NAVI - NASDAQ

Good morning, and welcome to the Navient Third Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will now turn the call over to Jen Earyes, Navient's Head of Investor Relations. Please go ahead.

Hello. Good morning, and welcome to Navient's earnings call for the third quarter of 2025. With me today are David Yowan, Navient's CEO; and Joe Fisher, Navient's CFO. After their prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found in Navient's third quarter 2025 earnings release, which is posted on our website. Thank you. And now, I will turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. This morning, we reported results that highlight our ability to drive high-quality loan growth and reduce operating expenses. Our expected life of loan cash flows increased substantially as our legacy loan portfolios experienced lower prepayment speeds. We also updated default rate, financing and secured debt service assumptions and incurred regulatory and restructuring charges. Adjusting for these assumption changes and charges, core EPS was $0.29 for the quarter. A summary of these significant items can be found on Slide 2. We're also announcing a new share repurchase authorization of $100 million. This authorization provides additional capacity and flexibility to purchase future value at a discount. Turning to our engine for future growth. For the third straight quarter, Earnest doubled origination volume year-over-year, totaling approximately $800 million in new loans. This included $528 million in refi loans, our highest quarterly volume this year, accompanied by credit quality that is among the strongest in our refi history. In-school lending also saw a record peak season with $260 million originated, also the highest quarterly volume in our history. Our strong performance across both product lines demonstrates our ability to attract high-quality, high-balance customers, many of them graduate students by offering products and a customer experience that meets their needs and exceeds their expectations. Earnest refinance business helps high-earning early professionals move from managing debt to building wealth. We focus on customers with prime to super-prime credit, most earning over 6 figures and about half holding graduate degrees. We succeed with this segment through a streamlined, transparent application process, advanced underwriting, personalized pricing and an in-house U.S.-based client happiness team with industry-leading Trustpilot scores. Borrowers can select from up to 240 term and rate combination, making ours one of the most flexible refinance products in the market. Data-driven marketing and a mobile optimized process allow us to efficiently attract and serve financially sophisticated borrowers. Our scalable platform supports higher volume and additional products. We're proud of our momentum, excited about future growth, especially with the backdrop of potential Fed rate reductions and expanded product and market opportunities. Turning to our ongoing effort to aggressively reduce expenses. We're pleased to report that we will exceed our ambitious expense reduction targets ahead of schedule. You'll recall that less than 2 years ago, we shared the ambitious goals related to our strategic initiatives, outsource loan servicing, divest BPS and reshape our infrastructure and corporate footprint. The removal of a large amount of infrastructure and corporate expenses was dependent on the successful completion of the first 2 objectives. We have now completed our final obligations under the last transition services agreement, the final milestone in our Phase 1 transformation. This is earlier than both our original timing and the timing we shared last quarter. Team Navient has done a phenomenal job to accomplish this feat. Completing our obligations under the final TSA allows us to accelerate the removal of final expenses that were previously identified for removal. These expenses include $14 million in the third quarter that were supporting the TSA, as well as additional expenses that could not be eliminated until all TSA obligations were complete, all of which will further reduce our corporate footprint. These expense removals are already underway, and are expected to be completed in the first few months of 2026. Once complete, we have exceeded our initial goal of $400 million run-rate expense reduction target set in January 2024. We're now on track to remove over 90% of this expense reduction target by the end of 2025. Let me now turn to the cash flows we expect to harvest from our legacy loan portfolios. As you know, a significant portion of our portfolio is comprised of FFELP and private loans originated over a decade or more ago. Our portfolios have generally been experiencing lower levels of prepayments over the last few quarters. Our ongoing process of reviewing portfolio performance was supplemented by our Phase 2 review. The trends we are seeing have incorporated into our life of loan cash flow assumptions. The trends are largely driven by changes in public policy and customer repayment behavior. The result is the increase of projected life of loan cash flows by approximately $195 million. All other factors held constant. Two of this quarter's assumptions changes had a significant impact on expected future cash flows. First, we lowered prepayment rate assumptions, reflecting changes in public policy under the current administration, which has not proposed, nor encouraged federal and FFELP loan forgiveness programs. As a result of these changes alone, expected future cash flows increased by approximately $280 million across all of our outstanding loan portfolios. All of these future expected cash flows, no part of them is reflected in Q3 results. Secondly, we've revised default and post-default recovery assumptions across all previously originated loans. These updates reflect slower portfolio amortization, continuation of recent credit trends in customer repayment and recent recovery trends on defaulted loans. As a result, expected net life of loan charge-offs increased by $151 million. Unlike the increase in expected cash flows from slower prepayment speeds, all of these reductions in future cash flows are reflected as provision expense in Q3 results. In addition, we updated certain financing and securitized debt service assumptions. The net effect of these changes was to increase expected life of loan cash flows by $66 million. Collectively, this set of changes increased life of loan cash flows by $195 million. As we do each quarter, life of loan cash flow projections were updated for actual loan repayments, new originations and benchmark interest rate assumptions, among other factors. Given our strong origination volume this quarter, these updated volumes further increase expected life of loan cash flows. The increase in expected life of loan cash flows from these updated assumptions and the actual results provides additional fuel for the growth strategy we have been working on. In addition, we recently completed our fourth term ABS financing of the year, backed by refi loan collateral. We continue to experience strong investor demand for these securities and are achieving effective cash advance rates that demonstrate our ability to grow more rapidly with low capital intensity. So, we have more fuel for our growth strategy, and we are growing in a more fuel-efficient way. We plan to provide an update on the progress of our going-forward growth strategy for our Earnest business on November 19. We look forward to sharing our observations and initiatives at that time. With that, I'll turn it over to Joe.

Thank you, Dave, and everyone on today's call for your interest in Navient. In the third quarter, we reported core loss per share of $0.84. Adjusting for significant items, we earned $0.29 per share. During the quarter, we demonstrated strong loan origination growth in both the refi and in-school lending products, reduced our operating expenses in line with our long-term efficiency initiatives and increased our reserves. Our reported results include the upfront costs of higher origination volumes along with the following significant items. First, provision of $168 million, of which $151 million, or $1.17 per share relates to previously originated loans. While our delinquency rates are improving, they remain elevated and the provision reflects a continuation of both the credit trends and lower levels of prepayment activity we are experiencing. Second, an interest income benefit of $11 million, or $0.08 per share, resulting from the impact lower prepayment expectations have on loan premium, loan discount and deferred financing fee amortization. And third, regulatory and restructuring expenses of $5 million, or $0.04 per share. Our outlook for the fourth quarter is a range of $0.30 to $0.35 per share. Our fourth quarter guidance range would place us within the full-year guidance of $1 to $1.20 a share, set at the beginning of the year before the significant items we are announcing this quarter. I'll walk through our results by segment, beginning with the Federal Education Loan segment on Slide 7. The net interest margin for Q3 was 84 basis points. This is 14 basis points higher than the second quarter. The increase in the quarter included reduced premium amortization from lowering our prepayment rate assumptions, resulting in a 23 basis point benefit. Prepayments were $268 million in the quarter compared to $1 billion a year ago. In the quarter, we earned $13 million of floor income on $3 billion of eligible loans. With respect to Floor Income, if rates were, on average, 50 basis points lower throughout the quarter, Floor Income would have increased by an additional $4 million. We expect fourth quarter NIM to range between 55 basis points and 60 basis points, which assumes moderately lower rates in the quarter. Compared to the second quarter, our total delinquencies declined from 19% to 18.1%, and the net charge-off rate increased 1 basis point to 15 basis points. The FFELP provision expense is driven, in part, by the expected extension of that portfolio from continued low levels of prepayments. Now, let's turn to our Consumer Lending segment on Slide 8. Total loan originations in the quarter grew to $788 million, an increase of 58% from the year ago period. This was driven by over 100% growth in refi originations and 9% growth in in-school originations. The doubling of refi originations demonstrates our capabilities to attract high-quality prospects and convert them to customers with improved efficiency. The external environment is providing a tailwind as lower benchmark rates coincide with an increase in federal borrowers seeking to lower their rate and payments. Our record high quarterly in-school originations of $260 million included $119 million of borrowers pursuing graduate degrees. We are raising our full-year total loan originations guidance to be around $2.4 billion, or over 30% higher than our guidance provided at the beginning of the year. Net interest margin in this segment was 239 basis points in the quarter compared to 232 basis points in the second quarter. Unlike FFELP, where we have a net loan premium on our books, our private legacy portfolio is on our books at a net discount to par, thus lowering our prepayment rate assumptions, reduced net interest income in the portfolio by $7 million or 17 basis points. We expect Consumer Lending NIM for the fourth quarter to range between 255 basis points and 265 basis points. When looking at delinquency and default trends over the last year or so, some context might be helpful. In 2024, FEMA declared 90 major disasters in the U.S., a sizable increase when compared to the 30-year average of 55 major disasters. As a result, forbearance balances were elevated and were 2.8% of balances a year ago compared to 1.5% in the current quarter. As these borrowers exited disaster-related forbearance and returned to repayment, we saw 91-plus delinquency rates rise to 3% in the second quarter of this year and begin to decline. These events coincided with changes in federal loan policy and broader economic pressures that have influenced repayment behavior. While we are seeing improvement in delinquency rates, they continue to remain elevated. Of the $155 million of private education loan provisions that we took in the quarter, $17 million is related to new originations and the remainder reflects our macroeconomic outlook and recent credit trends. Our allowance for loan loss, excluding expected future recoveries on previously charged-off loans for our entire education loan portfolio is $765 million, which is highlighted on Slide 9. The total reserve build in the quarter is driven by a variety of factors, including changes in student loan borrower behavior, elevated delinquency rates, macroeconomic outlook changes, new originations and the extension of the FFELP portfolio. Slide 10 shows the results from our Business Processing segment. As of October 17, we have no further obligations to provide transition services for our government services business. The TSA revenues and expenses from this quarter totaled $7 million and $6 million, respectively, and are reported in the other segment. This final step allows us to begin removing $14 million of shared expenses, primarily consisting of IT infrastructure that was leveraged to support multiple business lines prior to the strategic transformation. Once removed, we will have exceeded our original target of $400 million of expense savings that we outlined in January of 2024. More detail on total operating expenses can be found on Slide 11. Compared to a year ago, our total core expenses for the quarter declined by $93 million to $109 million. This substantial decrease was driven by our focused efforts to significantly reduce our expense base through the divestiture of the BPS business, transition to a variable servicing structure and reductions in our corporate shared service expenses. Turning to our capital allocation and financing activity that is highlighted on Slide 12. This month, we completed our fourth securitization of the year. Year-to-date, we have issued nearly $2.2 billion of term ABS financing. These transactions were characterized by strong investor demand and high advance rates. Our current cash and capital positions provide ample capacity to distribute capital and invest in strong loan origination growth. In the quarter, we repurchased 2 million shares at an average price of $13.19, as our shares remain significantly below tangible book value. In total, we returned $42 million to shareholders through share repurchases and dividends while maintaining a strong balance sheet with an adjusted tangible equity ratio of 9.3%. Our quarterly guidance of $0.30 to $0.35 per share incorporates continued strong origination growth boosted by moderately lower interest rates and continued expense reductions. Thank you for your time. And I'll now open the call for any questions.

[Operator Instructions] We'll take our first question from Bill Ryan with Seaport Research Partners.

First question, obviously, relates to the provision and delinquencies that you noted on the call. I look back last -- I'd say, in the last 6 of the 7 years, we've seen delinquency rates go up from Q3 to Q4 -- excuse me, Q2 to Q3, actually went down both in the 30-plus and 90-plus this year. Forbearance rates, as you noted, have moved lower as well. I was wondering if you could kind of talk about the decision process to do what looks like a Q3 cleanup provision. It's obviously very well upside to what we've seen in the last couple of quarters. And if you could maybe, Joe, be a little more specific about the default and recovery assumptions now embedded in the reserve rate and how those compare to current trend line?

Bill, thanks for the question. This is Dave. Let me try to step back and provide some context to the changes we've made around default and prepayment rates. And I think our situation is distinct because of our legacy portfolios. We first established life of loan loss reserves in January 2020 when CECL replaced the incurred loss model across lending in the U.S. Within a couple of months of recording that CECL reserve, of course, the pandemic began. And we and like many other lenders, provided COVID-related forbearance to private loan borrowers. Of course, the federal government, provided federal borrowers with payment relief, and they also provided consumers and small businesses with broad financial support programs. As a result, delinquency rates and charge-offs in our legacy portfolios fell significantly during this period, and they remained at historically low levels for some period of time. We didn't release reserves during that period as we expect the defaults that we assumed would happen were being deferred, not avoided. Federal loan payment relief programs remain in place for an extended period of time. Federal loan forgiveness programs were also proposed. It's only about 2 years ago that federal loan payments resumed and about a year ago, that credit bureau reporting also resumed. As these relief programs are being wound down, we did, in fact, see over time, as you just pointed out, increases in delinquency rates and charge-offs. These included charge-offs that were deferred during the pandemic. We also experienced, as Joe indicated, some disaster forbearance volumes, which further but temporarily increased our delinquency and default rates. At the same time, in recent quarters, we also began to experience incremental defaults. We continue to see those incremental defaults. These are due to a wide variety of factors, including changes in borrower repayment behavior and macroeconomic conditions. The provision expense we recorded this quarter assumes that these incremental defaults will continue for some time into the future. In recent quarters, we also began to see substantially lower levels of prepayments, especially within the FFELP portfolio. These have also continued. They're due to a wide variety of factors as well, but particularly public policy around federal loan forgiveness. The prepayment assumption changes we made this quarter also assume that these low levels of prepayments that we're experiencing will continue for some time into the future as well.

And Bill, to your question about recovery rate assumptions, think about our portfolio today, our recovery rate assumption is about 17% on the private portfolio. If you go back 5 or 10 years, that would have been a higher recovery rate assumption, reason primarily driven by as these loans have seasoned, we've lowered that recovery rate over the years, but relatively flat over the last couple of quarters at 17%.

Okay. And then if we could kind of go to the gross default assumption as well?

Sure. In terms of the -- well, net charge-off rate that we've seen historically, we've given a charge-off rate range of 1.5% to 2%. We are trending slightly higher than that over the first 9 months outside of our range. When we think about the new originations that we're making today, especially on the refi side, those are very high quality, as Dave highlighted in his prepared remarks, some of the highest credit scores that we've seen in our history. And so that charge-off rate assumption is roughly around 1.5% in terms of the new loans that we're making on the refi side.

Okay. And just one quick follow-up. Your guide for Q4, $0.30 to $0.35. I know you don't want to provide a 2026 outlook just yet, but should we be thinking that range as a potential starting point for moving into next year?

So I wouldn't use it as a baseline, just primarily because, obviously, we've got a lot of opportunities here in terms of addressing during our upcoming investor update as well as during the next quarter's earnings calls. So depending on interest rate assumptions that you're making, obviously, it could be a significant tailwind for us as it relates to refi originations. There's an opportunity, as you know, from the elimination of the Grad PLUS program. So as we circle those numbers and look forward to next year, obviously, there's higher provision expense that you take upfront in terms of the costs associated with those loans. So as we give you better guidance into next year, I would just keep in mind those upfront costs that you take during that time of origination will be a driver that you won't see necessarily in the fourth quarter.

Bill, if I could just add to that a bit. So look, we're -- if you think about the fourth quarter, we still have some expenses that we're going to take out, that we expect to get rid of by the end of the first quarter of 2026. So, we're not at quite a run rate there. Operating expenses will undoubtedly be lower. We're looking for additional opportunities to do that. I think the thing I would just emphasize that Joe just said is, as you think about '26 is we see substantial opportunities to continue to grow as we have. And so the key variable in terms of run rate will be the acquisition costs and the upfront cost of additional loan originations.

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

I was hoping to get a better sense of kind of where within Consumer Lending, you're seeing the credit weakness and what's driving the reserve build. I mean, it looks like the consolidation loan credit has been relatively stable. So it seems like it's the rest of the portfolio. Is the weakness mainly coming from kind of legacy private student loans? Or are you also seeing weakness in some of the more recent in-school loans that you've made?

Yes. Mark, this is Dave. Thanks for the question. If you think back the first part of my answer to Bill's question, the majority of what we're seeing is focused on the legacy portfolios that we have. That's why I went through the establishment of the CECL reserve, the conditions that have changed since then. And so that's where the majority of the provision expense has been. The other products, there have been some changes, but they're not as significant as the changes in the private legacy portfolio in particular.

Okay. And so just to clarify, based on the comments you made, is it kind of your observation that the primary source of the weakness now is just kind of the end of some of the more extended forbearance options that they've been granted under on other loans that they hold? Is that what's kind of driving the weakness?

Yes, that's certainly -- that's one part of it. There's a variety of factors. Macroeconomic conditions have weakened part of our reserve increase, not a significant part is due to weakening of the Moody's economic forecast. That was a contributor to the second quarter as well. But if you think about the primary source of the provision being the legacy portfolios, again, that's why I go back to when we established the life of loan reserves. It was really -- I think we can all agree, it was in a very different ecosystem for those loans than exists today as they've come through the pandemic. Part of the lower prepayment speeds, which we're seeing in both FFELP and in private legacy, loans that pay off don't default, right? So, part of the reason we've tried to make sure that you see the relationship between the incremental cash flows from longer portfolios from slower prepayment speeds, that's also a contributing factor to higher provision as well because higher average balances outstanding can create higher charge-offs as well. So, there's a variety of factors that are at play here.

Okay. And just wanted to gauge your comfort level with how conservative these revised assumptions are and what kind of risk, if any, is there to further negative revisions?

Look, we're responding to what we're seeing with current trends, Mark. I'm not going to give a life of loan forecast for that. I think we feel we've done the appropriate thing here, obviously, to reflect what we're seeing in the portfolio today. And I'll just leave it at that.

We'll take our next question from Moshe Orenbuch with TD Cowen.

I looked through the cash flow assumption changes and noticed that more than all of the increase comes in 2030 and beyond. And from 2026 to 2029, it's actually almost $200 million less than you had in Q2. What's the driver for that?

The primary driver is the lowering of the prepayment speeds, Moshe. So if you think about the FFELP portfolio, we lowered our overall CPR from 5% to 3%, and that we have going until through 2028 and then again, increasing back to 5% more historical levels. So as a result, that impacts the cash flows that are coming in your earlier periods and increases those cash flows in the 2030 and out. Similarly, on the private portfolio, on the legacy portion of our portfolio, we lowered our CPR speeds from 10% to 8%. So, that's really the biggest driver of the movement from the earlier periods into the outer years.

And maybe if you mentioned this already, I missed it, and I apologize, but is there an ongoing impact on the private margin from that? You mentioned what the impact was in this quarter, but is there an ongoing impact on the margin from slower prepays?

So, we adjust for that every single quarter. So really, the biggest driver in terms of margin impacts when you look back historically and what's, I'd say, lowered the margins overall is that as our balance has shifted more towards the refi portfolio from the legacy in-school loans that we originated, we typically have lower margins on the refi, albeit at much higher credit quality. And so that's the push on the margin in the recent years as that has become a higher percentage of our balance.

But still the margin going forward on the legacy book would be lower at a slower prepay rate, right?

It really shouldn't impact it overall. I mean, you take that charge in the quarter and have the catch-up, assuming that the rate we have in place continues, there really shouldn't be much of an impact to the margin.

Got it. Okay. And then how do you think about capital needs given the potential for significant asset growth if you have expanded plans for Earnest?

Yes. Look, I think we feel very confident about our ability to finance rapid asset growth. We're doing that today. We've called out in the last 2 releases, Moshe, if you've seen, our ABS issuances. I can't overstate how important that is to our outlook for this business and how we're comfortable with our ability to grow it in a much more, as I call it, fuel-efficient way, meaning less capital. We're achieving advanced rates in our most recent ABS securitizations that are higher than we have historically achieved. So, we're getting a majority of the financing we need to originate those loans from the ABS market, therefore, requiring less equity and other sources of risk capital to finance the loans. We've also got other avenues that we haven't exercised levers before like loan sales, et cetera. You combine what we're seeing in the ABS market with some of the flexibility that we think we have, and we're highly confident in our ability to finance higher levels of loan originations.

Just to follow up, I mean, is loan sales or are loan sales kind of a key part of the strategy? Is that something that you've got a program in place? Or how do you think about that?

I think I'm not going to preview our November presentation or our '26 plan at this point. We've historically been an opportunistic seller of loans. Again, I think we feel confident in our ability on a make-and-hold basis to continue to originate loans. Make and sell is an option we have, and it's good to have that flexibility.

Great. We'll be listening on the 19.

We'll take our next question from Rick Shane with JPMorgan.

Look, a long-standing part of the narrative is sort of the decline in the reserve rate due to consolidation of loans and the relative loan quality. And if we look back consistently, the provision has been well below charge-offs on any given quarter in the private -- in the consumer book. Have we reached the inflection point when you think about, for example, fourth quarter guidance, does that assume that the reserve rate is now stabilized in the mid-2.50s? Or how should we think about that going forward?

So the way I would think about it going forward is going to be a function of also new originations and what we're making. So as I said in my earlier response, for the refi originations, we're reserving at 1.5% in terms of life of loan loss assumptions. So for every dollar we're adding there, it's 1.5%, which would lower our overall allowance. So as that balance shifts, I would just imagine that, that allowance would come down to more -- to reflect just the greater percentage of refi loans. To the extent that we are -- we see an opportunity here, obviously, in the Grad PLUS Market and grab opportunity there, those loans typically are originated with life of loan loss assumptions closer to 6%. So, that's the balance and the trade-off there. Otherwise, just in a naturally amortizing portfolio where we have life of loan loss expectations, I would imagine that, that allowance would come down, all else equal as the portfolio runs off.

Got it. And just to be clear, and I don't know if I missed this or not, but you're suggesting that the reserve rate on the consolidation loans was not changed of this increase that we saw today?

For new originations, no, it was not. So if you think about the refi portfolio, as Dave mentioned, very high credit quality, high earners, that's some of the best that we've seen in terms of our history there. And the early trends that we've seen over the last year have not given any indication that we would need to change that.

Great. But does that suggest that on the older stuff, not the new originations that the CECL rate on the consolidation loans did change?

So on the refi book -- we keep saying consolidation. So on the refi book, yes, we did take up our reserves on the refi originations, primarily as we looked at some of the back books and vintages that were, call it, 4 or 5 years old.

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

Just a follow-up on some of the credit quality questions. Just on this provision that you did take, the $151 million, how much of it was credit related versus just the cash flows extending out because of lower payment speeds? I'm just curious on that. And then I guess just a follow-up on that as well. It sounds like when I look at the slide, you guys -- every third quarter, you sort of true up that number and look at the back book. I'm just curious like what -- I understand like things have changed post-pandemic, but what changed between last year and this year? Was it just the repayment behaviors that changed? I'm just curious what you think drove that because you would have thought the conditions post-pandemic have been fairly stable more recently than they were in some of the years sort of ensuing that.

Yes. So, thanks for the question, Sanjay. If you think about the narrative that I went through with Bill's question, the change in public policy, particularly around the FFELP loans, for example, is a new administration policy, right? Prior to the inauguration, the prior administration had a very proactive view of loan forgiveness, payment relief programs, et cetera. The new administration has not exhibited that same appetite for that and in fact, has not proposed anything. And so we're 3 months -- 3 quarters, excuse me, into that new administration, and we've now both for prepayment and default rates, looked at trends that we're seeing when you see a trend that occurs over several quarters, we've appropriately stepped back and said, let's take a look at if we continue to see these trends, both on prepayment and default rates, here's the impact on life of loan cash flows. And then, of course, the accounting treatment for each one of those is very different. There's none of the future cash flows from extension that gets booked in the current quarter and all of the provision expense gets booked in the current quarter. I think in terms of the -- I'm not going to try to attribute all the different factors here. We've laid them out. I think we could turn it into a World Series game of 18 innings. There's a lot of factors going on. The ones we've called out are really the impact of the -- everything that went on in the pandemic related to COVID relief, related to federal loan forgiveness, the macroeconomic conditions that we've seen. And again, this is a distinct portfolio for us, just given the age of this. The majority of the provision we're taking, again, is on loans that originated a decade or more ago. And I think that's distinct certainly from the loans that we're booking today and distinct from maybe other players that have a different story to tell this quarter.

And of that $151 million, I mean, is there a breakdown of that? Like how much of it is credit? How much of it is extension of duration?

Yes. I'm not going to -- there are so many factors involved. We don't have that attribution, Sanjay.

Okay. Got it. And then just one last one on -- so it seems like the delinquency rates aren't necessarily showing the same type of deterioration that the charge-offs are. So, should we expect that severity of loss -- like so that the roll rates to be higher on a go-forward basis? I'm just curious, Joe, as we think about sort of where this all falls.

Yes, they should be lower. So a big driver, obviously, of just the charge-offs in this quarter is the timing of those borrowers coming out of the various disaster relief programs and forbearances. So to your point, we're seeing early-stage delinquencies that are improving and late-stage delinquencies for that matter on the Consumer Lending side. So from that standpoint, we would expect lower charge-offs going forward and we are seeing improving roll rates.

Sorry, I have one more question. You hear a lot about high levels of unemployment among graduate students. I'm just curious if you guys are seeing anything in your portfolio that you've accounted for any of that in this provision increase?

No, we are not seeing that. Certainly, when you look at the originations that we've been making, we've been doing that since 2020. They've predominantly been to -- I should say, more than half have been to graduate students. And we're just not seeing that in terms of those that have graduated here in the early term, there has not been the impact that you're seeing in the headlines.

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

I apologize upfront. It's another question on the provision. I'm just trying to understand the moving pieces. You mentioned the $155 million increase in provision in the consumer segment. $17 million was due to new originations. Is there a way to break out the remaining $138 million between the macro policy changes and just higher delinquencies even? I guess we're just trying to understand the moving pieces, how much is coming from macro assumptions and policy assumptions changing? How much is coming from actual like delinquency? Because the delinquencies don't -- like the trends in delinquency, I think, as some of the previous analysts also mentioned don't seem that bad. I mean, I understand they're higher than earlier, but -- so just trying to understand the moving pieces.

Yes. Look, I appreciate the question. The macroeconomic condition piece this quarter is relatively small. The rest of it there is the trends we're seeing in the portfolio, and our assumption and expectation that those trends are going to continue. Again, I go back to the narrative that I used to answer Bill's question upfront. I think you really have to look at the private legacy portfolio, look at the establishment of the reserve back in 2020, think about the 5 years since then, see what we're seeing now, that's what we're responding to. There's a variety of factors on that very seasoned portfolio that we're responding to there. That's the majority of the story of the $151 million.

Okay. And then maybe just on the refinance side. As you had some more time to digest some of the changes that are going on, on the graduate side and so maybe just a question like both on the in-school opportunity for new loans and then just on the refinance side even. Is there something for us to be thinking about with all the policy changes going on there where there could be some type of refinance benefit also?

Yes. So, thanks for the question. Yes, we do -- well, you're seeing in our results today, I think the opportunity in refi and our ability to capitalize on it. I mentioned at last quarter's release, one of the things that, again, I keep going back to 2020, but prior to the pandemic, our refi originations were roughly 50% coming from federal loan borrowers. Then during the pandemic period, which also coincided with a period of higher benchmark interest rates and volumes lower, roughly 20% of our refi origination volume was coming from federal loan borrowers. In the first half of the year, roughly 40% of our borrowers were coming from consolidating out of federal loans. And this quarter, 50% were consolidating out of federal loans. So the impact of federal public policy -- federal loan public policy on payment relief programs, et cetera, has made the federal loan value proposition to borrowers less attractive than it once was. And therefore, the private loan, the refi loans becoming more attractive. We think that's what's driving a part of the increase in the growth in refi that we're seeing. We would expect that to continue. Lower benchmark interest rates only further increased the addressable market there. If you look at the interest rates on federal loans, I think it's over -- there's over $100 billion of federal loans originated in the last 6 years that have above 7% coupon. That's a significant and substantial opportunity, not all of which meets our targeted customer base, but the refi opportunity is significant and substantial. The Grad PLUS piece is still -- we don't know what -- I don't think anyone knows for sure what that's going to look like. We feel confident in our ability demonstrated this quarter again to attract high credit quality, high balance borrowers, predominantly graduate students. And so when those students present themselves and are looking for a gap to help finance their education, we're confident in our ability to meet them, meet their needs and exceed their expectations.

We'll take our next question from Ryan Shelley with Bank of America.

Most of mine have been answered. I just wanted to ask about your outlook on competition going forward. So, obviously, with changes to federal policy, it sounds like there's going to be more greenfield. I know you just said it's hard to exactly size that. But big picture, it sounds like there will be more opportunity. How do you see that changing the competitive landscape? And any commentary around what you're doing to prepare yourself to more effectively compete?

I think that we've done a good job in terms of our entrance into the market over the last several years here, positioned ourselves very well to take advantage of the opportunity. When we look at our competition as it relates to new in-school graduate loan originations, just looking at public data, we're roughly over $200 million in terms of graduate originations when you look at last year. We estimated that market to be between $1 billion and $1.4 billion. If you look at some of our competitors and what they suggest is the market that's fairly consistent. So, roughly a 20% market share there. And I think that the product suite that we offer is very attractive. In the early stages of what we've seen here and just really with some of the reforms that have taken place, we've had a number of financial aid offices reach out. We've been able to add in terms of the percentage of the top 200 schools that we participate in over the last 2 quarters here. So call it, an additional 9% to 10% increase there. So certainly, we're taking advantage of the opportunity here that's in front of us. And the normal competitors in that place are obviously the largest player in the market. We still -- has a significant share there. We haven't yet seen new entrants that have made a significant impact. And on the refi side, there's a significant opportunity for growth there if, obviously, rates fall. It's predominantly just us and one other larger competitor in the market. We don't see other players stepping in yet to, like we did, call it, 5 years ago, where there were more diverse players in the refi space. So today, I'd say it's really a 2-person race in terms of refi originations, and we're not seeing any changes in really outsized coupons that are changing or pressure on rates that are being charged to borrowers at this stage. So, we feel good about where we are and we're well positioned for all of 2026.

[Operator Instructions] We'll take our next question from Jeff Adelson with Morgan Stanley.

I know it's already been asked already, but just in terms of the potential Grad PLUS opportunity here, is there any more work you've done over the past quarter to try to better sort of ring-fence the opportunity here, what your work has shown you? And I think one of your competitors has been out there on the in-school side talking about a $4 billion to $5 billion opportunity annually. Does that seem maybe in the ballpark for you? Or are there any maybe differences in how you would think about that? Or should we be maybe expecting something on this November update around sort of market size opportunity there?

So, I would think of it as the market share today is $1 billion to $1.4 billion in terms of what the graduate market represents for the private players. I would say Grad PLUS as a total is a $14 billion market. So, I don't view that as just one-for-one replacement that you're adding $14 billion. I know one of our competitors has said $4 billion to $5 billion is the expansion. Another one of our competitors has quoted is closer to $10 billion. So from us, we certainly think there's going to be a level of multiples of expansion there, and we're excited about the opportunity and that's where I leave it.

Okay. That's helpful. And then just on the refi side, I think you had said your -- about 50% is now as of this quarter coming back from the government refi side of things more in line with pre-COVID. Do you think there's an opportunity for that to expand even further above even where pre-COVID was just as sort of rates fall from here and the government policy on forgiveness and repayment plans after next year is going to get a little bit worse?

Absolutely, I think there's opportunities when you think about just the rate environment here. So, I'll just use one example. If I look at the Grad PLUS program, going back the last 14 years, there's only been one instance where the rates that are reset every single year has been below 6%. And if you look at the last 4 years, those rates have been at 7.5% or higher and just 2 years ago, it was at 9%. So as rates fall here, I think there's a tremendous opportunity when you think of the volume of high-quality borrowers that have attended and graduated with a graduate degree. I think it's a great opportunity in front of us to increase that percentage and ultimately increase the volume. You don't have to go that far back to see just very high-level volumes from us. Back in 2021, we were close to $6 billion in terms of originations. So, I think it's really going to be rate driven, and we'll have to see what happens here in the next couple of quarters.

And there are no further questions on the line at this time. I'll turn the program back to Navient's CEO, David Yowan, for any additional or closing remarks.

Yes. Thank you, and thanks for joining today. Before we close, I'd just like to put into context this quarter's results the way that we see it. And I'd actually call your attention to Slide 3 in our slide package. We've included this slide for 8 or 9 quarters now. So it has 4 elements to it that we're attempting to deliver on. I'll just go through them. One, maximize the cash flows from our loan portfolios. Based on the trends that we're seeing today that we have recorded and put into our life of loan cash flow assumptions, those combined to have a $195 million increase in the life of loan cash flows that we saw. The second thing we said we'd deliver on was enhance the value of our growth businesses. For the third straight quarter, we've doubled our origination volume from prior quarters. We had our highest peak season in in-school lending in our history. Credit quality is exceptionally high. Customer satisfaction remains very high. And so we're positioning ourselves for further growth in market and in product opportunities. Continuously simplify the business and increase efficiency, I'd call your attention to Slide 11, where operating expenses this quarter are roughly 55% of what they were just in the year ago quarter. And we've identified within the amounts we incurred this quarter, $14 million of expenses that we know are going to go away. We're in the process of getting rid of those. That would bring our operating expenses down to less than half the level they were a year ago, and we're committed to continue to look for ways to be more efficient. And then fourthly, maintain a strong balance sheet and distribute excess capital. We have an adjusted tangible equity ratio of 9.3%, which remains above our long-term average and we were able to grow loans at the levels we grew at and still distribute $42 million worth of capital for our shareholders. So, we feel like this quarter is a great example of our ability to check all 4 of those boxes in a very meaningful way. And I hope you can see our results in that same context. Appreciate your time and attention. We look forward to speaking to you in November.

Thanks for joining today's call. Sorry, David.

Go right ahead, Jen.

I was just going to offer anybody whose question we didn't get to, please contact me after the call. Happy to have some more conversations. And thank you, David.