The other is both the growth in sort of size and sophistication of private credit and sort of our ability to think about creating a new sort of third funding leg of the stool, if you will, and sort of a real business around that.

And so our view is at one end of the spectrum, you've got growing the bank balance sheet, and that comes with really stable, high-quality earnings, but it also has a fairly high and heavy capital requirement to it. At the other end of the spectrum, you've got our traditional loan sale program, which we still really like, which is attractive earnings economics, but -- and very attractive sort of capital characteristics, but a little bit more volatility in the earnings. I think you heard Pete talk about that a minute ago.

I think what we believe we have the opportunity to create is something that's a little bit in the middle that has the potential of having sort of more stable long-term earnings. I think we've talked about this over time, the kinds of things that would be easier to sort of model and manage think about it almost in a sort of asset under management kind of construct, at the very same time, really attractive sort of capital characteristics that go along with that. And Rick, you've known us long enough to know that we really care about capital efficiency and capital return as sort of our north star.

And so I think what you're hearing us talk about and you've heard us talk about for the last 3 or 4 quarters, is we're excited about building sort of that third leg to our stool. And I think this is the right time for us to do it as we're sitting here on the EO plus reform beginning yes, that probably will cause us to think a little bit differently about balance sheet growth levels here over the next several quarters as we get that up and going. But make no mistake, nothing has changed in our strategy. except we have an exciting third opportunity, which should only make it better.

Got it. Okay. I suspect we'll see a slide on this in a few months. .

I would hope so.

We will move next to Giuliano Bologna with Compass Point.

Question. I appreciate a lot of the commentary around the new program. Maybe touching on the -- in that program in the [indiscernible] around that I'm curious when you talk about the loans that are going to be moved to help upsell. Is that just for the initial sale that you're planning? Or is there -- or will you continue to roll loans into held for sale as you execute in the program? Or will those go up more similarly to the current loan sales? .

Yes. So -- the idea and the intent is to create a multiyear partnership arrangement. The specific loans that we've identified are sort of the start of that relationship. And so over time, we would have ideally, some portion of our new originations that would go into this new partnership.

That's helpful. So we should see an ongoing flow of loans that just go directly into held for sale -- lower cost of market going forward. And then when I think about the -- I realize that there are there limitations in terms of how much you can say, but in order to kind of get within the guidance range, it seems like it's you need to have a number that flies well into the $1 billion even close to $2 billion that would have to move to held for sale in terms of the reserve releases. Is that wildly off base or I mean are we -- am I thinking about the right [indiscernible].

I mean, again, the simple math would be our reserve rate times a notional number. So it's probably about all I'm [indiscernible] on the call.

That's helpful. And then maybe just one quick one. I realize that a question set a few times. There's obviously been a bit of a structural change in the way that you're point for bear and modifications and out of delinquencies. And we have all the [indiscernible] terms of what you expect when it comes to the ultimate improvements. I'm curious when you think about the overall kind of accounting impact is the kind of lower usage of [indiscernible] and higher usage of modifications post -- so Vigor in the current time frame going forward, some of that will have a benefit when it comes to more -- less interest rate reversals and that might move around the actual delinquency rate and benefits or go over time? Or is there a potential that charge-off might be higher, but you have less interest rate reversals because you're getting more loans to reperform and still benefiting on a net basis. .

Yes. I think if you take a few steps back and you look broadly at our use of forbearance as a tool to manage the stress in the early-stage repayment portion of the book. The overall levels of people enrolled in that forbearance prior to our change in practice compared to the overall level of people that are now in the mod programs is relatively consistent. It's not exactly like-for-like. But it's on order of magnitude is pretty consistent.

But what we substituted was sort of short-term and judgmental usage of forbearance to manage stress and forbearance, meaning no payments are required for a more programmatic tool that tries to adjust for where the borrower is in terms of their ability to make payments on the loan. And so we feel like these new programs that we have put in place are fit for purpose, so to speak. We believe that the metrics that we're seeing in terms of performance of the borrowers in those programs are promising and give us comfort that they're designed appropriately. And we believe that as the borrowers start to graduate out of those programs and step back into their contractual terms, we expect to see a high degree of success in doing that.

We'll move next to Jon Arfstrom with RBC Capital.

How are you sensing about buyback appetite at this point and the authorization as well.

Jon, it's Jon. I think the way that I would say that is, first of all, we are delighted with how our buyback program has performed through the course of this year. If you look at the numbers we just announced, we were obviously very active in the marketplace over the last couple of months during this period of dislocation and I think bought back stock on attractive terms and at prices that I think when we look back in a month or 2 or a quarter or 2, we're going to feel absolutely great about -- we've obviously talked a lot about the partnership on this deal. We've talked a lot about sort of the various gives and takes to sort of our balance sheet and business model over the course of the next quarter to two.

I think our view is we will sit back as we get this partnership across the goal line. We will look at the exact timing of that. We will determine, therefore, what's our appetite to do sort of additional share buybacks, how much of that we're going to do, and we'll set up our plan to sort of execute that over the course of this in coming quarters. So I can't comment to that any more specifically on what it's going to be. I think we have to get through a couple of these sort of moving pieces. But I think you should expect, as has been the case for the last 5 years, we remain really committed to buying back our stock aggressively. It's something that we feel is an important thing that drives shareholder value. And we'll continue to do so at the time and in the quantity that we deem to be correct.

Okay. Fair enough. And then just an optics question that 4% delinquency rate, is that a level that we should expect continue to trend up over time? Or is it not clear? Or is that not the right way to really look at it?

Look, I think that we're -- this quarter, in particular, is a seasonal sort of peak with the way that the repayment waves come through. And -- so I would expect this to be kind of a high point in terms of delinquencies in any given year. In terms of absolute levels, again, we're not as concerned about what the absolute level is what we're concerned about is 1 in the late-stage delinquency levels were in the roll rates and how is that implicated in terms of net charge-offs, and we feel really good about the programs that we've designed and how they're performing.

Okay. And then if I can ask one more, Jon, for you. just very big picture, but the noise is kind of defining on consumer health and students entering the job market and -- do you feel like we're -- it has been a wild quarter in your stock. Do you feel like we're all too pessimistic on the credit outlook -- are we overreacting to it? Or do you have any thoughts on that, just bigger picture?

Yes, Jon. I'm not sure I have a lot to add over the answer I gave earlier. I think -- we have seen a relatively de minimis change year-over-year again the unemployment rate of early college grads or young college grads, those kind of 20 to 24. I think I said in my prepared remarks that we have not yet seen this ambiguous economic environment translate into anything that we sense as an inability for customers to not meet their financial obligations and sort of commitments to Sallie Mae.

It's a little bit hard for me to say whether it's overblown or not, I'll just say, we have not seen we have not seen the results of some of the stories that have been profit out there. And it's obviously something that we take very seriously and we'll continue to watch for. But Yes, the time of college graduation is always associated with higher unemployment and a little bit more financial distress and I'm not sure that we're seeing anything right now that's particularly out of the ordinary from what we would expect to see.

We'll move next to Caroline Lada with Bank of America.

I just want to ask how are you guys thinking about the opportunity from the Plus program and other federal government policy changes?

Yes, Caroline, I probably won't do it justice here today. I think we see it as an important opportunity for the private student lending market to step in and help support families and students through sort of this time of transition. We gave some numbers on the last call of what we thought that could be worth in terms of annual origination changes to us when fully implemented. And I think we were thinking about that if memory serves in the sort of $4 million to $5 million range. That will not all be sort of recognized on year 1, the plus reform phases in sort of each year. So if you're enrolled in a program and you've taken a loan before, I think it's July 1 of next year, you're grandfathered in under the old program. So that means it's really next year's undergraduate freshmen and graduate school first years that are sort of under the new program. So you have to sort of build it up over time based on the average land expectancy of sort of each of those programs. But if you go back and you look at some of the details we provided on the last call, I think you'll get a pretty good sense of that.

Awesome. And then maybe just a follow-up. Are you seeing any differences in how graduate loans are performing versus undergraduate loans in terms of like entry into delinquency and roll rates?

Yes. We -- we have a number of different grad programs. It is an apples-to-oranges comparison. All the different programs performed differently. But all of them are sort of governed under the same kind of return and lifetime loss thresholds and standards that we hold. So while the timing and the patterns might be a little bit different, the underlying sort of decision and governance matrix and framework is the same. So yes, they're different on the surface, but we like those loans every bit as much as we like our other loans. .

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.

Clearly, thank you, and thank you to everyone who joined today. We appreciate your ongoing interest in Sallie Mae. We look forward to speaking with all of you at the upcoming investor forum, which we will schedule here in the weeks ahead, but will happen before the end of the year. And obviously, we look forward to continuing the conversation as well next quarter. With that, Kate, we'll turn it over to you for some closing business.

Thanks, John. 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 Third Quarter 2025 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.