Committee on Education and Labor

U.S. House of Representatives

"Ensuring the Availability of Federal Student Loans"

Testimony of

Paul W. Wozniak

Managing Director, UBS Securities LLC

March 14, 2008

Good Morning. I am Paul Wozniak, a Managing Director and Group Manager
of UBS Securities LLC. The group is one of the largest of its kind on
Wall Street, and we are mandated to coordinate all education loan
related finance activities in the Fixed Income department, which
includes asset-backed finance and municipal securities. I am currently
in my 26^th^ year of financing postsecondary education loans.

\$54 billion of Stafford and PLUS FFELP loans were originated in the
2007-2008 academic year, primarily by banks, private and public non-bank
corporations, state agencies and not-for- profit corporations. If
patterns held as in years past, banks probably accounted for
approximately 60% of loan originations -- as they did in the prior year
which is the last year for which data were available. However, when one
observes holders of loans, banks' market share of outstanding loans
falls to less than 24%. This is important when trying to understand how
entities finance themselves.

Banks, as deposit taking institutions have a general cost advantage to
entities that are required to access the capital markets through
securitizations or other means. They must also allocate costs of capital
and reserves, but on the margin, they should maintain a funding
advantage over those raising money in the capital markets. Further, for
those banks that originate and sell their loans to other holders in the
secondary market, which appears to be the majority of banks, their
funding needs are both modest in size and short-term in nature.

The remaining participants in the FFELP program, those who are holders
of more than three-quarters of all FFELP loans outstanding, rely on the
capital markets for their funding source. This generally takes several
forms. Most of these entities will use some type of warehousing program
or line of credit -- a commercial paper conduit or bank loan -- with
terms that are generally renegotiated every 364-days and permit the
FFELP lender to accumulate a sufficient amount of loans to accomplish an
efficient financing program that will meet rating agency and investor
acceptance. These credit lines must generally be cleaned out into some
other financing program at least once per year.

The most common form of refinancing or 'take-out' is a securitization.
Primarily this has taken the form of the issuance of Floating Rate Notes
or FRN's. A securitization is merely the creation of a trust which
issues securities to investors. The trust uses the proceeds to acquire a
pool of loans from the warehouse facility, and the warehouse line of
credit is paid down. The securitization trust is structured to allow the
investor to solely look to the underlying loan collateral for repayment
of the investment. This is important because this insulates the investor
from any negative credit event that may befall the sponsor of the trust.
As a result, the trust receives a higher rating than it would if
corporate issuer risk continued as a possibility, and therefore the
FRN's bear a lower interest rate spread than it would if it were not so
insulated. Alternatively, the trust is required to perform on its own
with no additional support from the lender.

It should also be noted that banks also avail themselves of the Floating
Rate Note securitization market. Indeed, while banks are holders of less
than one-quarter of all outstanding FFELP loans, banks accounting for
about 75% of these holdings use or are prepared to use FRN
securitizations to finance their portfolios to some extent. Banks do
this because it diversifies the funding sources of their assets. While
it may be a more expensive cost of funds than deposits, the
diversification of funds and the potential for off-balance sheet funding
requires its consideration.

Another option that has been used extensively, and more so among state
agencies and not-for-profit corporations, has been the auction rate
securities market. The education loan backed auction market is now only
about 1/3 of the size of the education loan FRN securitization market.
In recent years, issuance of FRNs has greatly exceeded the issuance of
taxable auction rate securities, especially to finance pre-10/1/2007
originated consolidation loans during the heavy origination era of those
loans. Issuers had to weigh the advantages of a fixed spread FRN against
the advantages of the auction structure. Auctions permitted a high
degree of financing efficiency, in that they acted as a combination
warehouse facility and term financing at a reasonable and variable rate
cost of funds. Their ability to be redeemed or converted to other
structures without significant cost was also a very positive feature.
Given the relatively narrow spread on FFELP student loans, it is
important to have a highly efficient, flexible financing vehicle.

For 15 years the auction product performed exceptionally well. It was
able to withstand numerous market shocks such as the 1994 bond market
which at the time was described as the worst since the great depression,
the 1998 Russian debt crises, Y2K and an accounting reclassification
event in 2004. These tests of the product seemed to show its resilience.
Interest rate spreads would widen, and then return to previous levels.
For, what I would estimate as 150,000 auctions of education loan backed
collateral; the market had never experienced a failed auction (where
auction sales exceeded purchases and holds). That ended recently. As a
consequence, the ensuing days resulted in significant auction sales
resulting in a complete and total failure of the auction market. This
was compounded by the problems facing the monoline insurance companies,
encouraging sales and reducing restructuring options.

As a result of the continuing liquidity crisis, the deleveraging of
investor balance sheets and the failure of the education loan backed
auction market, the cost of funds to holders of loans has risen
significantly. Those with auction rate securities are incurring a
penalty interest rate. Those with warehouse facilities, to the extent
that renewals are available, are incurring a much higher rate as well as
the requirement of posting significantly more equity than had previously
been required. There are approximately \$150 billion of education loans
currently financed via these two methods. For those who would refinance
these loans into a fixed spread FRN structure, they face (i) interest
rate spreads that may be a full 1% (100 basis points) higher, (ii) the
inability to currently finance certain loans with long average lives
(consolidation loans) due to lack of investor demand, and (iii) the need
to add significant and costly equity into a structure based on new
rating agency assumptions borne of the current market environment. The
burden on this marketplace is significant and real and is unlikely to
correct itself to avoid having an impact on access to loans.