Structured Finance

ABS Rating Methodology

Global Private Student

Loan ABS Rating
Methodology

Analytical Contacts:

Rosemary Kelley, Senior Managing Director Melvin Zhou, CFA, Director

rkelley@kbra.com, (646) 731-2337 mzhou@kbra.com, (646) 731-2412

Jenny Ovalle, Director Charlene M. Davis, Director

jovalle@kbra.com, (646) 731-2309 cdavis@kbra.com, (646) 731-2439

March 22, 2019

 Table of Contents

Executive Summary ..................................................................................................................... 3

Market Overview ......................................................................................................................... 3
Private Student Loan Characteristics ............................................................................................... 5
Originator and Servicer Review ...................................................................................................... 5
Company Overview ................................................................................................................... 5
Originations and Underwriting..................................................................................................... 6
Servicing ................................................................................................................................. 6
Back-Up Servicers..................................................................................................................... 7
Technology .............................................................................................................................. 8
Collateral Analysis........................................................................................................................ 8
Credit Score ............................................................................................................................. 9
School Type ............................................................................................................................. 9
Co-Signer Status ...................................................................................................................... 9
Interest Rate and Type ............................................................................................................ 10
Determination of Loss Expectation................................................................................................ 10
Loss Rates and Recoveries ....................................................................................................... 11
Projection of Cumulative Losses ................................................................................................ 11
Projection of Annualized Losses ................................................................................................ 13
Cash Flow Stresses / Modeling ..................................................................................................... 13
Transaction Structure and Analysis ............................................................................................... 16
Transaction Structure .............................................................................................................. 16
Surveillance .............................................................................................................................. 19
Appendix I: Sample Information Request ...................................................................................... 20
Appendix II: Sample Agenda for Originator and Servicer Review ....................................................... 21
Appendix III: PSL Loss Coverage Multiples .................................................................................... 23

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Rating Methodology
Executive Summary
This report describes Kroll Bond Rating Agency, Inc. and its rating affiliates (collectively, “KBRA”) rating
methodology for private student loan asset-backed securities (“PSL ABS”). This includes transactions
secured by collateral originated by PSL lenders, including both traditional PSL lenders as well as through
online PSL marketplace lending platforms (“MPL Platform”) in the U.S. It excludes transactions secured by
collateral originated under the U.S. Federal Family Education Loan Program (“FFELP”) or income contingent
student loans granted by the U.K. government. KBRA’s rating of a PSL ABS transaction incorporates analysis
of: (1) the quality and expected performance of the underlying collateral, (2) the business model and
operational capabilities of the originator and servicer, and (3) the transaction terms, including capital
structure, credit enhancement and legal structure. KBRA assigns ratings to PSL ABS using its short-term
and long-term rating scales based on the securities being rated. The methodology aims to develop and
maintain credit ratings that perform in accordance with KBRA’s published rating definitions. For more
information about KBRA’s rating scale, please see KBRA’s Rating Scale and Definitions.

When rating PSL ABS, KBRA analyzes the underlying collateral pool and the historical portfolio performance
data of the originator. KBRA typically performs an operational assessment of the originator and servicer and
then incorporates the results into its rating analysis. KBRA reviews the entity’s ongoing legal and compliance
programs, operational controls, origination strategy, liquidity and funding sources, credit underwriting
model, target customer base, account management, customer service capabilities, and its servicing and
collection efforts. In addition, KBRA reviews the prospective PSL ABS transaction’s legal structure,
transaction documents, and legal opinions. The capital structure will also be tested by applying stressed
assumptions in KBRA’s cash flow analysis of the transaction to determine whether proposed credit
enhancement is sufficient for the requested ratings.1 In conjunction with this methodology, KBRA employs
the Global Structured Finance Counterparty Methodology for assessing counterparty risk in structured
finance transactions. This methodology is a general framework and, as such, does not specifically address
country or jurisdiction-specific risks. These will be considered in conjunction with our rating analysis and
highlighted, as relevant, in KBRA’s transaction reports.

On a final note, KBRA employs judgment in the application of all our methodologies. This may result in
situations where certain aspects of the methodology are not employed, de-emphasized, or modified to
address additional considerations in the analytical process, where deemed appropriate.

Market Overview
Student loans play a crucial role in the U.S. in ensuring access to an affordable higher education for millions
of students. Most borrowers of student loans in the U.S. use federal student loans and over 90% of the
outstanding student loan debt is provided by the U.S. Department of Education’s federal loan program.
However, each year millions of students use PSL debt to fill the financial gap between cost of attendance
and funds available through federal student loans, grants, and other sources for a college education.

The PSL product was launched in the U.S. in the late 1990s as a supplement to U.S. FFELP. At that time,
underwriting was limited and loan terms were similar to those used in U.S. FFELP originated loans. Borrowers
were typically not required to make repayment while they were in school or during the grace period. Once
in repayment, borrowers had the option to suspend loan repayment if they returned to school (deferment)
or experienced financial hardship (forbearance). Major lenders in the U.S. included Sallie Mae, First
Marblehead Corporation, The Student Loan Corporation and various banks. In addition, many U.S. state-

1
Although an issuer may request specific rating levels, KBRA will determine the ratings levels, in its sole discretion, based upon KBRA’s
analysis of the transaction.

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Rating Methodology
sponsored lenders created their own PSL programs with a focus on supporting students and schools in their
respective states.

The financial crisis in 2008 exerted a heavy toll on the student loan industry in the United States. Many PSL
products, notably loans made to proprietary schools or directly to consumers without school certification,
experienced heavy losses. Credit market problems caused long-term funding through securitization to dry
up. The disruption in the PSL ABS market, coupled with the termination of the U.S. FFELP program in 2010,
led to the considerable decline in activity for the student loan ABS market since its peak in 2006.

The landscape of the student loan industry in the U.S. and the student loan ABS (“SLABS”) market has
evolved significantly in the 10 years since the financial crisis. Many lenders, such as traditional banks and
state-sponsored lenders, exited the education lending business, while lenders who continued to originate
PSLs started to tighten their underwriting and servicing policies. A post-crisis PSL lender is more likely to
require a co-signer, a minimum FICO, and/or some repayment while the borrower is in school. The loan
product will typically feature a shorter repayment term and have a tighter forbearance policy.

Post-crisis regulatory changes in the U.S., increased oversight, tightened underwriting, and the cessation of
originations by some private lenders have allowed for the successful entry and emergence of nonbank,
alternative lenders, such as U.S. MPLs that focus on refinancing student loan debt. Taking advantage of
technological innovations, the MPLs are able to offer loan refinancing products to U.S. FFELP and traditional
U.S. PSL borrowers who graduate with a professional degree and have had a meaningful length of
employment history. Due to the significantly better credit quality of the underlying obligors and tighter
underwriting, the refinancing (“refi”) loans made by the MPLs have exhibited extremely low delinquencies
and defaults. However, these loans were made in a relatively benign credit environment, and it remains
unclear how they will perform during an economic downturn.

Although student loan ABS issuance has primarily been in the U.S., there have been recent student loan
issuances in the U.K. For example, Student Loans Company is a U.K. government-controlled and financed
entity which provides income-contingent loans to students attending university in the country. In addition,
PSL lender Future Finance, among others, have entered the market and offered loans to U.K. students over
the past few years. Transactions backed by loans granted by the U.K. government are not covered by this
methodology, but transactions backed by loans granted from PSL lenders are included in this methodology.
KBRA will continue to monitor developments in PSL ABS in the U.K., Europe and other jurisdictions. This
methodology will apply to these PSL ABS transactions.

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Rating Methodology
Private Student Loan Characteristics
Exhibit 1 compares certain characteristics of PSLs with characteristics of consumer loans.
Exhibit 1: Private Student Loan Characteristics
Characteristic U.S. Private Student Loans Consumer Loans
Loan Type Closed-end loan Closed-end loan normally
Loan Purpose Higher education Consumption
Loan Term 10-25 years after graduation Typically less than 10 years
Co-Borrower May require a cosigner if the borrower is in school Generally no cosigner is required
Loan repayment may be deferred until after Loan repayment starts immediately after
Repayment
borrower graduates disbursement
Loan repayment may be suspended if borrower
Loan repayment may be suspended if borrower
Deferment and Forbearance goes back to school (deferment) or experiences
experiences economic hardship (forbearance)
economic hardship (forbearance)
Unsecured - Generally nondischargeable in
Security May be unsecured or secured by various assets
bankruptcy in the U.S.
Interest Rate Variable or Fixed Fixed normally
Closed-end fixed amount. Additional borrowing
Interest accrued and unpaid in the interim periods
Additional Borrowings through new loans (aka. "Renewals") and full re-
is capitalized to the original loan amount
underwriting

PSLs are unsecured and not guaranteed by the any government entity. However, unlike unsecured consumer
loans, PSLs are generally nondischargeable in bankruptcy in the U.S. In addition, consumer loans may be
secured by “hard assets,” such as the title to a vehicle or a boat, or by “soft assets” like a security interest
in household goods owned by the consumer.

PSL loans typically allow for more flexible repayments compared to other consumer loans. A PSL borrower
can defer or make partial repayment until after graduation, or if he or she returns to school for a graduate
degree (deferment). Although policies vary, for all consumer loans including PSLs, loan repayment can be
suspended if a borrower experiences economic hardship (forbearance).

PSLs and most consumer loans are closed-end. However, PSL lenders allow for interest accrued but not paid
in the interim periods (in-school, grace, deferment and forbearance) to be capitalized at time of repayment,
while some consumer loan lenders allow existing borrowers to qualify for “renewals,” which are essentially
new loans that refinance a borrower’s outstanding loan in response to a borrower request for additional
credit or a loan modification.

Originator and Servicer Review

KBRA conducts originator and servicer reviews to assess each entity’s management experience, as well as
operational capabilities with respect to originations, underwriting, servicing and collections. These factors
help determine KBRA’s view of expected collateral performance. KBRA may start its review process of the
originator and servicer with an information request that is often customized for a particular review. The
following sample information requests and operational review agendas are shown in the appendices:

• Appendix I: Sample information request

• Appendix II: Sample agenda for originator and servicer review

Company Overview
KBRA’s operational review typically includes management meetings to discuss the company’s history,
ownership, business model, financial condition, funding strategy, management experience and strategic
plan. This information will be considered in the context of overall business conditions, including the
company’s competitive position and regulatory environment. KBRA reviews an organization’s structure,

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Rating Methodology
including how the company manages marketing, origination, underwriting, and servicing operations. KBRA
also reviews the internal control, internal audit and compliance areas. This includes the organizational
resources devoted to such areas, procedures used, and reporting processes.

Originations and Underwriting

KBRA reviews the origination process, including origination channels and loan programs. KBRA reviews the
marketing programs used to reach that target market. Student loan issuers may use various methods to
market their services to schools or directly to borrowers, including direct mail offers, third-party aggregators,
telemarketing, referrals and internet marketing strategies. KBRA reviews the student loan issuer’s target
market, which may include new loans to current students or “refi” loans to borrowers currently in repayment.
KBRA reviews the company’s policies and procedures governing loan origination and considers their impact
on loan quality and performance. KBRA reviews the use of third parties and the policies and procedures for
approval and oversight of these parties.

KBRA evaluates underwriting guidelines and any changes made to those guidelines that could affect loan
collateral performance. As discussed in the Determination of Loss Expectation section, KBRA reviews the
company’s historical performance data to develop a base case loss expectation for the collateral pool. KBRA
may adjust the loss expectation either positively or negatively depending on any recent changes made in
underwriting standards. KBRA typically reviews—through discussions with management—the originator’s
underwriting criteria and credit scoring models used to approve or decline applications and price loan offer.
KBRA will also assess how a company segments its accounts and the variability of performance within these
segments. Segmented data aids KBRA in refining its base case loss expectation and provides a more
accurate estimate of losses as portfolio mix changes for each rated securitization. More detailed segment
information provided by the issuer will generally be viewed favorably by KBRA, while limited or insufficient
segmented data may result in an increase to KBRA’s base case loss estimate or loss coverage multiple for
a particular rating level.

KBRA also compares collateral attributes and performance against similar historical collateral and
representations and warranties made by the company. KBRA may review authorization levels and exceptions
to the company’s underwriting policies, as well as the controls in place to minimize these exceptions.

For student loans originated to in-school students, KBRA will examine whether loan disbursements are made
to schools or directly to borrowers without school verification. For student loans originated on a marketplace
platform or through other direct-to-consumer channels, KBRA will assess the policies implemented by the
MPL Platform or lender to prevent borrower fraud in the loan applications, including internal controls to
verify the borrower’s identity and detect and prevent fraud. Such procedures may include identifying data
inconsistencies, bank account verification tests, device fingerprinting and borrower credit checks.

Servicing
The PSL sector has no uniform servicing standard as compared to U.S. FFELP loans, since there is no
guarantee of principal in PSLs. As PSL servicing is similar to other consumer assets, such as consumer loans,
KBRA’s review of the servicing standards typically mirrors the review conducted on consumer loan servicers.
KBRA reviews the processes and procedures used to service a company’s PSL portfolio. This review may
include an assessment of a company’s customer service, payment processing, account maintenance,
collections and default management processes and procedures. An assessment of a company’s customer
service policies and procedures includes evaluating how a company responds to customer inquiries and
handles customer complaints. Assessing the payment processing procedures includes evaluating the controls
and procedures used for billing, cash management, payment processing and any potential commingling of
funds.

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Rating Methodology
KBRA reviews the company’s collection policies and procedures, as well as any changes over time. Data
collected during this review generally includes the number of people dedicated to servicing, the frequency
and form of customer contact and the number of accounts assigned to each collector. KBRA reviews changes
in payment terms, such as the length of in-school and grace periods, and the use of deferment and
forbearance.

The collection strategy, experience, organizational structure, and information technology platform of the
servicer are important factors that affect a loan pool’s performance. Servicers may break up collection efforts
to different departments based on stage of delinquency and may outsource to third parties. Technology that
supports collection efforts, including automated dialers, behavioral scorecards, and “best time to call”
software may also be reviewed, along with the compensation and incentive plans for collection personnel.
The use of third-party collection agencies or subservicers to collect loans will also be considered, including
the management, oversight and fee structure of these third parties by the servicer in a transaction.

KBRA reviews a company’s policies regarding the timing of charge-offs. KBRA also reviews policies and
procedures for recoveries after charge-off, including any use of third-party collectors or defaulted loan sales
to collection agencies.

KBRA typically will review the investor reporting and accounting areas to assess historical timeliness and
accuracy of reports in addition to staffing and the policies and procedures for these areas.

Back-Up Servicers
PSL ABS transactions generally have servicing termination events which enable the indenture trustee to
terminate and replace the servicer in accordance with the criteria stipulated in the transaction documents.

KBRA considers the inclusion of the back-up servicer in its overall assessment of the credit strength of a
transaction. The rationale for including a back-up servicer is to minimize the impact of a potential servicing
transfer if the primary servicer’s financial condition declines and/or if it is no longer able to adequately
service the portfolio. KBRA will assess those companies which perform servicing loans centrally until the
loan is repaid or charged off, along with companies which may outsource the majority of servicing activities
to third-party providers. The type of servicing arrangement, compensation structure and third-party
oversight is considered in KBRA’s analysis of each transaction.

To the extent there is a back-up servicer, KBRA will also review the terms of the back-up servicing
arrangement, including the level of readiness of the back-up servicer. A hot back-up servicer is prepared to
take over servicing immediately or within a very short period of time. A hot back-up servicer has mapped
its systems to the primary servicer, has conducted an on-site review of the servicer, and receives updated
tapes at least monthly from the servicer to allow as seamless a transfer as possible should the need arise.
A warm back-up servicer is prepared to take over the servicing following a transition period, the timing of
which may not be known upfront in the transaction. A warm back-up servicer ties out servicer reports and
may map its systems upfront, but not necessarily on an ongoing basis. A cold back-up servicer is identified
upfront but is not responsible for ongoing duties ahead of a servicing transfer. The exact terms of the back-
up servicing arrangement along with KBRA’s assessment of the back-up servicer’s experience and capacity
to take over servicing will be important considerations in the transaction rating.

In analyzing the readiness level of a back-up servicer, KBRA will assess the type of assets, quality of the
obligor, strength of the primary servicer and transaction’s rating level. KBRA will review the sufficiency of
the servicing fee to be paid to the successor servicer and the potential cost of a servicing transfer, as well
as any impact on the transaction including increased servicing fees or any transition fees.

KBRA also reviews the quality and terms of the back-up servicing arrangement in a transaction, the
likelihood of a servicing transfer and factors that may impact a servicing transfer.

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Rating Methodology
Technology
KBRA typically assesses the technology and any other support areas of a company’s operations, including
its information systems and any planned upgrades or changes to those systems. Disaster recovery policies
and procedures are also assessed and included in this review. MPLs use technology to reduce costs, improve
efficiencies and underwrite and fund loans. MPLs typically use automated underwriting models based on
machine learning techniques and alternative data sources to improve their ability to predict a borrower’s
probability of default. These platforms use fraud detection capabilities to reduce fraud risk that is inherently
greater for internet-based originations compared to in-person originations. KBRA reviews the methods and
success of technologies employed in the company’s business.

Collateral Analysis
KBRA analyzes the characteristics of the collateral pool to understand the credit profile of the assets included
in the proposed securitization. KBRA typically compares the characteristics of the proposed pool to those
originated by other PSL platforms, or the originator’s historical data to ascertain the similarities of the
proposed pool to prior originations. This assessment helps to determine whether the historical static pool
data is appropriate as a projection tool for potential expected loss levels of the current pool. In addition,
KBRA may compare the characteristics of the proposed pool to the characteristics of originations from
competitors in order to benchmark performance to peers.

KBRA typically reviews the following loan characteristics:

• Product/Loan Type
• Credit Score
• School Type
• Co-Signer Status
• Loan Repayment Options
• Interest Rate and Type
• Geographic Diversification

Product/Loan Type
PSL lenders may differentiate their loan products by origination channel, degree program, or purpose of
financing, among other characteristics. Most traditional PSLs are originated through a school’s financial aid
office and disbursed directly to the school. School channel loans are certified by the schools that validate
the student’s enrollment at the institution and that the amount requested by the borrower does not exceed
the cost of attendance. Direct-to-consumer (“DTC”) loans are primarily marketed directly to the borrowers
and not through school financial aid offices. DTC loans incurred heavy losses during the financial crisis and
have largely been discontinued by PSL lenders.

Degree programs include undergraduate, graduate and professional degrees, such as medicine and law, as
well as certificate programs. Graduate and professional degrees have historically experienced the lowest
default rates given the likelihood that there is higher earnings potential and better employment prospects.

PSL consolidation or refi products were introduced in the mid-2000s by traditional PSL lenders but never
comprised a significant portion of the market until the MPL Platforms emerged. So far, the MPL Platforms
have targeted borrowers with professional degrees and proven employment history. By avoiding borrowers
who drop out of school or cannot find employment after graduation, these refi loans have performed
exceptionally well to date. However, as these refi products have not gone through an economic downturn,
KBRA will review the through-the-cycle performance of proxy loan products and incorporate such data in
the formulation of its base case loss assumptions and/or stress multiples.

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Rating Methodology
Credit Score
KBRA compares the characteristics of the proposed current pool to previously originated collateral in order
to identify shifts in pool credit quality of any migration of underwriting standards. KBRA may analyze the
performance of historical data based on the borrower’s credit bureau score or the company’s internal credit
score and use that information when determining a base case loss expectation for the collateral in the
proposed transaction. KBRA typically requests the data stratified by segment. To the degree that stratified
performance data reflects a differentiation in performance, the mix of scores and their related loss
projections can be reflected in the pool’s expected loss rate. For example, a pool with a higher concentration
of better than average credit scores compared to the historical data would likely be assigned a lower
expected loss rate, while concentrations of lower scores would likely result in a higher expected loss rate.
Adjustments made to KBRA’s loss expectations as a result of differences between the pool submitted to
KBRA and historical pools will be discussed in KBRA’s transaction report as warranted. KBRA may also adjust
its loss expectations for adjustments made by the credit bureau or the company, which could impact
performance expectations.

KBRA may review certain metrics to assess the credit quality of the underlying loan pool and the borrower’s
ability to repay the loan. When available (as in the case of refinancing loans), KBRA may review the debt-
to-income ratio (DTI), payment-to-income ratio (PTI) ratio or free cash flow (FCF) amounts for a collateral
pool and the components of each of these items, such as the calculation of housing expenses. KBRA views
the availability of these metrics to be a positive factor in our assessment of a transaction.

The DTI ratio is a measure of a borrower’s total monthly debt payments divided by the borrower’s gross
monthly income level, while the PTI ratio is the ratio of the borrower’s monthly loan payment for his or her
loan divided by the borrower’s monthly gross income. FCF is a measure of the borrower’s excess cash per
month after known monthly debt payments, new debt borrowed in the current loan and estimated housing
obligations based on geographic region. DTI, PTI and FCF are used to assess the borrower’s ability to make
loan payments.

KBRA generally views high DTI and PTI and low FCF loans unfavorably and may incorporate this analysis
into our loss assumptions. If the range or distribution of the values of these ratios is different from the
originator’s prior originations, KBRA may adjust its assumptions accordingly.

School Type
School types include four-year, two-year and proprietary or vocational institutions. Historically, PSLs by
school type have demonstrated distinct default rates. For example, borrowers attending two-year
institutions or proprietary/vocational institutions generally exhibit higher default rates than four-year
institutions.

Co-Signer Status
Students who enroll in college immediately after high school usually have a limited credit history. If a
borrower is unable to qualify for a PSL based solely on his or her own credit profile, the borrower may qualify
by obtaining a co-signer. The co-signer is often a parent but can also be a legal guardian or any other
individual that represents a second source for repayment of the PSL. The co-signer is legally bound to make
payments on the student loans when those payments are not made by the student. Having a co-signer can
reduce default risk and increase the probability of recoveries should the loan default. Some loan programs
allow for the release of co-signers after a certain number of on-time payments and the borrower satisfies
credit criteria at the time they apply for co-signer release.

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Rating Methodology
Loan Repayment Options
PSL lenders may provide up to four repayment options to borrowers, which include immediate repayment,
interest only, fixed payment, and full deferment until after graduation. However, for PSL refi loans,
immediate repayment is typically the only option.

Exhibit 2: Private Student Loan Repayment Options

Repayment Option Monthly Payment Amount
Immediate Repayment Level payment over loan term regardless of borrower status
Interest Only Interest accrued for the month
Fixed Payment Fixed amount that is typically less than accrued interest for the month
No payment required while borrower is in school; level payment over
Deferred Repayment
loan term after borrower graduates

The type of payment option a student chooses may ultimately impact the expected default rate of the pool.
If a borrower chooses the immediate repayment option, principal and interest payments are required to be
made while the borrower is in school. The interest-only option, which allows the borrower to pay only interest
while in school, and the fixed-payment option, which allows the borrower to pay a small fixed amount while
in school, can mitigate the shock of a higher loan balance when the loan enters full repayment after
graduation. The immediate repayment, interest-only and fixed-payment options allow the lender to maintain
constant communication with the borrower while he or she is in school, thereby increasing the probability
of early payment behavior. The full deferment option, unlike the aforementioned options, delays both
interest and principal payments until after the student graduates. For borrowers that choose the full
deferment option, interest typically accrues during the in-school period and is capitalized to the loan principal
periodically, resulting in a higher outstanding loan balance. Historically, borrowers who choose the full
deferment option tend to have higher default rates than borrowers who choose the immediate repayment,
the interest only or the fixed payment options.

Interest Rate and Type

Interest rates on PSLs may be either fixed or floating. Originators usually set a borrower’s interest rate
based on the current interest rate environment and their internal pricing and return guidelines. Loans are
normally priced using risk-based pricing, which means that the interest rate charged is linked to the
borrower’s credit quality and the loan tenor. Borrowers with lower credit quality are generally charged higher
interest rates to compensate for the risk associated with extending credit to that obligor. The interest rate
charged is an important consideration as it impacts voluntary prepayments and the amount of excess spread
available to cover losses in KBRA’s cash flow analysis. KBRA will factor the originator’s policies for pricing
loans into our analysis.

Geographic Diversification
The geographic diversification of borrowers in the collateral pool may mitigate the effects of an economic
downturn or event risk in a state or region. While a PSL pool originated by a U.S. national lender is typically
geographically diversified, that is not the case for U.S. state-sponsored lenders. KBRA analyzes the
geographical distribution of the collateral pool and, to the extent the portfolio is not considered diversified,
KBRA may factor that into its loss expectation and/or stress multiple.

Determination of Loss Expectation

PSLs’ repayments mainly depend on the borrower’s (and co-signer’s, if applicable) credit quality. KBRA
typically analyzes the originator’s historical static pool vintage data and historical portfolio performance
data. KBRA prefers the historical performance data to cover a substantial portion of the life cycle for loans

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Rating Methodology
originated under similar underwriting standards. However, depending on the quality and quantity of the
performance data, KBRA may accept less historical data if there is proxy data that KBRA can reasonably
utilize as part of its analysis. In these cases, KBRA may adjust its base case loss determination, increase
the loss coverage multiple for a particular rating or may limit the potential rating on a transaction to
compensate for the amount and quality of data received. If proxy data is utilized in KBRA’s analysis, KBRA
will generally discuss this analysis in the transaction report.

Loss Rates and Recoveries

KBRA analyzes historical loss data on PSL transactions. Depending on the characteristics of the collateral
and the data available, KBRA will analyze losses based on the cumulative losses or monthly annualized
losses.

KBRA will use historical data to determine the base case level of expected losses on the securitized loan
pool. Ideally, this historical pool data will be segmented by loan product, credit score, school type, co-
signature status, repayment option, origination channel and/or loan term to develop base case expectations
for each segment of the collateral pool. KBRA will review loss trends over time and analyze the volatility of
loss levels and potential factors that impact those levels.

KBRA uses the historical recovery data of the issuer in order to project the expected recovery rate on the
collateral pool. PSLs are generally non-dischargeable upon a borrower’s bankruptcy unlike other unsecured
consumer loans, so the recovery amount from defaulted PSLs tends to be higher and recovery time tends
to be much longer than in the case of defaulted unsecured consumer loans. In addition to or instead of in-
house collections, loan originators may sell defaulted or delinquent loans to a third party and the proceeds
of the loan sale will be used as recovery amounts. Depending on the terms of loan sale agreements or
history of these sales, KBRA may consider them in deriving the expected recovery rate and timing.

Projection of Cumulative Losses

KBRA typically develops its base case loss expectation for PSLs by constructing a loss timing curve based
on the average periodic (monthly, quarterly or annual) change in losses across historical repayment
vintages. All loans that entered repayment in the same period are grouped into vintages. This is done using
static pool analysis on loan pools that have already completed their full loss cycle, as well as loan pools that
are still experiencing losses. KBRA calculates the periodic change in cumulative losses for each static pool
vintage. KBRA generally takes an average of periodic losses for the relevant period and then combines the
result to determine a cumulative loss timing curve. The loss timing curve represents the cumulative
percentage of expected losses across each period over the life of the pool. The loss curve is designed to
forecast losses on the underlying collateral pool by allocating base and stressed loss assumptions through
this loss timing curve.

KBRA also uses the loss timing curve to project the cumulative losses for those deals that have yet to
experience their full loss cycle. Exhibit 3 compares hypothetical projected cumulative losses to cumulative
losses to date for each sample collateral pool. In order to determine the ultimate expected amount of losses
that will occur, KBRA divides the actual cumulative gross losses experienced to date by the percentage of
losses that have historically occurred, based on KBRA’s loss timing curve. For example, Pool No.10 has been
in repayment for 48 months and is projected to have an ultimate lifetime expected cumulative gross default
of 12.92% (11.88%/91.91%=12.92%).

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Rating Methodology
 Exhibit 3: Summary of Cumulative Loss Projections
Months in Actual Cumulative % of Expected Loss Projected Cumulative
Pool
Repayment Losses to Date (%) Timing Curve Gross Losses
1 63 6.53% 98.91% 6.60%
2 61 7.60% 98.51% 7.71%
3 60 8.41% 98.22% 8.56%
4 59 8.91% 97.95% 9.10%
5 57 9.85% 97.26% 10.12%
6 56 9.28% 96.84% 9.58%
7 53 11.70% 95.32% 12.28%
8 51 10.26% 94.00% 10.92%
9 49 10.67% 92.73% 11.51%
10 48 11.88% 91.91% 12.92%
Average 9.93%
Min 6.60%
Max 12.92%
KBRA Base Case 10.00%

KBRA then reviews the average expected cumulative gross defaults for all the pools, in addition to the
average for select periods. In many cases, KBRA receives several years of static pool data, which enables
us to compare changes from year-to-year and to review performance trends. However, for many newer
issuers, including many MPL Platforms, performance data may be limited. As a result, KBRA combines static
pool analysis of originations through the platform with other data KBRA determines to represent proxy
performance. If we are utilizing proxy data, KBRA may be more conservative in our base case loss
expectation and/or loss multiples. KBRA also examines the minimum and maximum loss values to determine
the overall range of performance over time, which generally considers the existing credit and economic
environment during the applicable time period.

Exhibit 4 illustrates cumulative gross loss performances of sample collateral pools and KBRA’s base case
cumulative gross loss assumption using the method described in this section.

Exhibit 4: Hypothetical Static Pool Cumulative Gross Loss (%)

14%

12%

10%
Gross Loss %

8%

6%

4%

2%

0%

Months

Pool 1 Pool 2 Pool 3 Pool 4

Pool 5 Pool 6 Pool 7 Pool 8
Pool 9 Pool 10 KBRA Base Case

Global Private Student Loan ABS Page | 12 March 22, 2019

Rating Methodology
Projection of Annualized Losses
KBRA may alternatively develop its base case loss expectation using annualized gross losses rather than, or
as a supplement to, cumulative gross losses. Annualized gross losses may be used for originators who have
not accumulated enough historical loss data and with limited comparable pools for a cumulative gross loss
projection analysis. Annualized gross losses may also be used for pools with significant seasoning, as the
annualized gross loss rate for a PSL pool tends to stabilize after the initial 2-3 years of volatility. Annualized
gross loss is calculated as gross loss amounts, divided by the current collateral balance in repayment, then
multiplied by 12.

For example, Exhibit 5 illustrates historical annualized gross loss performance for hypothetical collateral
pools. Annualized gross losses calculate the monthly gross losses regardless of the origination month over
the aggregate loan balance in repayment. Rapidly growing loan portfolios may underestimate annualized
gross loss percentages as losses do not occur for several months after entering into repayment status and
the portfolio loan balance in repayment (the denominator in the formula) is increasing faster and not in line
with losses (the numerator). A decreasing loan portfolio may have an opposite impact by overstating loss
percentages. For loan portfolios that are increasing or decreasing, KBRA may use a lagged approach, where
the denominator is the loan balance of several months prior to the loss amount.

Exhibit 5: Hypothetical Annualized Gross Loss (%)

14%

12%
Annualized Gross Loss %

10%

8%

6%

4%

2%

0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63

Months
Pool 1 Pool 2 Pool 3 Pool 4 Pool 5
Pool 6 Pool 7 Pool 8 Pool 9 Pool 10

Cash Flow Stresses / Modeling

KBRA performs cash flow analysis for each transaction based on stressed cash flow scenarios for each rating
level. KBRA starts with its base case loss assumptions and then may stress each of the following variables:
cumulative loss rates, loss timing curves, recovery rates, deferment and forbearance rates, voluntary
prepayment rates, interest rates, and reinvestment rates on permitted investments. The level of stress on
each variable depends on the rating levels for the transaction as well as the amount of historical data and
volatility of each variable. It also depends on the stability of the originator or MPL Platform and servicer of
the transaction. KBRA performs cash flow stress analysis to determine whether the proposed enhancement
levels are sufficient to warrant the ratings for each class of notes. KBRA will explain any adjustments to its
rating stresses in its transaction report.

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Rating Methodology
KBRA may limit the rating for a specific transaction or issuer based on the results of the operational review
or results of our analysis of the collateral characteristics and historical performance data, among other
items. The existence of this rating limitation may be discussed in the transaction report and may change
over time.

KBRA Loss Multiple Range

KBRA utilizes stress case loss multiples for PSL collateral which uses our analysis of the variability of losses
over time as well as our extrapolation of AAA sf loss ranges under an “extremely challenging” economic
environment, as described in Appendix III. Below are KBRA’s typical stress case loss multiple ranges for
PSLs at each rating category:

Exhibit 5: Private Student Loan Stress Loss Multiples

KBRA Rating Loss Multiple
AAA (sf) 3.00 - 6.00x
AA (sf) 2.50 - 5.00x
A (sf) 2.00 - 3.50x
BBB (sf) 1.75 - 3.00x
BB (sf) 1.25 - 2.25x
B (sf) 1.00 - 1.50x

KBRA determines a base case loss rate for each collateral pool together with a stress case multiple range
for each rating category. Annualized loss assumptions will be converted to cumulative loss assumptions for
purposes of assessing rating multiples. In determining a loss multiple for a transaction, KBRA typically
considers the amount of historical loss data available, the historical variability of losses in the originator’s
or marketplace lender’s portfolio, product and loan specific risks, the borrower’s relationship with the lender,
assumed payment priority in the mind of the customer, the originator’s financial condition, the results of
the operational review, and the geographic concentration of the borrowers.

KBRA will most likely utilize multiples in the higher end of the ranges provided in Exhibit 5 for newer
originators. However, the actual multiple used will depend on KBRA’s consumer credit outlook, the legal and
regulatory environment, and the company’s business model, funding model, competitive landscape, growth
strategy, platform stability, strength of management and key personnel, availability and variability of
historical loss data and whether the loans are originated through a funding bank or local licensed financial
institution.

In most cases, the stress case loss multiple will fall within the ranges shown in Exhibit 5. However, in certain
situations, KBRA may deem it appropriate to apply multiples that are either lower or higher than these
specified ranges. For example, the originator and servicer may have provided KBRA with issuer-specific data
that supports loss multiples during historical stress cycles outside of the typical ranges. KBRA will disclose
such details in the transaction report.

KBRA notes that higher multiples are often associated with lower base case losses. A collateral pool with a
relatively low base case loss could be deemed to have greater potential volatility from that low level,
resulting in a relatively high multiple. While the multiple may be relatively high, the absolute loss level will
reflect the quality of the collateral pool. Inversely, loan pools with higher expected losses may have lower
multiples as a result of lower volatility around loss assumptions.

Even if loss coverage multiples warrant a higher rating, KBRA may decide to limit ratings at certain levels
due to limited historical data, servicing related risks, a restrictive regulatory environment, layering of risks,
or the presence of certain material credit concerns.

Global Private Student Loan ABS Page | 14 March 22, 2019

Rating Methodology
Loss Timing Curve
KBRA may run several loss timing curves to test the cash flow’s sensitivity to loss timing. The expected loss
timing curve is developed from our analysis of the static pool data for the originator’s collateral. KBRA may
also develop a more front-loaded scenario and a back-loaded scenario, which are used as stressed cases
from the expected loss timing curve. The front-loaded curves are generally more stressful to the senior
notes, while the back-loaded curves tend to be more stressful to subordinate tranches or in instances when
cash is released from the transaction. In each case, the loss curve may be adjusted based on the underlying
collateral pool’s seasoning to reflect the timing of the remaining losses expected in the pool.

Recovery Rate and Recovery Timing

KBRA typically stresses cumulative gross losses when modeling our stress case cash flows. KBRA may stress
recovery rate and recovery timing if historical data does not cover a substantial portion of the recovery cycle
and/or the data exhibits high volatility.

Deferment and Forbearance

To the extent KBRA believes that deferment or forbearance may affect transaction liquidity in terms of timely
payment of interest or ultimate payment of principal, we may apply stresses to deferment and forbearance
utilization rates and/or timing. For loan products that historically exhibit very low deferment or forbearance
usage, such as the refi loans, KBRA may not make separate deferment or forbearance assumptions, but
rather take them into consideration in setting its prepayment assumptions.

Prepayment Rates
Prepayment speeds for PSLs are commonly measured by constant prepayment rate. Prepayments impact
the amount of excess spread available to cover defaults in a transaction. KBRA determines the prepayment
rates based on available issuer and asset-specific prepayment data.

For PSLs, voluntary prepayments are generally inversely correlated to involuntary prepayments (defaults).
Higher voluntary prepayments are associated with PSL pools with higher credit quality, more seasoning, or
in a benign economic environment, while higher involuntary prepayments are the opposite. KBRA’s
prepayment rate assumption generally includes both voluntary prepayments and defaults. Since KBRA
projects defaults separately, voluntary prepayments will be calculated by subtracting defaults from the total
prepayments.

Interest Rates
Interest rates on PSL ABS notes can be fixed or floating. A PSL transaction is exposed to interest rate risks
if there are fixed- to floating-rate or floating-rate index mismatches between the collateral and the notes.
If interest rate risks exist and there is no interest rate hedge in place to materially mitigate these risks,
KBRA may apply stressed interest rate curves in its cash flow analysis. When the transaction is structured
with interest rate hedges, KBRA will assess the hedge counterparty, hedge maturity and other hedge terms
to determine to what extent the existence of the hedge arrangement mitigates risks related to an interest
rate mismatch.

Servicing Fees and Expenses

KBRA typically reviews the servicing fees and expenses in a transaction to determine whether they are
comparable to market rates and sufficient to cover the actual costs of servicing the collateral. To the extent
KBRA determines the rates do not reflect market rates, KBRA may incorporate a market rate in its analysis
of the transaction in case a successor servicer needs to be retained. In addition, KBRA reviews the structure
of the fees in the waterfall for each transaction.

Global Private Student Loan ABS Page | 15 March 22, 2019

Rating Methodology
Excess Spread
Excess spread is stressed in transaction cash flows through the stress case assumptions. The stress on
interest rates, voluntary prepayment rates, losses, servicing fees and expenses all impact the amount of
excess spread available in the transaction. Since these stresses are applied concurrently, excess spread
deteriorates quickly in most stress case scenarios.

Prefunding and Master Trusts

Unlike their for-profit counterparts, U.S. state-sponsored issuers commonly utilize a master trust structure
to facilitate multiple annual issuances that prefund their originations for each academic year. In transactions
that include a prefunding or recycling period, KBRA will assume the worst possible case permitted by the
eligibility criteria and the origination schedule provided for in the transaction documents to formulate its
base case loss expectation. It is assumed that the collateral pool may move to that worst possible mix,
which would result in higher loss expectations, and the originations may be delayed, which would result in
higher negative carry.

Legal Final Determination

KBRA also reviews the legal final determination date for the longest dated security based on the tenor of
the longest loan in the pool plus the maximum amount of extensions allowed by the issuer as per the issuer’s
policy. For loans to borrowers currently in school or in the grace period, if applicable, KBRA assumes they
will enter repayment as scheduled. If there is a prefunding or a recycling period, KBRA will incorporate the
tenor of the potentially longest loan in the pool given this prefunding or recycling period.

Alternatively, KBRA may choose to test the legal maturities of the securities through cash flow analysis.
KBRA will assume no voluntary prepayments and apply stressed levels of defaults, deferment and
forbearance. If there is a prefunding or a recycling period, the newly acquired loans will be assumed to have
the longest possible term permitted by the eligibility criteria.

Transaction Structure and Analysis

Transaction Structure
PSL transactions can be either amortizing, amortizing with a prefunding or recycling period, or fully
prefunded. During the prefunding or recycling period, new loans can be funded into the transaction as long
as the deal is in compliance with certain conditions and the loans meet certain eligibility criteria set forth in
the transaction documents. Once the prefunding or recycling period ends, available funds are used to pay
down the outstanding notes.

Exhibit 6 depicts a typical PSL ABS structure. The loans are usually first transferred to a special-purpose
entity such as the depositor, and then transferred by the depositor to the issuer. In this example, the
indenture trustee is also the back-up servicer, with the indenture trustee and servicer providing services to
the issuer under the transaction documents. Alternatively, the loans may be sold directly from the seller
to the issuer, or in the cases of most U.S. state-sponsored issuers, the loans are pledged to a trust as
collateral for ABS issuance.

Global Private Student Loan ABS Page | 16 March 22, 2019

Rating Methodology
 Exhibit 6: Traditional PSL ABS Transaction Structural Diagram

(Originator, Sponsor,
Seller & Servicer)

Representations
$ Sale of
and Warranties;
Loans
Loan Repurchase
Loan
(Depositor) Servicing

$ Sale of
Loans

(Indenture Trustee,
Custodian, (Issuer)
Back-up Servicer)

$
Notes and
Certificates

Note
Ratings Class A Notes
KBRA Certificates
Class B Notes
Class C Notes

Exhibit 7 shows an example of a state-sponsored issuer’s transaction structure, where loans are originated
by a state-sponsored issuer and pledged, rather than sold, to the trust as collateral for the issuance of notes.

As part of its legal analysis of U.S. state-sponsored transactions, where the issuer is not a special-purpose
vehicle, KBRA will review applicable regulatory, statutory or common law holdings that might impact the
enforceability of the loans in the securitization.

Global Private Student Loan ABS Page | 17 March 22, 2019

Rating Methodology
 Exhibit 7: State-Sponsored PSL ABS Transaction Structural Diagram

(Originator, Issuer &

Servicer)

Pledge of Loan
$ Representations
Loans Servicing
and Warranties;
Loan Repurchase
(Indenture Trustee,
Custodian, (Trust)
Back-up Servicer)

$
Notes

Note
KBRA Ratings Class A Notes
Class B Notes

Transaction Documents
KBRA reviews the transaction documents to evaluate:

• The transaction’s overall structure, including adequacy and form of credit enhancement, priority of
payments, hedging arrangements (if necessary) and performance triggers.
• Representations and warranties provided by the transaction parties and the enforcement
mechanisms for a breach thereof, including, in the case of collateral related representations, any
cure or repurchase requirements.
• Loan servicing standards.
• Other obligations of the seller, servicer, trustee, back-up servicer and other transaction parties.
• Events of default, early amortization events and any other investor rights and remedies.

The content of the operative agreements is evaluated in conjunction with the overall transaction analysis,
including KBRA’s originator and servicer evaluations, as well as KBRA’s determination of the credit
enhancement provided by the structure. To the extent any provisions in the transaction documents are
materially weaker than market standards or do not provide protections consistent with KBRA’s expectations
for the applicable type of transaction and there are no adequate compensating factors, KBRA will consider
the absence of such protections in its overall credit quality assessment.

Performance Triggers
PSL ABS transactions may include performance triggers. Examples of performance triggers are those tied
to overcollateralization levels or cumulative loss levels, where a breach in either trigger could result in a
change of principal and interest payments or “turbo,” where all cash flow received net of transaction
expenses are used to pay down the notes.

If performance triggers are included in a transaction, KBRA’s overall transaction analysis will include an
assessment of such triggers and the relative impact on credit quality by considering, among other things,
the trigger levels and amount of excess cash flow within the overall transaction structure.

Global Private Student Loan ABS Page | 18 March 22, 2019

Rating Methodology
Surveillance
KBRA views the assignment of an initial rating as the starting point of an analytical process that continues
for the duration of the transaction. KBRA views ongoing transaction surveillance as critical to maintaining
the accuracy of existing ratings and providing insights into asset, servicer, and transaction performance
which can inform the new issue rating process. The KBRA surveillance process incorporates the following
key components:

1. Servicer Report and Performance Data Monitoring: KBRA reviews the servicer reports, which
generally include underlying collateral characteristics, application of cash receipts, summary of
performance trigger tests and credit support. KBRA reviews the performance trends and flag any
material indicators of positive or deteriorating performance. Additionally, divergence from
established parameters may be flagged for further analysis. For example, a sudden rise in
delinquencies and losses beyond expected levels or a decline in credit enhancement levels would
require an analyst to do further analysis. The level of deviation from the expected performance could
trigger an earlier than regularly scheduled review and rating action.

Depending on specific performance concerns, more details and further analysis may include contact
with the servicer to obtain additional data for an understanding of the factors contributing to
performance, running revised cash flows for the pool to obtain updated loss coverage projections, or
taking other appropriate steps. After preparation of all requisite analysis and based on the observed
performance to date, as well as the expectation of future performance, an analyst may convene a
surveillance committee to review the rating(s) instead of waiting for the next schedule review date.
KBRA will provide updates to the market of any changes to the ratings on the transaction via a
surveillance report and/or press release.

2. Periodic Surveillance Review: In the event no performance issues arise during periodic performance
data monitoring, KBRA will conduct a surveillance review for each transaction at least on an annual
basis after its closing date.

KBRA reviews the performance of each transaction including losses, recoveries, delinquencies, and
total credit enhancement levels. KBRA compares losses experienced in the transaction to date versus
the original base case loss expectation for the deal to that point.

KBRA updates its projection of expected losses for a transaction using various methods. The primary
method will be to project base case losses along the original curve used for the deal to develop a
revised base case loss expectation. Alternatively, KBRA may project losses using annualized default
rate, which will be converted to cumulative losses to which KBRA’s stress multiples will apply. KBRA
may also project losses based on the deal’s pool factor, thereby assuming that the same proportion
of losses will be realized going forward. In addition, KBRA may supplement this analysis with
additional analysis. KBRA may apply recovery rates that differ from what was applied at closing based
on the latest data provided by the issuer.

3. Servicer Updates and Market Trends: KBRA strives to maintain an active dialogue with the servicer
and will perform regular updates to its servicer evaluation. KBRA will monitor the financial condition
and operational capabilities of the originator, the MPL Platform and/or the servicer, as applicable
since those factors have an impact on the loans coming into the transaction during the
prefunding/recycling period and the ongoing performance of the transaction. Any developments
regarding these parties that affect KBRA’s expectations for loan performance, particularly those
relating to collections, default management, and recoveries, will typically be factored into the
transaction analysis. KBRA also reviews any industry-specific changes or events to determine the
potential impact on outstanding PSL ABS ratings.

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Rating Methodology
Appendix I: Sample Information Request
Company Data

• Financial statements
• Management biographies
• Terms of liquidity/warehouse funding
• Managed portfolio data
o Defaults and recoveries
o Delinquencies
o Deferment, forbearance and other repayment term changes

Operational Data and Procedures

• Description of loan programs

• Origination practices and procedures
• Underwriting criteria
• Underwriting approval and exception rates
• Organizational charts and staffing levels by department
• Servicing and collections policies and procedures
• Deferment and forbearance policies
• Charge-off and recovery policies and procedures

Collateral Data

• Interest rate or annual percentage rate (APR) on the loans

• Credit scores—internal credit scores and/or externally produced credit scores
• Product or loan type—undergraduate, graduate, professional, refinancing
• School type: 4-year/graduate, 2-year, proprietary
• Loan terms—original, remaining and seasoning
• Loan repayment options—immediate repayment, interest-only repayment, deferred
repayment
• Geographic mix
• Borrower’s ability to pay—DTI, PTI, FCF

Static Pool Data

Static pool data broken out by loan program, school type, credit score, and co-signature status:

• Cumulative gross losses

• Cumulative net losses
• Recoveries on gross loss (default) cohorts
• Annualized gross losses
• Stratification of historical originations
o Interest rate
o Credit score
o Product or loan type
o School type
o Loan term
o Loan payment option

Global Private Student Loan ABS Page | 20 March 22, 2019

Rating Methodology
Appendix II: Sample Agenda for Originator and
Servicer Review
Corporate Overview

• Company History and Business Model

• Ownership and Management
o Ownership by management or private equity
o Organizational charts
o Management experience
o Recent changes
• Strategy
o Competitive position
o Goals and targets
o Strategic initiatives
o Response to regulatory changes
• Financial Profile
o Capital structure
o Financial performance
o Funding strategy
o Loss expectations and recovery
o Major accounting policies
o Outstanding litigation
• Internal Audit, Quality Control and Compliance
• Legal/Regulatory update

Originations

• Department overview and organization

• Originations channels, programs and marketing
• Origination method—funding bank or through local licensed financial institution
• Terms of loan and sale agreement with funding bank
• Technology in place for originations
• Fraud prevention
• Loan underwriting
o Scoring models and validation
o Underwriting guidelines
o Lending authority and exceptions approval
o Verification—income/employment/residence/affordability
• Closing, funding and documentation

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Rating Methodology
 Servicing

• Department overview and organization

• Customer service
• Collections
o Staffing levels
o Collection strategies
o Policies and procedures
o Technology and behavioral scoring
o Use of deferment and forbearance
• Compliance and quality control
o Control and oversight of:
• Third-party collection and customer service agencies
• In-store payments
• Third-party location payments
• Charge-offs and loss mitigation
o Timing
o Charge-off policies
o Post charge-off policies
• Investor reporting and accounting
o Procedures for investor reporting
o Cash controls
o Commingling of funds
Technology

• Servicing systems overview

• Disaster recovery plans and last test
• Planned changes to systems
• Data privacy
• Internal and external threats
• Operational controls

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Rating Methodology
Appendix III: PSL Loss Coverage Multiples
KBRA’s stress loss levels are based on applying a loss multiple for a specific rating level to the base case
cumulative losses derived for a particular transaction. In order to develop these multiples, KBRA has
analyzed historical cumulative loss data over the past 13 years in order to review the historical loss volatility
associated with PSLs. KBRA relates this volatility to its loss multiples in terms of the level of stress associated
with this period. The next steps in developing KBRA’s loss multiples are evaluating the relationship between
losses on PSLs and unemployment rate and deriving AAA stress multiples based on that relationship (see
Exhibit 8).

Issuer Data
KBRA analyzed the variability of aggregated annualized losses for Navient Corporation’s 34 PSL trusts over
the past 13 years (2006-2018) to compare the performance of similarly originated collateral under different
economic cycles and to determine the potential loss volatility under different economic conditions. The 13-
year time frame covers the severe economic downturn, which occurred from 2008 to 2010.

KBRA summarized the data, by year and by pool, for each issuer’s deals in order to be able to compare
across vintages and periods of economic stress. KBRA identified 2015-18 as a stable period in the economy,
which generally exhibited good PSL performance. KBRA used this stable period as a baseline for comparison
against years of greater economic stress when PSL defaults were higher: 2009-10. KBRA compared the
maximum cumulative gross loss level in these more stressful vintages against the average cumulative gross
loss for the 2015-18 base period in order to ascertain the highest multiple of losses under stress versus the
average experienced in the base period during a stable economic environment.

The multiples of the base periodic losses are shown are calculated by dividing the losses incurred for the
more stressful period over the base period. This shows that the range of losses experienced during the worst
deal years of 2009-10 has a multiple of 2.23x.

Exhibit 8: PSL Loss Variability

Issuer Data Annualized Defaults
2009-2010 Average 5.49%
2015-2018 Average 2.46%
Multiple 2.23x

KBRA views the 2009-2010 loss levels to be consistent with A stress levels, given the significant rapid
increase in unemployment during 2008 and 2009.

Relationship of PSL Defaults to Unemployment

KBRA also compared the PSL periodic default rate against the unemployment rate for all and for those with
a bachelor’s degree and higher. PSL defaults are closely tied to unemployment for those with a bachelor’s
degree, as illustrated in Exhibit 9.

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Rating Methodology
 Exhibit 9: Annualized PSL Defaults vs. Unemployment

12%

10%

8%

6%

4%

2%

0%
Feb-06

Feb-07

Oct-08

Oct-09
Feb-10

Feb-11

Oct-12

Oct-13

Oct-14
Feb-15

Feb-16

Oct-17

Oct-18
Oct-06

Oct-07
Feb-08

Feb-09

Oct-10

Oct-11
Feb-12

Feb-13

Feb-14

Oct-15

Oct-16
Feb-17

Feb-18
Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Annualized Defaults as a % of Loans in Repayment Annualized (Navient Sponsored PSL Trusts)
Unemployment Rate - Bachelor's degree and higher
Unemployment Rate - All

KBRA reviewed the relationship between the unemployment rate and PSL defaults over the 13-year period
in order to determine how PSL default rates might be correlated with unemployment. Exhibit 10 summarizes
this relationship expressed as a multiple of the stress period to the base period:

Exhibit 10: Relationship of Annualized Defaults to Unemployment * - 2009-2010 to 2015-2018

Issuer Data Annualized Defaults Unemployment Rate
2009-2010 Average 5.49% 4.70%
2015-2018 Average 2.46% 2.39%
Multiple 2.23x 1.97x
Default Multiple / Unemployment Multiple 1.13x
* Unemployment for those who have a bachelor's degree and higher

Derived AAA Stress Range

To develop our ‘AAA’ stress multiple range, KBRA analyzed the potential increase in losses using the ratio
to unemployment stress indicated by the data in Exhibit 10. The analysis suggests that for a given projected
increase in unemployment, expressed as a multiple, PSL defaults should be stressed at a slightly higher
multiple.

To determine the AAA multiples, KBRA used a range of 20.75% to 24.75% unemployment rate as an
appropriate stress level. As a basis for this stress level, the U.S. overall unemployment rate increased to a
high of 24.75% in 1933 and averaged 20.75% from 1933-35, while the 2015-18 average overall
unemployment rate was 4.58%. The result of this analysis implies that under such an extremely challenging
economic environment, the loss multiples realized could range between 5.14x and 6.13x.

Exhibit 11: Derived 'AAA' Loss Multiples 1933 1933 - 1935

AAA Unemployment Rate - All 24.75% 20.75%
2015-2018 Average Unemployment Rate - All 4.58%
AAA to 2015-2018 Average (Unemployment Multiple) 5.41x 4.54x
Default Multiple / Unemployment Multiple 1.13x
AAA to 2015-2018 Average (Default Multiple) 6.13x 5.14x

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Rating Methodology
© Copyright 2019, Kroll Bond Rating Agency, Inc., and/or its licensors and affiliates (together, "KBRA”). All rights reserved. All
information contained herein is proprietary to KBRA and is protected by copyright and other intellectual property law, and none of such
information may be copied or otherwise reproduced, further transmitted, redistributed, repackaged or resold, in whole or in part, by
any person, without KBRA’s prior express written consent. Information, including any ratings, is licensed by KBRA under these
conditions. Misappropriation or misuse of KBRA information may cause serious damage to KBRA for which money damages may not
constitute a sufficient remedy; KBRA shall have the right to obtain an injunction or other equitable relief in addition to any other
remedies. The statements contained herein are based solely upon the opinions of KBRA and the data and information available to the
authors at the time of publication. All information contained herein is obtained by KBRA from sources believed by it to be accurate and
reliable; however, all information, including any ratings, is provided “AS IS”. No warranty, express or implied, as to the accuracy,
timeliness, completeness, merchantability, or fitness for any particular purpose of any rating or other opinion or information is given
or made by KBRA. Under no circumstances shall KBRA have any liability resulting from the use of any such information, including
without limitation, for any indirect, special, consequential, incidental or compensatory damages whatsoever (including without
limitation, loss of profits, revenue or goodwill), even if KBRA is advised of the possibility of such damages. The credit ratings, if any,
and analysis constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not
statements of fact or recommendations to purchase, sell or hold any securities. KBRA receives compensation for its rating activities
from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website.
Please read KBRA’s full disclaimers and terms of use at www.kbra.com.

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Rating Methodology