Excel lence IN STUDENT LOAN SERVICING AnnuA l RepoR t

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1 Excel lence IN STUDENT LOAN SERVICING

2 Message from the Executive Director MOHELA s fiscal year successfully concluded June 30, While fully supporting and maintaining a more than $4 billion legacy student loan portfolio, MOHELA is simultaneously completing the steps required to become a federal contractor for the servicing of direct student loans. This successful transition is made possible by the full support and guidance of MOHELA s board members, as well as the full dedication of our leadership team and vital employees. As a result, our stakeholders can continue to rely on significant net revenues. After definitively concluding that stakeholders would be benefactors of substantial net income generated by MOHELA servicing direct loans, our board approved operating budgets and capital investment budgets designed specifically to position MOHELA as one of the top 10 servicers of direct loans within 18 months. MOHELA s management team immediately began a comprehensive transition toward that ultimate goal. The highlights of this transition include the following: n During the fiscal year, construction began and was nearly completed on a multimillion-dollar, 292-seat Direct Loan Servicing Center located in MOHELA s main headquarters building in St. Louis. The new Direct Loan Servicing Center increased MOHELA s seating space to accommodate up to 500 employees a sufficient number for servicing accounts for up to 3 million direct loan borrowers. n MOHELA invested more than $5 million in its technology systems, including print and mail facility upgrades, telecom system upgrades and expansion, and enhanced server virtualization capacity. MOHELA s network infrastructure was also enhanced and expanded. Even the commitment and the excitement surrounding the pursuit of a Federal Direct Loan Program contract could not overshadow MOHELA s commitment to our primary stakeholders the students attending Missouri s 154 institutions of higher education. MOHELA provided a recordsetting $31 million in scholarship funding during fiscal year 2011, and set aside an additional $30 million for scholarship funding for fiscal year This scholarship funding is in addition to MOHELA s routine annual practice of providing millions of dollars in loan forgiveness and reduced interest rates for teachers, military personnel and other qualifying borrowers. This is an exciting time for MOHELA and our stakeholders, who have the full commitment of our employees and board members that MOHELA s resources will be carefully managed. We vow to balance an investment in our future with continuing to redistribute significant net revenues directly to our stakeholders putting the money where it belongs. Sincerely, Raymond H. Bayer Jr. Executive Director

3 CONTENTS page operations: Going Above and Beyond page operations: expanding Resources page Giving Back page Financials 1

4 Operations: Going Above and Beyond Providing excellent customer service in every interaction we have with our students, borrowers, lenders, partners and parents is the goal of our Operations group. We use our more than 30 years of experience to deliver on this goal through our Call Center, Loan Servicing and Human Resource Departments. SERving LOAn HOLDERS MOHELA maintains nearly $3.8 billion in Federal Family Education Loan (FFEL) Program student loan volume, as well as more than $200 million in private loans, on our system. Our service levels are monitored continuously, so we can add resources as needed, and we cross-train all operational staff. As a result, we answer nearly 99 percent of all calls within 60 seconds, providing borrowers with the excellent service they expect from MOHELA. FEDERAL COnTRACTS Our Federal Contracts Department (FCD) continues its intensive work on understanding the expectations for servicing direct loans. The Authority is working to transition our business from servicing Federal Family Education Loans to servicing direct loans through a contract with the U.S. Department of Education. Activities conducted to date include: n Handpicked a cross-functional team of employees for the FCD to act as internal business owners n Completed IT security and controls assessment n Identified new and modified staff positions n Established teams to review and respond to requests for information (RFIs) and requests for proposals (RFPs) n Secured a certified servicing system n Established a servicing-readiness team and a core team to meet federal direct loan servicing requirements Hundreds of deliverables and requirements must be met between our Memorandum of Understanding (MOU) and our Authorization to Operate (ATO) both with the U.S. Department of Education before a direct loan servicing contract can be executed. Every department within MOHELA has been touched by this initiative. Our next steps include: n Migrating our servicing system from testing to production n Taking our financial reconciliation and reporting system from programming through testing/ migration and into production n Executing security clearances for all staff n Finalizing procedures for direct loan servicing n Establishing access to FSA entities and servicing system providers n Creating/Modifying internal controls and processes n Revising our web portal and implementation (for FSA, schools, borrowers) n Finalizing school on-boarding plan n Implementing policy changes that impact staff n Training staff 2 While a tremendous amount of work remains to be done, palpable excitement is coursing through the organization. As more staff members come to understand what this work means for our future, one can see pride and hope in their faces, as we continue to prepare MOHELA for this new reality.

5 MoHelA was created for, and remains committed to, providing assistance to help MISSOURI STUDENTS AND families achieve their higher education goals. this direction provides us guidance in everything we do, every day. 3

6 Operations: Expanding Resources MOHELA continues to prepare for the increased demands on our facilities, infrastructure and equipment as we evolve into a Federal Direct Loan Program servicer. it AnD SYSTEM SECURiTY In order to maintain the strength and reliability of our data center and IT infrastructure, we responded to new demands that have resulted from increased security requirements in compliance with the National Institute of Standards and Technology components of the Federal Information Security Management Act. We also responded to increased demands from more customers, higher staffing levels and increasing demands for the efficiency of all our processes. Upgraded network We doubled our Internet and VPN capacity as well as our computer storage capacity. The computer storage expansion should handle existing needs for the Authority and at our Columbia disaster recovery site for the next two to three years. Enhanced Security We enhanced the security of our data center by adding a new keypad-based access process. We added an entirely new uninterrupted power supply, to stabilize unexpected power surges. Upgraded Capabilities We completed major software upgrades in December 2010 and implemented call recording capability in February SUPPORT SERviCES Our Support Services staff worked hard to accommodate new demands on our mail system as we prepared to communicate with up to three million accounts in a 12-hour day. Changes and improvements completed this year included: n Expanded mail and print work space by adding 3,150 square feet n Made extensive upgrades in new folding/inserting equipment to handle all of the letters, bills, forms and other communication to borrowers n Improved the efficiency of equipment by adding a dehumidification system to allow the equipment to operate at peak performance FACiLiTY To meet the needs of thousands of new direct loan borrowers, MOHELA estimates hiring 60 agents and as many as 150 additional agents over the next months. To ensure the success of our team members, MOHELA redesigned the main servicing floor to maximize functionality, comfort and available work space. The redesign included work spaces modified for the use of Winterm thin clients instead of traditional PCs, new carpet and a new color scheme. The redesign also resulted in the relocation and construction of a new call center tower, improving the ability of our coordinators to monitor the activity and volume of calls in the center. FinAnCiAL MAnAgEMEnT SYSTEMS Robust financial tracking and reporting functionality is required to secure a contract with the Department of Education to service direct loans. MOHELA upgraded our accounting system to permit our finance and accounting team to leverage the system s ability to integrate with other platforms. This solution is flexible, customizable and scalable to expand with our new business model. As our understanding grew with the contract expectations, we decided to create a Direct Loan Department within Finance and Accounting. 4

7 Focusing on what we do best... providing OUTSTANDING SERVICES to student and parent loan borrowers... requires continued diligence to ensure that we are servicing each account in absolute strict compliance with federal regulations and that every borrower is treated with the utmost dignity and respect. 5

8 Giving Back Fiscal year 2011 was a great year for bringing the mission of MOHELA to more students in our community. We found new ways to reach needy students and families and facilitate their access to higher education. From funding scholarship programs to forgiving loans, we continue to give back to our community. in SUPPORT OF HigHER EDUCATiOn in MiSSOURi Access Missouri Funding When we saw the revenue challenges confronting the state of Missouri and the deficit in the Access Missouri need-based scholarship program, we wanted to respond. Our board reviewed the Authority s priorities and mission, and assessed the impact MOHELA could have on Missouri students who require financial assistance to access higher education. Thanks to one-time gains from certain bond transactions in 2010, MOHELA was able to donate to two state programs. Our board of directors authorized a donation of $30 million to the Access Missouri Financial Assistance Program and $1 million for a new state scholarship program called the Advanced Placement Incentive Grants. Borrower Benefits Paid MOHELA has a history of generously supporting Missouri students and their families via borrower benefits. Traditionally, we are known for our loan-based benefits, which allow us to reduce the interest rate or provide loan forgiveness on certain loans. In the past four years alone, MOHELA has supported students and families attending Missouri schools with loan forgiveness in excess of $300 million. When the Federal Family Education Loan Program ended, most of our borrower benefit programs ended too. We were able to continue this work in FY 2011, however, by giving more than $1.2 million in loan forgiveness through programs that are grandfathered in. Missouri Scholarship Foundation We wanted to further MOHELA s mission to help needy Missouri students and families obtain a higher education, so the MOHELA board authorized management to create the Missouri Scholarship Foundation (MSF). On May 25, 2011, the IRS notified us that the MSF was an official 501(c)3. The MOHELA board and management are now working to grow this foundation. The MSF reports to the MOHELA board and currently has three members on its own board. 6

9 MoHelA has a history of generously supporting Missouri students and their families... attending Missouri schools with loan forgiveness in excess of $300 million. 7

10 Financials MOHELA purchased/originated $758.8 million of gross principal student loans from a variety of financial institutions during FY This compares to $938.5 million in gross principal during FY 2010 and $842 million during FY 2009, representing a 19% decrease for FY 2011 compared to an 11.5% increase for FY We received revenues of more than $2.8 million in servicing fee income from our lender partners for serviced loans that in the past would have been purchased. We received an additional $19.8 million in revenues from the sale of loans to the Department of Education through the 2008 Ensuring Continued Access to Student Loans Act (ECASLA) Federal Loan Participation Purchase Program. MOHELA used the Participation and Purchase programs through their respective expiration dates of September 17 and October 15, SUCCESSFUL BOnD FinAnCing AnD new LinE OF CREDiT On September 28, 2010, we issued $495.2 million in LIBOR floating rate notes under the Trust to purchase more than $460 million in loans from lender partners and to purchase more than $22 million in loans from MOHELA s general fund. MOHELA also closed on a $50,000,000 line of credit with Bank of America to purchase FFELP loans from lender partners and guarantors. Total assets decreased $362.2 million compared to a decrease in liabilities of $352.7 million resulting in a decrease in MOHELA s net assets of $9.4 million in FY CHAnging PORTFOLiO MOving into THE FUTURE We are now beginning to see the characteristics, behavior and performance of our changing portfolio as it ages and more of our accounts enter repayment. This comes at a time when MOHELA will begin to rely less on revenue from our FFELP or legacy business and shift toward income that will be derived once a contract is executed and loans are converted as agreed to in MOHELA s MOU with the Department of Education. 8

11 $759 Million Gross Principal of Student Loan Purchased/Originated $732 million in loans from lender partners $14 million rehabilitated loans purchased from the Missouri guaranty agency $11 million in repurchases from various guarantors of loans that had previously been in a bankruptcy status $2 million Stafford and PLUS loans PORTFOLiO Aging - PORTFOLiO in REPAYMEnT STATUS 100% 95% 9% 5% 90% 85% 91% 95% 80% 75% FY 2010 FY 2011 In School/In Grace In Repayment 9

12 Condensed Statements of net Assets (in thousands) Cash and cash equivalents Accrued interest receivable Capital assets Other Student loans receivable $ 353,849 89,037 16,858 26,449 3,776,452 $ 242, ,844 14,045 25,435 4,229,752 $ 145, ,868 14,182 24,991 4,415,659 Total assets $ 4,262,645 $ 4,624,797 $ 4,737,063 Current liabilities Long-term liabilities $ 458,578 3,498,395 $ 950,145 3,359,542 $ 783,136 3,785,520 Total liabilities $3,956,973 $ 4,309,687 $ 4,568,656 Invested in capital assets Restricted Unrestricted $ 16, ,415 84,399 $ 14, ,214 83,851 $ 14, ,276 27,949 Total net assets $ 305,672 $ 315,110 $ 168,407 Condensed Statements of Revenues, Expenses and Changes in net Assets (in thousands) Interest on loans Special allowances ECASLA income Gain on extinguishment of debt Investment income and other $ 186,231 (86,874) 19,770 4,785 4,465 $ 187,621 $ 237,404 (89,617) (47,953) 19, ,461 7,440 4,665 Total operating revenues 128, , ,116 Bond expenses Student loan expenses Administrative and general expenses 46,196 32,841 58,778 58,510 25,139 34, ,021 26,752 31,358 Total operating expenses 137, , ,131 Operating income before special items (9,438) 146,703 4,985 Special items 51,354 Change in net assets $ (9,438) $ 146,703 $ 56,339 10

13 Students and families of the state of Missouri benefit through our conservative and diligent financial philosophy. this has helped to sustain MoHelA throughout this transition from a FFelp provider to a federal contractor that will service direct loans for the Department of education. 11

14 our future couldn t be brighter as we head into a NEw business MODEL, while continuing to remain true to the reason we were created. MoHelA will continue to focus on Missouri students and families in assisting them with their educational goals. 12

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